10-K 1 body.txt COMMUNITY WEST BANCSHARES 10-K 12-31-2004 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. -1-

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

-2- PART I ITEM 1. DESCRIPTION OF BUSINESS ------- ------------------------- 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 ------- ------------------------- 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 ------- ------------------ 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 ------------------------------------------------------------------------------------------------------------

-6- ITEM 6. SELECTED FINANCIAL DATA ------- ------------------------- The following selected financial data have been derived from the Company's consolidated financial condition and results of operations, as of and for the years ended December 31, 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:

YEAR ENDED DECEMBER 31, ------------------------------------------------ 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- (IN THOUSANDS) Nonaccrual loans $ 8,350 $ 7,174 $13,965 $11,413 $ 4,893 SBA guaranteed portion of loans included above (5,287) (4,106) (8,143) (7,825) (2,748) -------- -------- -------- -------- -------- Nonaccrual loans, net $ 3,063 $ 3,068 $ 5,822 $ 3,588 $ 2,235 ======== ======== ======== ======== ======== -25- Troubled debt restructured loans $ 124 $ 193 $ 829 $ 1,093 $ 615 Loans 30 through 90 days past due with interest accruing 1,804 3,907 5,122 2,607 4,277 Interest income recognized on impaired loans $ 103 $ 277 $ 190 $ 1,443 $ 387 Interest foregone on nonaccrual loans and troubled debt restructured loans outstanding 208 216 1,263 1,146 592 -------- -------- -------- -------- -------- Gross interest income on impaired loans $ 311 $ 493 $ 1,453 $ 2,589 $ 979 ======== ======== ======== ======== ========

The accrual of interest is discontinued when substantial doubt exists as to collectibility of the loan; generally at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is no longer recognized on the loan. As such, interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. All of the nonaccrual loans are impaired. Although net nonaccrual loans decreased slightly during 2004, total nonaccrual loans increased by $1.2 million. This increase was due to an increase in SBA guaranteed loans repurchased from investors on behalf of the SBA of $1.1 million. These loan balances represent no credit risk to CWB as they are guaranteed by the SBA. Total impaired loans decreased by $3.1 million, or 43.8%, in 2004. The specific valuation allowances allocated to impaired loans also decreased by $215,000, or 33.6%. The majority of this decrease relates to payoffs received from borrowers of $2.8 million with specific reserves of $132,000 and one loan for $197,000 with a specific valuation allowance of $129,000 which was converted to OREO during 2004. Also contributing to the change were $395,000 of regular loan payments received from borrowers and $144,000 of loans upgraded during the year. These declines were partially offset by $527,000 in new impaired loans with $155,000 of specific valuation allowance allocated to them. Financial difficulties encountered by certain borrowers may cause the Company to restructure the terms of their loan to facilitate loan repayment. A troubled debt restructured loan ("TDR") would generally be considered impaired. The balance of impaired loans disclosed above includes all TDRs that, as of December 31, 2004, 2003 and 2002, are considered impaired. Total TDRs decreased by 35.8%, or $69,000, from $193,000 to $124,000 as of December 31, 2003 and 2004, respectively. INVESTMENT PORTFOLIO --------------------- The following table summarizes the carrying values of the Company's investment securities for the years indicated:

YEAR ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ------- ------- ------ Available-for-sale securities (IN THOUSANDS) ----------------------------- U.S. Government and agency $15,221 $ 7,024 $ - Other (1) 7,037 8,408 ------- ------- ------ Total held-to-maturity securities $22,258 $15,432 $ - ======= ======= ====== Held-to-maturity securities --------------------------- U.S. Government and agency $ 200 $ 200 $ 707 Other (1) 5,894 4,836 5,305 ------- ------- ------ Total available-for-sale securities $ 6,094 $ 5,036 $6,012 ======= ======= ======

At December 31, 2004, $200,000 at carrying value of the above held-to-maturity securities were pledged as collateral to the U.S. Treasury for CWB's treasury, tax and loan account and $14 million at carrying value were pledged under repurchase agreements, which are treated as collateralized financing transactions. Additionally, $14.1 million, at carrying value, were pledged to the Federal Home Loan Bank, San Francisco, as collateral for current and future advances. -26- The following tables summarize the maturity period and weighted average yields of the Company's investment securities at December 31, 2004.

LESS THAN ONE ONE TO FIVE FIVE TO TEN TOTAL AMOUNT YEAR YEARS YEARS OVER TEN YEARS AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ (DOLLARS IN THOUSANDS) Available-for-sale securities ----------------------------- U. S. Government and agency $15,221 3.0% $ - - $11,257 3.0% $ 3,964 3.0% $ - - Other (1) 7,037 4.0% - 7,037 4.0% - - - - ------- ------- ------- ------- ------- Total HTM $22,258 3.3% $ - - $18,294 3.4% $ 3,964 3.0% $ - - ======= ======= ======= ======= ======= Held-to-maturity securities --------------------------- U.S. Government and agency $ 200 3.7% $ 200 3.7% $ - - $ - - $ - - Other (1) 5,894 4.8% - - 4,852 4.6% - - 1,042 5.5% ------- ------- ------- ------- ------- Total AFS $ 6,094 4.7% $ 200 3.7% $ 4,852 4.6% $ - - $ 1,042 5.5% ======= ======= ======= ======= =======

(1) Consists of pass-through mortgage backed securities and collateralized mortgage obligations. Mortgage-backed securities and collateralized mortgage obligations are distributed in total based on average expected maturities. Interest-Only Strips and Servicing Rights As of December 31, 2004 and 2003, the Company held interest-only strips in the amount of $2.7 million and $3.6 million, respectively. These interest-only strips represent the present value of the right to the estimated net cash flows generated by SBA loans sold. Net cash flows consist of the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. The Company also held servicing rights related to SBA loans sales of $3.3 million and $2.5 million at December 31, 2004 and 2003, respectively. For loans sold subsequent to March 31, 2002, the initial servicing rights and resulting gain on sale were calculated based on the difference between the best actual par and premium bids on an individual loan basis. The servicing right balances are subsequently amortized over the estimated life of the loans using industry prepayment statistics and the Company's own experience. Quarterly, the servicing right and I/O strip assets are analyzed for impairment. In 2002, the Company recorded a $1.8 million impairment charge related to the valuation of the servicing rights and I/O strips. The interest-only strips are accounted for as investments in debt securities classified as trading securities. Accordingly, the Company marks them to fair value with the resulting increase or decrease recorded through operations in the current period. At December 31, 2004 and 2003, all of the servicing rights are related to SBA loan sales. LIQUIDITY MANAGEMENT --------------------- The Company has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits. Ultimately, public confidence is gained through profitable operations, sound credit quality and a strong capital position. The Company's liquidity management is viewed from both a long-term and short-term perspective as well as from an asset and liability perspective. Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk. The Company has asset/liability committees ("ALCO") at the Board and Bank management level to review asset/liability management and liquidity issues. The Company maintains strategic liquidity and contingency plans. Periodically, the Company has significantly used short-term time certificates from other financial institutions to meet projected liquidity needs. The Company has invested resources in the purchase of government-guaranteed investment securities and obtained a financing arrangement, repurchase agreements ("Repos") that allow it to pledge these securities as collateral for short-term borrowing in case of increased liquidity needs. As of December 31, 2004, the Company had $13.7 million of outstanding Repos, with interest rates of 1.40% to 2.35%, all of which mature within one year. -27- In 2004, CWB was approved for membership in the Federal Home Loan Bank ("FHLB"). As a member of the FHLB, the bank has established a credit line under which the borrowing capacity is determined subject to "delivery" status of qualifying collateral. Generally, this collateral includes certain mortgages or deeds of trust and securities and notes of the U.S. Government and its agencies. As of December 31, 2004, CWB had $33.8 million of loans and $14.1 million of securities pledged as collateral for FHLB borrowings. CWB has borrowed $10.5 million with interest rates between 1.77% and 3.28% on advances maturing within three years. CWB had $18.8 million in remaining borrowing capacity with FHLB at December 31, 2004. Repos provided the Company improved flexibility in managing its liquidity resources. However, the Company intends to let them mature in 2005, transfer the collateral to the FHLB, and use FHLB for future advances. The FHLB provides more flexibility as to terms. The Company also maintains two federal funds purchased lines for a total borrowing capacity of $13.5 million. The Company, through the Bank, also has the ability as a member of the Federal Reserve System, to borrow at the discount window up to 50% of what is pledged at the Federal Reserve Bank. In January 2003, the Reserve Bank replaced the existing discount window program with new primary and secondary credit programs. CWB qualifies for primary credit as it has been deemed to be in sound financial condition. The rate on primary credit will be 50 basis points less than the secondary credit rate and will generally be granted on a "no questions asked basis" at a rate that initially will be at 100 basis points above the Federal Open Market Committee's (FOMC) target federal funds rate. As the rate is currently not attractive, it is unlikely it will be used as a regular source of funding, but is noted as available as an alternative funding source. The Company has not experienced disintermediation and does not believe this is a potentially probable occurrence. CWB's core deposits (excluding certificates of deposit) grew by approximately $56.1 million during 2004. The liquidity ratio of the Company has steadily increased and was 25%, 26% and 27% at December 31, 2002 and 2003 and 2004, respectively. The liquidity ratio consists of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets. CWBC's routine funding requirements primarily consist of certain operating expenses. Normally, CWBC obtains funding to meet its obligations from dividends collected from its subsidiary and has the capability to issue debt securities. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. Interest Rate Risk The Company is exposed to different types of interest rate risks. These risks include: lag, repricing, basis and prepayment risk. - Lag Risk- lag risk results from the inherent timing difference between the repricing of the Company's adjustable rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. However, at a community bank such as CWB, when rates are rising, funding sources tend to reprice more slowly than the loans. Therefore, for CWB, the effect of this timing difference is generally favorable during a period of rising interest rates and unfavorable during a period of declining interest rates. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes. - Repricing Risk - repricing risk is caused by the mismatch in the maturities / repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This is so since loans tend to reprice more quickly than do funding sources. Typically, since CWB is somewhat asset sensitive, this would also tend to expand the net interest margin during times of interest rate increases. - Basis Risk - item pricing tied to different indices may tend to react differently, however, all CWB's variable products are priced off the prime rate. - Prepayment Risk - prepayment risk results from borrowers paying down / off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. Since a majority of CWB's loan originations are adjustable rate and set based on prime, and there is little lag time on the reset, CWB does not experience significant prepayments. However, CWB does have more prepayment risk on its securitized and manufactured housing loans and its mortgage-backed investment securities. Offsetting the prepayment risk on the securitized loans are the related bonds payable, which were issued at a fixed rate. When the bonds payable prepay, given the current -28- interest rate environment, this reduces CWB's interest expense as a higher, fixed rate is, in effect, traded for a lower, variable rate funding source. Management of Interest Rate Risk To mitigate the impact of changes in market interest rates on the Company's interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as our funding sources. CWB sells mortgage products and a portion of its SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise. Loan sales- The Company's ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by CWB. A significant decline in interest rates could also decrease the size of the CWB's servicing portfolio and the related servicing income by increasing the level of prepayments. Operational Risk Operational risk represents the risk of loss resulting from the Company's operations, including but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, transaction processing errors and breaches of internal control system and compliance requirements. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation and customer attrition due to potential negative publicity. Operational risk is inherent in all business activities and the management of this risk is important to the achievement of the Company's objectives. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, the Company could suffer financial loss, face regulatory action and suffer damage to its reputation. The Company manages operational risk through a risk management framework and its internal control processes. The framework involves business units, corporate risk management personnel and executive management. Under this framework, the business units have direct and primary responsibility and accountability for identifying, controlling and monitoring operational risk. Business unit managers maintain a system of controls with the objective of providing proper transaction authorization and execution, proper system operations, safeguarding of assets from misuse or theft and ensuring the reliability of financial and other data. Business unit managers ensure that the controls are appropriate and are implemented as designed. Business continuation and disaster recovery planning is also critical to effectively manage operational risks. The Company's internal audit function (currently outsourced to a third party) validates the system of internal controls through risk-based regular and ongoing audit procedures and reports on the effectiveness of internal controls to executive management and the Audit Committee of the Board. While the Company believes that it has designed effective methods to minimize operational risks, there is no absolute assurance that business disruption or operational losses would not occur in the event of disaster. DEPOSITS -------- The following table shows the Company's average deposits for each of the periods indicated below:

YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2004 2003 2002 ------------------- ------------------- ------------------- AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) Noninterest-bearing demand $ 38,761 15.6% $ 34,400 15.9% $ 31,560 15.6% Interest-bearing demand 50,785 20.4% 35,768 16.5% 29,347 14.5% Savings 17,810 7.2% 15,480 7.2% 13,270 6.6% TCD's of $100,000 or more 31,851 12.8% 21,076 9.7% 42,970 21.2% Other TCD's 109,456 44.0% 109,828 50.7% 85,137 42.1% -------- --------- -------- --------- -------- --------- Total Deposits $248,663 100.0% $216,552 100.0% $202,284 100.0% ======== ========= ======== ========= ======== =========

-29- The maturities of time certificates of deposit ("TCD's") were as follows:

DECEMBER 31, ------------------------------------------- 2004 2003 -------------------- --------------------- TCD'S OVER OTHER TCD'S OVER OTHER $100,000 TCD'S $100,000 TCD'S ----------- ------- ----------- -------- (IN THOUSANDS) Less than three months $ 8,002 $16,237 $ 7,376 $ 18,824 Over three months through six months 7,062 20,809 5,071 25,209 Over six months through twelve months 9,877 15,843 5,315 43,743 Over twelve months through five years 15,452 39,137 1,911 21,315 ----------- ------- ----------- -------- Total $ 40,393 $92,026 $ 19,673 $109,091 =========== ======= =========== ========

The deposits of the Company may fluctuate up and down with local and national economic conditions. However, management does not believe that deposit levels are significantly influenced by seasonal factors. The Company manages its money desk in accordance with its liquidity and strategic planning. Such deposits increased by $20.7 million during 2004 as the Company's general funding needs increased due to the increase in loan originations. The Company can use the money desk to obtain funds when necessary in a short timeframe; however, these funds are more expensive as there is substantial competition for these deposits. CONTRACTUAL OBLIGATIONS ----------------------- The Company has contractual obligations that include long-term debt, deposits, operating leases and purchase obligations for service providers. The following table is summary of those obligations at December 31, 2004:

OVER 5 TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS YEARS -------- --------- ---------- ---------- ------- (IN THOUSANDS) Bonds payable in connection with securitized loans $ 14,511 $ 257 $ 582 $ 687 $12,985 FHLB borrowing 10,500 3,500 7,000 - - Time certificates of deposits 132,419 77,830 36,900 17,689 - Operating lease obligations 2,372 760 1,157 239 216 Purchase obligations for service providers 463 194 206 63 - -------- --------- ---------- ---------- ------- Total $160,265 $ 82,541 $ 45,845 $ 18,678 $13,201 ======== ========= ========== ========== =======

SUPERVISION AND REGULATION OF THE COMPANY The following discussion of statutes and regulations affecting banks and their holding companies is only a summary, does not purport to be complete and is qualified in its entirety by reference to the actual statutes and regulations. No assurance can be given that the statutes and regulations will not change in the future. Moreover, any changes may have a material adverse effect on our business. GENERAL The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to regulation by the Board of Governors of the Federal Reserve System ("FRB"). Under FRB regulations, the Company is expected to act as a source of managerial and financial strength for its bank subsidiary. It cannot conduct operations in an unsafe or unsound manner and must commit resources to support its banking subsidiary in circumstances where the Company might not otherwise do so. Under the BHCA, the Company and its banking subsidiary are subject to periodic examination by the FRB. The Company is also required to file periodic reports of its operations and any additional information regarding its activities and those of its subsidiaries with the FRB, as may be required. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the Commissioner of the California Department of Financial Institutions ("DFI"). Regulations have not yet been proposed or adopted or steps otherwise taken to implement the DFI's powers under this statute. -30- The Company has a class of securities registered with the Securities Exchange Commission ("SEC") under Section 12 of the Securities Exchange Act of 1934 ("1934 Act") and has its common stock listed on the National Association of Securities Dealers ("Nasdaq"). Consequently, the Company is subject to supervision and regulation of the SEC and compliance with the listing requirements of the Nasdaq. RECENT LEGISLATION THE SARBANES-OXLEY ACT OF 2002 The Sarbanes-Oxley Act of 2002 ("SOX") became effective in July 2002 for all public companies. SOX is designed to protect investors in capital markets by improving the accuracy and reliability of corporate disclosures of public companies. It is designed to address weaknesses in the audit process, financial reporting systems and controls and broker-dealer networks surrounding companies that have a class of securities registered under Section 12 of the 1934 Act or are otherwise reporting to the SEC pursuant to Section 15(d) of the 1934 Act (collectively, "public companies"). It is intended that by addressing these weaknesses, public companies will be able to avoid the problems previously encountered by many notable public companies. The provisions of SOX and regulations issued by the SEC and the National Association of Securities Dealers have a direct and significant impact on banks and bank holding companies that are public companies. SOX has resulted in the following: Enhanced Financial Disclosure and Reports - Certification of financial statements - Disclosure of material information Enhanced Accounting Oversight, Board Independence and Conflicts of Interest Rules - Public Accounting Oversight Board - Auditor independence - Independent Audit Committees - Code of ethics - Independent Board of Directors - Independent Nominating and Compensation Committees - Director and executive officer loans - Stock option plans - Attorney conduct Enhanced Enforcement Powers and Penalties - Document destruction - Forfeiture for restated financial statements - No discharge in bankruptcy - Power to freeze funds - Whistleblower protection - Securities fraud felony - Extended statue of limitation On March 2, 2005, the SEC further extended the compliance dates for non-accelerated filers such as the Company. These extensions of the compliance dates require that the Company must begin to comply with the internal control over financial reporting requirements for the fiscal year ending after July 15, 2006, which means calendar year 2006 for the Company. Compliance with SOX is expected to continue to result in additional expenditures by the Company in auditors' fees, directors' fees, attorneys' fees, outside advisor fees, increased errors and omissions premium costs and other costs to satisfy the new requirements for corporate governance imposed by the rules and regulations of SOX. THE CALIFORNIA CORPORATE DISCLOSURE ACT On January 1, 2003, the California Corporate Disclosure Act ("CCD") became effective. The new law requires that all "publicly traded companies" file with the California Secretary of State a statement on an annual basis that includes at least the following information: -31- - The name of the independent auditor for the publicly traded company, a description of the services rendered by the auditor during the previous 24 months, the date of the last audit and a copy of the report - The annual compensation paid to each director and executive officer including options or shares granted to them that were not available to other employees of the company - A description of any loans made to any director at a preferential loan rate during the previous 24 months including the amount and terms - A statement indicating whether any bankruptcy has been filed by the company's executive officers or directors during the past 10 years - The statement indicating whether any member of the Board of Directors or executive officer was convicted of fraud during the past 10 years - A statement indicating whether the corporation has been adjudicated as guilty of having violated any federal securities laws or any banking or securities laws of California during the past 10 years which a judgment of over $10,000 was imposed For purposes of the CCD, a "publicly traded company" is any company whose securities are listed on a national or foreign exchange or which is the subject of a two-way quotation system that is regularly published. BANK HOLDING COMPANY LIQUIDITY The Company is a legal entity, separate and distinct from CWB. Although it has the ability to raise capital on its own behalf or borrow from external sources, the Company may also obtain additional funds through dividends paid by, and fees for services provided to, CWB. However, regulatory constraints may restrict or totally preclude CWB from paying dividends to the Company. See "- Limitations on Dividend Payments." The FRB's policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or that can only be funded in ways, such as by borrowing, that weaken the bank holding company's financial health or its ability to act as a source of financial strength to its subsidiary banks. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. TRANSACTIONS WITH AFFILIATES The Company and any subsidiaries it may purchase or organize are deemed to be affiliates of the bank subsidiary within the meaning of Sections 23A and 23B of the Federal Reserve Act, herein referred to as the "FRA," as amended. Pursuant thereto, loans by CWB to affiliates, investments by CWB in affiliates' stock and taking affiliates' stock as collateral for loans to any borrower will be limited to 10% of CWB's capital, in the case of any one affiliate, and will be limited to 20% of CWB's capital in the case of all affiliates. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices. Specifically, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the FRA. Such restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. The Company and CWB are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities. See -"Supervision and Regulation of the Bank Subsidiary - Significant Legislation." LIMITATIONS ON BUSINESSES AND INVESTMENT ACTIVITIES Under the BHCA, a bank holding company must obtain the FRB's approval before: - directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company - acquiring all or substantially all of the assets of another bank - merging or consolidating with another bank holding company The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank -32- holding company. In general, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting securities of a company that is not a bank or a bank holding company. However, with FRB consent, a bank holding company may own subsidiaries engaged in certain businesses that the FRB has determined to be "so closely related to banking as to be a proper incident thereto". The Company, therefore, is permitted to engage in a variety of banking-related businesses. Some of the activities that the FRB has determined, pursuant to its Regulation Y, to be related to banking are: - making or acquiring loans or other extensions of credit for its own account or for the account of others - servicing loans and other extensions of credit - operating a trust company in the manner authorized by federal or state law under certain circumstances - leasing personal and real property or acting as agent, broker, or adviser in leasing such property in accordance with various restrictions imposed by FRB regulations - acting as investment or financial advisor - providing management consulting advice under certain circumstances - providing support services, including courier services and printing and selling MICR-encoded items - acting as a principal, agent or broker for insurance under certain circumstances - making equity and debt investments in corporations or projects designed primarily to promote community welfare or jobs for residents - providing financial, banking or economic data processing and data transmission services - owning, controlling or operating a savings association under certain circumstances - selling money orders, travelers' checks and U.S. Savings Bonds - providing securities brokerage services, related securities credit activities pursuant to Regulation T and other incidental activities - underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions and other obligations authorized for state member banks under federal law Generally, the BHCA does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, CWB may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that: - the customer must obtain or provide some additional credit, property or services from or to CWB other than a loan, discount, deposit or trust service - the customer must obtain or provide some additional credit, property or service from or to the Company or CWB - the customer may not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended In 1999, the Gramm-Leach-Bliley Act ("GLB") was enacted. GLB significantly changed the regulatory structure and oversight of the financial services industry. GLB permits banks and bank holding companies to engage in previously prohibited activities under certain conditions. Also, under certain conditions, banks and bank holding companies may affiliate with other financial service providers such as insurance companies and securities firms. Consequently, a qualifying bank holding company, called a financial holding company ("FHC"), can engage in a full range of financial activities, including banking, insurance and securities activities, as well as merchant banking and additional activities that are beyond those traditionally permitted for bank holding companies. Moreover, various non-bank financial service providers who were previously prohibited from engaging in banking can now acquire banks while also offering services such as securities underwriting and underwriting and brokering insurance products. GLB also expands passive investment activities by FHCs, permitting them to indirectly invest in any type of company, financial or non-financial, through merchant banking activities and insurance company affiliations. See "- Supervision and Regulation of the Bank Subsidiary - Significant Legislation." CAPITAL ADEQUACY Bank holding companies must maintain minimum levels of capital under the FRB's risk based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be -33- denied approval to acquire or establish additional banks or non-bank businesses. The FRB's risk-based capital adequacy guidelines for bank holding companies and state member banks, discussed in more detail below (see "- Supervision and Regulation of the Bank Subsidiary - Risk-Based Capital Guidelines"), assign various risk percentages to different categories of assets and capital is measured as a percentage of those risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights. The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, the risks posed by concentrations of credit or risks associated with nontraditional banking activities or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers of GLB, may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. LIMITATIONS ON DIVIDEND PAYMENTS The Company is entitled to receive dividends when and as declared by CWB's Board, out of funds legally available for dividends, as specified and limited by the OCC's regulations. Pursuant to the OCC's regulations, funds available for a national bank's dividends are restricted to the lesser of the bank's: (i) retained earnings; or (ii) net income for the current and past two fiscal years (less any dividends paid during that period), unless approved by the OCC. Furthermore, if the OCC determines that a dividend would cause a bank's capital to be impaired or that payment would cause it to be undercapitalized, the OCC can prohibit payment of a dividend notwithstanding that funds are legally available. Since CWB is an FDIC insured institution, it is also possible, depending upon its financial condition and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice and, thus, prohibit those payments. As a California corporation, the Company's ability to pay dividends is subject to the dividend limitations of the California Corporations Code ("CCC"). Section 500 of the CCC allows the Company to pay a dividend to its shareholders only to the extent that the Company has retained earnings and, after the dividend, the Company meets the following criteria: - its assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and - its current assets would be at least equal to its current liabilities. SUPERVISION AND REGULATION OF THE BANK SUBSIDIARY GENERAL Banking is a complex, highly regulated industry. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the FDIC's insurance fund and facilitate conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and financial services industry. Consequently, CWB's growth and earnings performance can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including the OCC, FDIC and FRB. The system of supervision and regulation applicable to CWB governs most aspects of CWB's business, including: - the scope of permissible business - investments - reserves that must be maintained against deposits - capital levels that must be maintained - the nature and amount of collateral that may be taken to secure loans - the establishment of new branches - mergers and consolidations with other financial institutions - the payment of dividends -34- CWB, as a national banking association is a member of the Federal Reserve System, and is subject to regulation, supervision and regular examination by the OCC, FDIC and FRB. CWB's deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of the CWB's business. California law exempts all banks from usury limitations on interest rates. The following summarizes the material elements of the regulatory framework that applies to CWB. It does not describe all of the statutes, regulations and regulatory policies that are applicable. Also, it does not restate all of the requirements of the statutes, regulations and regulatory policies that are described. Consequently, the following summary is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies that may have a material effect on CWB's business. SIGNIFICANT LEGISLATION In 1999, GLB was signed into law, significantly changing the regulatory structure and oversight of the financial services industry. GLB repealed the provisions of the Glass-Steagall Act that restricted banks and securities firms from affiliating. It also revised the BHCA to permit an FHC to engage in a full range of financial activities, including banking, insurance, securities and merchant banking activities. It also permits FHCs to acquire many types of financial firms without the FRB's prior approval. GLB thus provides expanded financial affiliation opportunities for existing bank holding companies and permits other financial service providers to acquire banks and become bank holding companies without ceasing any existing financial activities. Previously, a bank holding company could only engage in activities that were "closely related to banking." This limitation no longer applies to bank holding companies that qualify to be treated as FHC's. To qualify as an FHC, a bank holding company's subsidiary depository institutions must be "well-capitalized," "well-managed" and have at least a "satisfactory" Community Reinvestment Act, herein referred to as "CRA," examination rating. "Non-qualifying" bank holding companies are limited to activities that were permissible under the BHCA as of November 11, 1999. GLB changed the powers of national banks and their subsidiaries and made similar changes in the powers of state-chartered banks and their subsidiaries. National banks may now underwrite, deal in and purchase state and local revenue bonds. Subsidiaries of national banks may now engage in financial activities that the bank cannot itself engage in, except for general insurance underwriting and real estate development and investment. For a subsidiary of a national bank to engage in these new financial activities, the national bank and its depository institution affiliates must be "well capitalized," have at least "satisfactory" general, managerial and CRA examination ratings and meet other qualification requirements relating to total assets, subordinated debt, capital, risk management and affiliate transactions. Subsidiaries of state-chartered banks can exercise the same powers as national bank subsidiaries if they satisfy the same qualifying rules that apply to national banks, except that state-chartered banks do not have to satisfy the managerial and debt rating requirements applicable to national banks. GLB also reformed the overall regulatory framework of the financial services industry. To implement its underlying purposes, GLB preempted conflicting state laws that would restrict the types of financial affiliations that are authorized or permitted under GLB, subject to specified exceptions for state insurance laws and regulations. With regard to securities laws, effective May 12, 2001, GLB removed the current blanket exemption for banks from being considered brokers or dealers under the Securities Exchange Act of 1934 and replaced it with a number of more limited exemptions. Thus, previously exempted banks may become subject to the broker-dealer registration and supervision requirements of the Securities Exchange Act of 1934. The exemption that prevented bank holding companies and banks that advised mutual funds from being considered investment advisers under the Investment Advisers Act of 1940 was also eliminated. Separately, GLB imposes customer privacy requirements on any company engaged in financial activities. Under these requirements, a financial company is required to protect the security and confidentiality of customer nonpublic personal information. Also, for customers that obtain a financial product such as a loan for personal, family or household purposes, a financial company is required to disclose its privacy policy to the customer at the time the relationship is established and annually thereafter, including its policies concerning the sharing of the customer's nonpublic personal information with affiliates and third parties. If an exemption is not available, a financial company must provide consumers with a notice of its information sharing practices that allows the consumer to reject the disclosure of its nonpublic personal information to third parties. Third parties that receive such information are subject to the same restrictions as the financial company on the reuse of the information. A financial company is prohibited from disclosing an account number or similar item to a third party for use in -35- telemarketing, direct mail marketing or other marketing through electronic mail. RISK-BASED CAPITAL GUIDELINES General. The federal banking agencies have established minimum capital ------- standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank's operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank's assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank's assets and off-balance sheet items. A bank's assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 100%. The bank's risk-based capital ratio is calculated by dividing its qualifying capital (numerator) by the combined risk weights of its assets and off-balance sheet items (denominator). A bank's total qualifying capital consists of two types of capital components: "core capital elements," known as Tier 1 capital, and "supplementary capital elements," known as Tier 2 capital. The Tier 1 component of a bank's qualifying capital must represent at least 50% of total qualifying capital and may consist of the following items that are defined as core capital elements: - common stockholders' equity and qualifying non-cumulative perpetual preferred stock (including related surplus) - minority interests in the equity accounts of consolidated subsidiaries The Tier 2 component of a bank's total qualifying capital may consist of the following items: - a portion of the allowance for loan and lease losses - certain types of perpetual preferred stock and related surplus - certain types of hybrid capital instruments and mandatory convertible debt securities - a portion of term subordinated debt and intermediate-term preferred stock, including related surplus Risk Weighted Assets and Off-Balance Sheet Items. Assets and credit equivalent -------------------------------------------------- amounts of off-balance sheet items are assigned to one of several broad risk classifications, according to the obligor or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar value of the amount in each risk classification is then multiplied by the risk weight associated with that classification. The resulting weighted values from each of the risk classifications are added together. This total is the bank's total risk weighted assets. A two-step process determines risk weights for off-balance sheet items, such as unfunded loan commitments, letters of credit and recourse arrangements. First, the "credit equivalent amount" of the off-balance sheet items is determined, in most cases by multiplying the off-balance sheet item by a credit conversion factor. Second, the credit equivalent amount is treated like any balance sheet asset and is assigned to the appropriate risk category according to the obligor or, if relevant, the guarantor or the nature of the collateral. This result is added to the bank's risk-weighted assets and comprises the denominator of the risk-based capital ratio. Minimum Capital Standards. The supervisory standards set forth below specify --------------------------- minimum capital ratios based primarily on broad risk considerations. The risk-based ratios do not take explicit account of the quality of individual asset portfolios or the range of other types of risks to which banks may be exposed, such as interest rate, liquidity, market or operational risks. For this reason, banks are generally expected to operate with capital positions above the minimum ratios. All banks are required to meet a minimum ratio of qualifying total capital to risk weighted assets of 8%. At least 4% must be in the form of Tier 1 capital, net of goodwill. The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill. In addition, the combined maximum amount of term subordinated debt and intermediate-term preferred stock that qualifies as Tier 2 capital for risk-based capital purposes is limited to 50% of Tier 1 capital. The maximum amount of the allowance for loan and lease losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk weighted assets. The allowance for loan and lease losses in excess of this limit may, of course, be maintained, but would not be included in a bank's risk-based capital calculation. The federal banking agencies also require all banks to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a bank rated in the highest of the five categories used by regulators to rate banks, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banks not rated in the highest category, the minimum leverage ratio must be at least 4% to 5%. These uniform risk-based capital guidelines and leverage ratios apply across the industry. Regulators, however, have the discretion to set minimum capital requirements for individual institutions, which may be significantly above the minimum guidelines and ratios. -36- OTHER FACTORS AFFECTING MINIMUM CAPITAL STANDARDS The federal banking agencies have established certain benchmark ratios of loan loss reserves to be held against classified assets. The benchmark by federal banking agencies is the sum of: - 100% of assets classified loss - 50% of assets classified doubtful - 15% of assets classified substandard and - estimated credit losses on other assets over the upcoming 12 months The federal risk-based capital rules adopted by banking agencies take into account a bank's concentrations of credit and the risks of engaging in non-traditional activities. Concentrations of credit refers to situations where a lender has a relatively large proportion of loans involving a single borrower, industry, geographic location, collateral or loan type. Non-traditional activities are considered those that have not customarily been part of the banking business, but are conducted by a bank as a result of developments in, for example, technology, financial markets or other additional activities permitted by law or regulation. The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards. The federal banking agencies also are authorized to review an institution's management of concentrations of credit risk for adequacy and consistency with safety and soundness standards regarding internal controls, credit underwriting or other operational and managerial areas. The federal banking agencies also limit the amount of deferred tax assets that are allowable in computing a bank's regulatory capital. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. However, deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of: - the amount that can be realized within one year of the quarter-end report date, or - 10% of Tier 1 capital The amount of any deferred tax in excess of this limit would be excluded from Tier 1 capital, total assets and regulatory capital calculations. The federal banking agencies have also adopted a joint agency policy statement that provides that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposure is a critical factor in the evaluation of the bank's capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the federal banking agencies to take corrective actions. Financial institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities, and who fail to adequately manage these risks, may be required to set aside capital in excess of the regulatory minimums. PROMPT CORRECTIVE ACTION The federal banking agencies possess broad powers to take prompt corrective action ("PCA") to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". Under the regulations, a bank shall be deemed to be: - "well capitalized" if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure - "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized" - "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances) - "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and - "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2% Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be "undercapitalized," that is, the bank fails to meet the required minimum level for -37- any relevant capital measure. Asset growth and branching restrictions apply to "undercapitalized" banks. Banks classified as "undercapitalized" are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to "significantly undercapitalized" banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to "critically undercapitalized" banks, those with capital at or less than 2%. Restrictions for these banks include the appointment of a receiver or conservator after 90 days, even if the bank is still solvent. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of PCA. A bank, based upon its capital levels, that is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratios actually warrant such treatment. DEPOSIT INSURANCE ASSESSMENTS The FDIC has implemented a risk-based assessment system in which the deposit insurance premium relates to the probability that the deposit insurance fund will incur a loss. The FDIC sets semi-annual assessments in an amount necessary to maintain or increase the reserve ratio of the insurance fund to at least 1.25% of insured deposits or a higher percentage as determined to be justified by the FDIC. Under the risk-based assessment system adopted by the FDIC, banks are categorized into one of three capital categories, "well capitalized", "adequately capitalized" and "undercapitalized". Assignment of a bank into a particular capital category is based on supervisory evaluations by its primary federal regulator. After being assigned to a particular capital category, a bank is classified into one of three supervisory categories. The three supervisory categories are: - Group A - financially sound with only a few minor weaknesses - Group B - demonstrates weaknesses that could result in significant deterioration - Group C - poses a substantial probability of loss The capital ratios used by the FDIC to define "well-capitalized", "adequately capitalized" and "undercapitalized" are the same as in the prompt corrective action regulations. The assessment rates are summarized below, expressed in terms of cents per $100 in insured deposits:

Assessment Rates Supervisory Group ------------------------------------- Capital Group Group A Group B Group C ------------- ---------- ----------- ------------ 1-Well Capitalized 0 3 17 2-Adequately Capitalized 3 10 24 3-Undercapitalized 10 24 27

CWB is currently risk rated a 1A, which results in CWB being categorized as well capitalized, group A. INTERSTATE BANKING AND BRANCHING Bank holding companies from any state may generally acquire banks and bank holding companies located in any other state, subject in some cases to nationwide and state-imposed deposit concentration limits and limits on the acquisition of recently established banks. Banks also have the ability, subject to specific restrictions, to acquire by acquisition or merger branches located outside their home state. The establishment of interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to many of the laws of the states in which they are located. California law authorizes out-of-state banks to enter California by the acquisition of, or merger with, a California bank that has been in existence for at least five years, unless the California bank is in danger of failing or in certain other emergency situations. Interstate branching into California is, however, limited to the acquisition of an existing bank. ENFORCEMENT POWERS In addition to measures taken under the PCA provisions, insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of -38- any law, rule, regulation or condition imposed in writing by the regulatory agency or term of a written agreement with the regulatory agency. Enforcement actions may include: - the appointment of a conservator or receiver for the bank - the issuance of a cease and desist order that can be judicially enforced - the termination of the bank's deposit insurance - the imposition of civil monetary penalties; - the issuance of directives to increase capital; - the issuance of formal and informal agreements - the issuance of removal and prohibition orders against officers, directors and other institution-affiliated parties - the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the deposit insurance fund or the bank would be harmed if such equitable relief was not granted SAFETY AND SOUNDNESS GUIDELINES The federal banking agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. These guidelines establish operational and managerial standards relating to: - internal controls, information systems and internal audit systems - loan documentation - credit underwriting - asset growth - compensation, fees and benefits Additionally, the federal banking agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in a formal enforcement action. The federal banking agencies have issued regulations prescribing uniform guidelines for real estate lending. The regulations require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan-to-value limits that do not exceed the supervisory limits prescribed by the regulations. MONEY LAUNDERING AND CURRENCY CONTROLS. Various federal statutory and regulatory provisions are designed to enhance recordkeeping and reporting of currency and foreign transactions. Pursuant to the Bank Secrecy Act, financial institutions must report high levels of currency transactions or face the imposition of civil monetary penalties for reporting violations. The Money Laundering Control Act imposes sanctions, including revocation of federal deposit insurance, for institutions convicted of money laundering. The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA"), a part of the USA Patriot Act, authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks and other financial institutions to enhance recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern. Among its other provisions, IMLAFATA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the Untied States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLAFATA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. On October 1, 2003, the Treasury Department adopted final regulations which implemented IMLAFATA and mandated that federally-insured banks and other financial institutions establish customer identification programs -39- designed to verify the identity of persons opening new accounts, to maintain the records used for verification, and to determine whether the person appears on any list of known or suspected terrorists or terrorist organizations. CONSUMER PROTECTION LAWS AND REGULATIONS The bank regulatory agencies are focusing greater attention on compliance with consumer protection laws and their implementing regulations. Examination and enforcement have become more intense in nature and insured institutions have been advised to carefully monitor compliance with various consumer protection laws and their implementing regulations. Banks are subject to many federal consumer protection laws and their regulations, including: - Community Reinvestment Act ("CRA") - Truth in Lending Act ("TILA") - Fair Housing Act ("FH Act") - Equal Credit Opportunity Act ("ECOA") - Home Mortgage Disclosure Act ("HMDA") - Real Estate Settlement Procedures Act ("RESPA") - Gramm-Leach-Bliley Act CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations. The federal banking agencies have adopted regulations that measure a bank's compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from a high of "outstanding" to a low of "substantial noncompliance". ECOA prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act. The Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: - overt evidence of discrimination - evidence of disparate treatment - evidence of disparate impact If a creditor's actions have had the effect of discriminating, the creditor may be held liable even when there is no intent to discriminate. FH Act regulates many practices, including making it unlawful for any lender to discriminate against any person in its housing-related lending activities because of race, color, religion, national origin, sex, handicap or familial status. FH Act is broadly written and has been broadly interpreted by the courts. A number of lending practices have been found to be, or may be considered, illegal under FH Act, including some that are not specifically mentioned in FH Act itself. Among those practices that have been found to be, or may be considered, illegal under FH Act are: - declining a loan for the purposes of racial discrimination - making excessively low appraisals of property based on racial considerations - pressuring, discouraging or denying applications for credit on a prohibited basis - using excessively burdensome qualifications standards for the purpose or with the effect of denying housing to minority applicants - imposing on minority loan applicants more onerous interest rates or other terms, conditions or requirements - racial steering or deliberately guiding potential purchasers to or away from certain areas because of race -40- TILA is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of TILA, all creditors must use the same credit terminology and expressions of rates, the annual percentage rate, the finance charge, the amount financed, the total payments and the payment schedule. HMDA grew out of public concern over credit shortages in certain urban neighborhoods. One purpose of HMDA is to provide public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. HMDA also includes a "fair lending" aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes. HMDA requires institutions to report data regarding applications for one-to-four family real estate loans, home improvement loans and multifamily loans, as well as information concerning originations and purchases of those types of loans. Federal bank regulators rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices. RESPA requires lenders to provide borrowers with disclosures regarding the nature and costs of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. GLB required disclosure of the bank's privacy policy at the time the customer relationship is established and annually thereafter. Under the provisions of GLB, financial institutions must put systems in place to safeguard the non-public personal information of its customers. Violations of these various consumer protection laws and regulations can result in civil liability to the aggrieved party, regulatory enforcement including civil money penalties and even punitive damages. OTHER ASPECTS OF BANKING LAW CWB is also subject to federal and state statutory and regulatory provisions covering, among other things, security procedures, currency and foreign transactions reporting, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability and truth-in-savings. There are also a variety of federal statutes that regulate acquisitions of control and the formation of bank holding companies. IMPACT OF MONETARY POLICIES Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its other borrowings and the interest rate earned on its loans, securities and other interest-earning assets comprises the major source of CWB's earnings. These rates are highly sensitive to many factors which are beyond CWB's control and, accordingly, the earnings and growth of CWB are subject to the influence of economic conditions generally, both domestic and foreign, including inflation, recession and unemployment and also to the influence of monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by: - Open-market dealings in U.S. government securities - Adjusting the required level of reserves for financial institutions subject to reserve requirements - Placing limitations upon savings and time deposit interest rates - Adjusting the discount rate applicable to borrowings by banks which are members of the FRB The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates. From June 2004 to December 2004, the FRB has increased the discount rate five times resulting in a rate increase of 1.25% during the period. The FRB raised interest rates once in March 2005 and additional increases are expected during the remainder of 2005. The nature and timing of any future changes in the FRB's policies and their impact on the Company and CWB cannot be predicted, however, depending on the degree to which our interest-earning assets and interest-bearing liabilities are rate sensitive, increases in rates would have a temporary effect of increasing our net interest margin, while decreases in interest rates would have the opposite effect. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan charge-offs, thus adversely affecting our net income or other operating costs. See Interest Rate Risk- page 28. REGULATORY MATTERS From October 2002 until October 2003, CWB was operating under a Consent Order with the OCC. In addition, from March 2000 until November 2003, the Company was operating under a Memorandum of Understanding with the FRB. Prior to termination of agreements, both CWB and the Company were precluded from certain activities. -41- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK -------- --------------------------------------------------------------- The Company's primary market risk is interest rate risk ("IRR"). To minimize the volatility of net interest income at risk ("NII") and the impact on economic value of equity ("EVE"), the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by the Board's ALCO. ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies, including IRR exposure. To mitigate the impact of changes in interest rates on the Company's interest-earning assets and interest-bearing liabilities, the Company actively manages the amounts and maturities. The Company generally retains short-term, adjustable-rate assets as they have similar re-pricing characteristics as funding sources. The Company sells substantially all of its mortgage products and a portion of its SBA loan originations. While the Company has some assets and liabilities in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise. The Company uses software, combined with download detailed information from various application programs, and assumptions regarding interest rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates. The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase in interest rates of 200 basis points and a decline of 200 basis points compared to a flat interest rate scenario.

------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY 200 BP INCREASE 200 BP DECREASE --------------- ------------------ 2004 2003 2004 2003 ------- ------ -------- -------- (DOLLARS IN THOUSANDS) Anticipated impact over the next twelve months: Net interest income (NII) $1,230 $ 871 $(1,237) $(2,106) 8.2% 6.4% (8.3%) (15.4%) ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- Economic value of equity (EVE) $ (749) $ 260 $ 241 $ (88) (1.6%) 0.7% 0.5% (.2%) -------------------------------------------------------------------------------------

For further discussion of interest rate risk, see Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ------- The Company's consolidated financial statements begin on page F-1. -42- Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Community West Bancshares We have audited the accompanying consolidated balance sheets of Community West Bancshares (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community West Bancshares at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Los Angeles, California February 4, 2005 F-1

COMMUNITY WEST BANCSHARES CONSOLIDATED BALANCE SHEETS DECEMBER 31, ---------------------- 2004 2003 ----------- --------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks $ 8,769 $ 5,758 Interest-earning deposits in other financial institutions 9,700 5,031 Federal funds sold 11,736 11,267 ----------- --------- Cash and cash equivalents 30,205 22,056 Time deposits in other financial institutions 647 792 Investment securities available-for-sale, at fair value; amortized cost of 22,258 15,432 $22,380 at December 31, 2004 and $15,455 at December 31, 2003 Investment securities held-to-maturity, at amortized cost; fair value of 6,094 5,036 $6,122 at December 31, 2004 and $5,035 at December 31, 2003 Federal Home Loan Bank stock, at cost 1,200 - Federal Reserve Bank stock, at cost 812 812 Interest only strips, at fair value 2,715 3,548 Loans: Held for sale, at lower of cost or fair value 45,988 42,038 Held for investment, net of allowance for loan losses of $2,785 at December 31, 222,153 166,874 2004 and $2,652 at December 31, 2003 Securitized loans, net of allowance for loan losses of $1,109 at December 31, 2004 and $2,024 at December 31, 2003 22,365 35,362 ----------- --------- Total loans 290,506 244,274 Servicing rights 3,258 2,499 Other real estate owned, net 13 527 Premises and equipment, net 1,763 1,632 Other assets 5,732 7,642 ----------- --------- TOTAL ASSETS $ 365,203 $304,250 =========== ========= LIABILITIES Deposits: Non-interest-bearing demand $ 44,384 $ 42,417 Interest-bearing demand 92,395 38,115 Savings 15,370 15,559 Time certificates of $100,000 or more 40,393 19,673 Other time certificates 92,026 109,091 ----------- --------- Total deposits 284,568 224,855 Securities sold under agreements to repurchase 13,672 14,394 Federal Home Loan Bank advances 10,500 - Bonds payable in connection with securitized loans 13,910 26,100 Other liabilities 4,984 4,570 ----------- --------- Total liabilities 327,634 269,919 ----------- --------- Commitments and contingencies-See Note 15 STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 shares authorized; shares issued and outstanding, 30,020 29,874 5,729,869 at December 31, 2004 and 5,706,769 at December 31, 2003 Retained earnings 7,621 4,472 Accumulated other comprehensive loss (72) (15) ----------- --------- Total stockholders' equity 37,569 34,331 ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 365,203 $304,250 =========== ========= See accompanying notes.

F-2

COMMUNITY WEST BANCSHARES CONSOLIDATED INCOME STATEMENTS YEAR ENDED DECEMBER 31, -------------------------- 2004 2003 2002 ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Loans $20,565 $19,658 $29,306 Investment securities 979 489 202 Other 301 236 468 ------- ------- -------- Total interest income 21,845 20,383 29,976 ------- ------- -------- INTEREST EXPENSE Deposits 5,016 4,621 5,545 Bonds payable and other borrowings 2,829 4,721 7,921 ------- ------- -------- Total interest expense 7,845 9,342 13,466 ------- ------- -------- NET INTEREST INCOME 14,000 11,041 16,510 Provision for loan losses 418 1,669 4,899 ------- ------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,582 9,372 11,611 NON-INTEREST INCOME 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 ------- ------- -------- NON-INTEREST EXPENSES 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 ------- ------- -------- Income (loss) before provision (benefit) for income taxes 6,523 3,311 (1,922) Provision (benefit) for income taxes 2,688 1,128 (652) ------- ------- -------- NET INCOME (LOSS) $ 3,835 $ 2,183 $(1,270) ======= ======= ======== INCOME (LOSS) PER SHARE - BASIC $ 0.67 $ 0.38 $ (0.22) INCOME (LOSS) PER SHARE - DILUTED $ 0.65 $ 0.38 $ (0.22) See accompanying notes.

F-3

COMMUNITY WEST BANCSHARES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ACCUMULATED OTHER TOTAL COMMON STOCK RETAINED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY ------ -------- ---------- --------------- --------------- (IN THOUSANDS) BALANCES AT JANUARY 1, 2002 5,690 $ 29,798 $ 3,559 $ - $ 33,357 Comprehensive income: Net loss (1,270) - (1,270) ------ -------- ---------- --------------- --------------- BALANCES AT DECEMBER 31, 2002 5,690 29,798 2,289 - 32,087 Exercise of stock options 17 76 - - 76 Comprehensive income: Net income 2,183 - 2,183 Change in unrealized losses on securities available-for-sale, net (15) (15) --------------- Comprehensive income 2,168 BALANCES AT ------ -------- ---------- --------------- --------------- DECEMBER 31, 2003 5,707 29,874 4,472 (15) 34,331 Exercise of stock options 23 146 - - 146 Comprehensive income: Net income 3,835 - 3,835 Change in unrealized losses on securities available-for-sale, net (57) (57) --------------- Comprehensive income 3,778 Cash dividends paid ($0.12 per share) (686) (686) BALANCES AT ------ -------- ---------- --------------- --------------- DECEMBER 31, 2004 5,730 $ 30,020 $ 7,621 $ (72) $ 37,569 ====== ======== ========== =============== =============== See accompanying notes.

F-4

COMMUNITY WEST BANCSHARES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ------------------------------- 2004 2003 2002 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,835 $ 2,183 $ (1,270) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loan losses 418 1,669 4,899 Provision for losses on real estate owned 1 25 86 Losses on sale of premises and equipment - - 132 Deferred income taxes (278) 474 1,219 Depreciation and amortization 1,270 1,589 3,031 Net amortization of discounts and premiums on securities 19 189 - Gains on: Sale of other real estate owned (2) (79) (14) Sale of loans held for sale (3,981) (4,401) (4,788) Changes in: Fair value of interest only strips, net of accretion 833 1,000 3,385 Servicing rights, net of amortization (759) (602) 593 Other assets 1,562 4,068 108 Other liabilities 1,058 (1,062) 726 --------- --------- --------- Net cash provided by operating activities 3,976 5,053 8,107 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of held-to-maturity securities (3,179) (7,337) (11,904) Purchase of available-for-sale securities (10,232) (24,197) - Purchase of Federal Reserve Bank stock - - (37) Purchase of Federal Home Loan Bank stock (1,200) - - Principal paydowns and maturities of available-for-sale securities 3,314 8,670 - Principal paydowns and maturities of held-to-maturity securities 2,095 8,219 6,010 Unrealized accumulated gains/losses on available for sale securities 99 - - Additions to interest only strip assets - - (240) Loan originations and principal collections, net (42,758) 2,744 14,049 Proceeds from sale of other real estate owned 529 1,718 399 Net decrease in time deposits in other financial institutions 145 1,485 3,661 Purchase of premises and equipment, net of sales (663) (254) (136) --------- --------- --------- Net cash (used in) provided by investing activities (51,850) (8,952) 11,802 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options 146 76 - Cash dividends paid to shareholders (686) - - Net increase in demand deposits and savings accounts 56,058 9,847 16,043 Net increase (decrease) in time certificates of deposit 3,655 (4,075) 6,874 Proceeds from securities sold under agreements to repurchase 13,672 20,041 - Repayments of securities sold under agreements to repurchase (14,394) (5,647) - Proceeds from Federal Home Loan Bank advances 14,000 - - Repayment of Federal Home Loan Bank advances (3,500) - - Repayments of bonds payable in connection with securitized loans (12,928) (25,381) (41,138) --------- --------- --------- Net cash provided by (used in) financing activities 56,023 (5,139) (18,221) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,149 (9,038) 1,688 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 22,056 31,094 29,406 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,205 $ 22,056 $ 31,094 ========= ========= ========= See accompanying notes.

F-5 COMMUNITY WEST BANCSHARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Community West Bancshares, a California Corporation ("Company or CWBC"), and its wholly-owned subsidiary, Community West Bank National Association ("CWB") (formerly known as Goleta National Bank), are in accordance with accounting principles generally accepted in the United States ("GAAP") and general practices within the financial services industry. All material intercompany transactions and accounts have been eliminated. The following are descriptions of the most significant of those policies: NATURE OF OPERATIONS - The Company's primary operations are related to commercial banking and financial services through CWB which include the acceptance of deposits and the lending and investing of money. The Company also engages in electronic banking services. The Company's customers consist of small to mid-sized businesses, as well as individuals. The Company also originates and sells U. S. Small Business Administration ("SBA") and first and second mortgage loans through its normal operations and loan production offices. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates to be reasonably accurate, actual results may differ. Certain amounts in the 2002 and 2003 financial statements have been reclassified to be comparable with classifications in 2004. BUSINESS SEGMENTS - Reportable business segments are determined using the "management approach" and are intended to present reportable segments consistent with how the chief operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of December 31, 2004 and 2003, the Company had only one reportable business segment. RESERVE REQUIREMENTS - All depository institutions are required by law to maintain reserves on transaction accounts and non-personal time deposits in the form of cash balances at the Federal Reserve Bank ("FRB"). These reserve requirements can be offset by cash balances held at CWB. At December 31, 2004 and 2003, CWB's cash balance was sufficient to offset the FRB requirement. INVESTMENT SECURITIES - The Company currently holds securities classified as both available-for-sale ("AFS") and held-to-maturity ("HTM"). Securities classified as HTM are accounted for at amortized cost as the Company has the positive intent and ability to hold them to maturity. Securities not classified as HTM are considered AFS and are carried at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of any applicable income taxes. Realized gains or losses on the sale of AFS securities, if any, are determined on a specific identification basis. Purchase premiums and discounts are recognized in interest income using the effective interest method over the terms of the related securities, or to earlier call dates, if appropriate. Declines in the fair value of AFS or HTM securities below their cost that are deemed to be other than temporary, if any, are reflected in earnings as realized losses. There is no recognition of unrealized gains or losses for HTM securities. INTEREST ONLY STRIPS AND SERVICING RIGHTS - The guaranteed portion of certain SBA loans can be sold into the secondary market. Servicing rights are recognized at fair market value 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. F-6 The I/O strips are classified as trading securities. Accordingly, the Company records the I/O strips at fair value with the resulting increase or decrease in fair value being recorded through operations in the current period. Quarterly, the Company verifies the reasonableness of its valuation estimates by comparison to the results of an independent third party valuation analysis. LOANS HELD FOR SALE - Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or market provision. Loans held for sale are primarily comprised of SBA loans, second mortgage loans and residential mortgage loans. The Company did not incur a lower of cost or market valuation provision in the years ended December 31, 2004 and 2003. LOANS HELD FOR INVESTMENT - Loans are recognized at the principal amount outstanding, net of unearned income and amounts charged off. Unearned income includes deferred loan origination fees reduced by loan origination costs. Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method. INTEREST INCOME ON LOANS - Interest on loans is accrued daily on a simple-interest basis. The accrual of interest is discontinued when substantial doubt exists as to collectibility of the loan, generally at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is no longer recognized on the loan. Interest on non-accrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Impaired loans are identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. All of the Company's nonaccrual loans were also classified as impaired at December 31, 2004 and 2003. REPURCHASE AGREEMENTS - Securities sold under repurchase agreements are treated as collateralized financing transactions and carried at the amount at which the securities will be subsequently repurchased. 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. 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 F-7 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. OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") is real estate acquired through foreclosure on the collateral property and is recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value of the OREO is charged-off against the allowance for loan losses. Subsequent to foreclosure, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value. Operating expenses or income, and gains or losses on disposition of such properties, are charged to current operations. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter. Generally, the estimated useful lives of other items of premises and equipment are as follows: Building and improvements 31.5 years Furniture and equipment 5 - 10 years Electronic equipment and software 2 - 5 years INCOME TAXES - The Company uses the accrual method of accounting for financial reporting purposes as well as for tax reporting. Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting. These items represent "temporary differences." Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. INCOME (LOSS) PER SHARE - Basic income (loss) per share is computed based on the weighted average number of shares outstanding during each year divided into net income (loss). Diluted income per share is computed based on the weighted average number of shares outstanding during each year plus the dilutive effect, if any, of outstanding options divided into net income (loss). STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, interest-earning deposits in other financial institutions and federal funds sold. Federal funds sold are one-day transactions with CWB's funds being returned the following business day. STOCK-BASED COMPENSATION - 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. 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. F-8 RECENT ACCOUNTING PRONOUNCEMENTS - 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 unaudited pro forma net income and earnings per share in Note 9 to our consolidated financial statements. Statement 123(R) 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. 2. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities is as follows:

DECEMBER 31, 2004 (IN THOUSANDS) ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR Available-for-sale securities COST GAINS LOSSES VALUE ----------------------------- ---------- ----------- ------------ ------- U.S. Government and agency $ 15,311 $ - $ (90) $15,221 Other securities 7,069 (32) 7,037 ---------- ----------- ------------ ------- Total available-for-sale securities $ 22,380 $ - $ (122) $22,258 ========== =========== ============ ======= Held-to-maturity securities --------------------------- U.S. Government and agency $ 200 $ - $ (1) $ 199 Other securities 5,894 29 - 5,923 ---------- ----------- ------------ ------- Total held-to-maturity securities $ 6,094 $ 29 $ (1) $ 6,122 ========== =========== ============ =======

F-9

DECEMBER 31, 2003 (IN THOUSANDS) ----------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR Available-for-sale securities COST GAINS LOSSES VALUE ----------------------------- ---------- ----------- ------------ ------- U.S. Government and agency $ 7,064 $ - $ (40) $ 7,024 Other securities 8,391 17 - 8,408 ---------- ----------- ------------ ------- Total available-for-sale securities $ 15,455 $ 17 $ (40) $15,432 ========== =========== ============ ======= Held-to-maturity securities --------------------------- U.S. Government and agency $ 200 $ - $ - $ 200 Other securities 4,836 - (1) 4,835 ---------- ----------- ------------ ------- Total held-to-maturity securities $ 5,036 $ - $ (1) $ 5,035 ========== =========== ============ =======

At December 31, 2004, $200,000 at carrying value of the above securities was pledged as collateral to the United States Treasury for its treasury, tax and loan account and $14,000,000 at carrying value, was pledged under repurchase agreements which are treated as collateralized financing transactions. Additionally, $14,100,000 at carrying value was pledged to the Federal Home Loan Bank, San Francisco, as collateral for current and future advances. 3. LOAN SALES AND SERVICING SBA Loan Sales - The Company sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing retained basis, in exchange for a combination of a cash premium, servicing rights and/or I/O strips. A portion of the proceeds is recognized as servicing fee income as it occurs and the remainder is capitalized as excess servicing and is included in the gain on sale calculation. The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts. The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed. The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party for a cash premium. The Company records servicing liabilities for the unguaranteed loans sold calculated based on the present value of the estimated future servicing costs associated with each loan. A portion of this cost is included as a reduction to the premium collected on the loan sale, and the remainder is accrued and recognized as servicing expense as it occurs. The balance of all servicing rights and obligations is subsequently amortized over the estimated life of the loans using an estimated prepayment rate of 20-25%. Quarterly, the servicing and I/O strip assets are analyzed for impairment. In 2002, the Company recognized impairment charges of $1.8 million. The Company also periodically sells SBA loans originated under the 504 loan program into the secondary market, on a servicing released basis, in exchange for a cash premium. As of December 31, 2004 and 2003, the Company had $43.6 million and $36.9 million, respectively, in SBA loans held for sale. The following is a summary of activity in I/O Strips:

YEAR ENDED DECEMBER 31, --------------------------- 2004 2003 2002 ------- -------- -------- (IN THOUSANDS) Balance, beginning of year $3,548 $ 4,548 $ 7,693 Additions through loan sales - - 240 Valuation adjustment, net (833) (1,000) (3,385) ------- -------- -------- Balance, end of year $2,715 $ 3,548 $ 4,548 ======= ======== ========

The following is a summary of activity in Servicing Rights:

YEAR ENDED DECEMBER 31, --------------------------- 2004 2003 2002 ------- -------- -------- (IN THOUSANDS) Balance, beginning of year $2,499 $1,897 $2,489 Additions through loan sales 1,259 1,116 597 Amortization (500) (514) (426) Valuation adjustment - - (763) ------- -------- -------- Balance, end of year $3,258 $2,499 $1,897 ======= ======== ========

F-10 Loans serviced for others are not included in the accompanying consolidated balance sheets. The principal balance of loans serviced for others at December 31, 2004 and 2003 totaled $167.1 million and $126.8 million, respectively. 4. LOANS HELD FOR INVESTMENT The composition of the Company's loans held for investment portfolio, excluding securitized loans is as follows:

DECEMBER 31, ------------------- 2004 2003 --------- -------- (IN THOUSANDS) Commercial $ 30,893 $ 24,592 Real estate 85,357 71,010 SBA 35,265 30,698 Manufactured housing 66,423 39,073 Other installment 8,645 5,770 --------- -------- 226,583 171,143 Less: Allowance for loan losses 2,785 2,652 Deferred fees, net of costs (103) 69 Discount on unguaranteed portion of SBA loans 1,748 1,548 --------- -------- Loans held for investment, net $222,153 $166,874 ========= ========

An analysis of the allowance for loan losses for loans held for investment is as follows:

YEAR ENDED DECEMBER 31, --------------------------- 2004 2003 2002 ------- -------- -------- (IN THOUSANDS) Balance, beginning of year $2,652 $ 3,379 $ 4,086 Loans charged off (459) (1,822) (5,637) Recoveries on loans previously charged off 75 802 1,859 ------- -------- -------- Net charge-offs (384) (1,020) (3,778) Provision for loan losses 517 293 3,071 ------- -------- -------- Balance, end of year $2,785 $ 2,652 $ 3,379 ======= ======== ========

The recorded investment in loans that are considered to be impaired is as follows:

YEAR ENDED DECEMBER 31, -------------------------- 2004 2003 2002 ------- ------- -------- (IN THOUSANDS) Impaired loans without specific valuation allowances $ 49 $ 235 $ 422 Impaired loans with specific valuation allowances 3,926 6,843 7,971 Specific valuation allowance related to impaired loans (425) (640) (1,127) ------- ------- -------- Impaired loans, net $3,550 $6,438 $ 7,266 ======= ======= ======== Average investment in impaired loans $5,137 $6,584 $ 7,565 ======= ======= ========

F-11 The following schedule reflects recorded investment at the dates indicated in certain types of loans:

YEAR ENDED DECEMBER 31, ---------------------------- 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Nonaccrual loans $ 8,350 $ 7,174 $13,965 SBA guaranteed portion of loans included above (5,287) (4,106) (8,143) -------- -------- -------- Nonaccrual loans, net $ 3,063 $ 3,068 $ 5,822 ======== ======== ======== Troubled debt restructured loans $ 124 $ 193 $ 829 Loans 30 through 90 days past due with interest accruing $ 1,804 $ 3,907 $ 5,122 Interest income recognized on impaired loans $ 103 $ 277 $ 190 Interest foregone on nonaccrual loans and troubled debt restructured loans outstanding 208 216 1,263 -------- -------- -------- Gross interest income on impaired loans $ 311 $ 493 $ 1,453 ======== ======== ========

The Company makes loans to borrowers in a number of different industries. Other than Manufactured Housing, no single concentration comprises 10% or more of the Company's loan portfolio. Commercial real estate loans and SBA loans comprised over 10% of the Company's loan portfolio as of December 31, 2004 and 2003, 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. 5. SECURITIZED LOANS The Company originated and purchased second mortgage loans that allowed borrowers to borrow up to 125% of their home's appraised value, when combined with the balance of the first mortgage loan, up to a maximum loan of $100,000. In 1998 and 1999, the Company transferred $81 million and $122 million, respectively, of these loans to two special purpose trusts. These loans were both originated and purchased by the Company. The trusts, then sold bonds to third party investors that were secured by the transferred loans. The loans and bonds are held in the trusts independent of the Company, the trustee of which oversees the distributions 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 bonds that guarantees the payment of the bonds. The Company did not surrender effective control over the loans transferred at the time of securitization. Accordingly, the securitizations are accounted for as secured borrowings and both the loans and bonds in the trusts are consolidated into the financial statements of the Company. At December 31, 2004 and 2003, respectively, securitized loans are net of an allowance for loan losses as set forth below, and include purchase premiums and deferred fees/costs of $469,000 and $823,000, respectively. An analysis of the allowance for loan losses for securitized loans is as follows:

YEAR END DECEMBER 31, ---------------------------- 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Balance, beginning of year $ 2,024 $ 2,571 $ 4,189 Loans charged off (1,356) (2,511) (4,012) Recoveries on loans previously charged off 540 588 566 -------- -------- -------- Net charge-offs (816) (1,923) (3,446) Provision for loan losses (99) 1,376 1,828 -------- -------- -------- Balance, end of year $ 1,109 $ 2,024 $ 2,571 ======== ======== ========

F-12 6. PREMISES AND EQUIPMENT

DECEMBER 31, ------------------ 2004 2003 -------- -------- (IN THOUSANDS) Furniture, fixtures and equipment $ 6,698 $ 6,851 Building and land 896 888 Leasehold improvements 757 771 Construction in progress 29 - -------- -------- 8,380 8,510 Less: accumulated depreciation and amortization (6,617) (6,878) -------- -------- Premises and equipment, net $ 1,763 $ 1,632 ======== ========

The Company leases office facilities under various operating lease agreements with terms that expire at various dates between January 2005 and December 2011, plus options to extend the lease terms for periods of up to ten years. The minimum lease commitments as of December 31, 2004 under all operating lease agreements are as follows:

(IN THOUSANDS) 2005 $ 760 2006 765 2007 392 2008 131 2009 108 Thereafter 216 --------------- Total $ 2,372 ===============

Rent expense for the years ended December 31, 2004, 2003 and 2002, included in occupancy expense was $724,000 $680,000 and $951,000, respectively. 7. DEPOSITS At December 31, 2004, the maturities of time certificates of deposits are as follows:

(IN THOUSANDS) 2005 $ 77,830 2006 25,675 2007 11,225 2008 3,185 2009 14,504 --------------- Total $ 132,419 ===============

8. BORROWINGS Repurchase Agreements ---------------------- The Company has entered into a financing arrangement with a third party by which its government-guaranteed securities can be pledged as collateral for short-term borrowings. As of December 31, 2004 and 2003, securities with a carrying value of $14.0 million and $14.7 million respectively, were pledged as collateral for short-term borrowings. As of December 31, 2004 and December 31, 2003, the Company had $13.7 million and $14.4 million, respectively, of outstanding repurchase agreements, with interest rates of 1.40% to 2.35% for 2004 and 1.25% to 1.43% for 2003, all of which mature within one year. Federal Home Loan Bank Advances ----------------------------------- As a member of the Federal Home Loan Bank of San Francisco ("FHLB"), the Company has established a credit line under which the borrowing capacity is determined subject to "delivery" status of qualifying collateral. Generally, this collateral includes certain mortgages or deeds of trust and securities and notes of the U.S. Government and its agencies. As of December 31, 2004, the Company had $33.8 million of loans and $14.1 million of securities pledged as collateral for current and future FHLB borrowings. F-13 Information related to advances from FHLB at December 31, 2004 (there were none as of December 31, 2003 and 2002) as follows:

Scheduled Maturities AMOUNT INTEREST RATES -------------------- ------------- --------------- (DOLLARS IN THOUSANDS) Due within one year $ 3,500 1.77%-2.75% After one year but within three years 7,000 2.59%-3.28% ------------- Total advances from FHLB $ 10,500 ============= Other information ------------------ Weighted average interest rate, end of year 2.71% Weighted average interest rate during the year 2.09% Average balance of advances from FHLB $ 5,419 Maximum amount outstanding at any month end 10,500

The total interest expense on advances from FHLB was $113,000 for 2004. Bonds Payable -------------- The following is a summary of the outstanding bonds payable:

YEAR ENDED DECEMBER 31, -------------------------------------------------------- RANGES OF INTEREST STATED MATURITY 2004 2003 RATES DATE ------- ------- ------------------- ----------------- (DOLLARS IN THOUSANDS) Series 1998-1 $ 179 $ 5,205 8.45% November 25, 2024 Series 1999-1 14,332 22,235 7.85%-8.75% May 25, 2025 ------- ------- 14,511 27,440 Less: Bond issuance costs 228 477 Bond discount 373 863 ------- ------- Bonds payable, net $13,910 $26,100 ======= =======

The bonds are collateralized by securitized loans with an outstanding principal balance of $6.6 million and $16.4 million as of December 31, 2004 for Series 1998-1 and Series 1999-1, respectively. There is no cross collateralization between the bond issues. Financial data pertaining to bonds payable were as follows:

YEAR ENDED DECEMBER 31, ---------------------------- 2004 2003 2002 -------- -------- -------- (DOLLARS IN THOUSANDS) Weighted average coupon interest rate, end of year 8.27% 8.26% 8.02% Annual weighted average interest rate 12.41% 11.89% 11.44% Average balance of bonds payable, net $19,676 $39,000 $69,251 Maximum amount of bonds payable, net, at any month end $24,706 $50,473 $84,910

As of December 31, 2004, the annual scheduled bond repayments were as follows:

2005 2006 2007 2008 2009 THEREAFTER TOTAL ----- ----- ----- ----- ----- ----------- ------- (IN THOUSANDS) Bond repayments $ 257 $ 279 $ 303 $ 329 $ 358 $ 12,985 $14,511

The Company has the option to call and pay off the remaining bond balance when the related loan balances are reduced to 10% of the original pool balance. F-14 9. STOCKHOLDERS' EQUITY Common Stock ------------- Earnings per share-Calculation of Weighted Average Shares Outstanding ----------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 2002 ----- ----- ----- (IN THOUSANDS) Basic weighted average shares outstanding 5,718 5,694 5,690 ----- ----- ----- Dilutive effect of stock options 149 64 - Diluted weighted average shares outstanding 5,867 5,758 5,690 ===== ===== =====

The incremental shares from assumed conversions of stock options on 13,674 shares in 2002 were excluded from the computations of diluted earnings per share because the Company had a net loss for 2002, which made them anti-dilutive. Stock Option Plans -------------------- As of December 31, 2004, options were outstanding at prices ranging from $3.00 to $12.50 per share with 276,467 options exercisable and 372,451 options available for future grant. As of December 31, 2003, options were outstanding at prices ranging from $3.00 to $14.88 per share with 256,327 options exercisable and 475,651 options available for future grant. As of December 31, 2004, the average life of the outstanding options was approximately 6.81 years. Stock option activity is as follows:

YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2004 2003 2002 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE 2004 EXERCISE 2003 EXERCISE 2002 EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- --------- -------- --------- --------- --------- Options outstanding, January 1, 463,207 $ 6.04 350,852 $ 6.30 432,624 $ 6.31 Granted 151,500 9.10 198,000 5.51 88,128 4.60 Canceled (48,300) 7.22 (69,100) 6.22 (169,900) 5.77 Exercised (23,100) 6.31 (16,545) 4.63 - - -------- --------- -------- --------- --------- --------- Options outstanding, December 31, 543,307 $ 6.77 463,207 $ 6.04 350,852 $ 6.30 ======== ========= ======== ========= ========= ========= Options exercisable, December 31, 276,467 $ 6.39 256,327 $ 6.53 208,992 $ 6.49 ======== ========= ======== ========= ========= =========

The fair value of each stock option grant under the Company's stock option plan during 2004, 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

YEAR ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ------- ------- ------ Annual dividend yield 1.7% 0.0% 0.0% Expected volatility 35.7% 32.4% 45.1% Risk free interest rate 4.2% 3.9% 4.0% Expected life (in years) 6.8 7.3 7.3

The grant date estimated fair value of options was $2.91 per share in 2004, $2.83 per share in 2003 and $2.90 per share in 2002. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company's net income (loss) and income (loss) per share for the years ended December 31, 2004, 2003 and 2002 would have been adjusted to the pro forma amounts indicated below: F-15

YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 2002 ------------- ------------ --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income (loss): As reported $3,835 $2,183 $( 1,270) Pro forma 3,664 1,975 ( 1,434) Income (loss) per common share - basic As reported 0.67 0.38 ( 0.22) Pro forma 0.64 0.35 ( 0.25) Income (loss) per common share - diluted As reported 0.65 0.38 ( 0.22) Pro forma 0.62 0.34 ( 0.25)

10. INCOME TAXES The provision (benefit) for income taxes consists of the following:

YEAR ENDED DECEMBER 31, -------------------------- 2004 2003 2002 ------- ------- -------- (IN THOUSANDS) Current: Federal $2,423 $ 647 $(1,873) State 543 7 2 ------- ------- -------- 2,966 654 (1,871) Deferred: Federal (441) 712 1,223 State 163 (238) (4) ------- ------- -------- (278) 474 1,219 ------- ------- -------- Total provision (benefit) $2,688 $1,128 $ (652) ======= ======= ========

The federal income tax provision (benefit) differs from the applicable statutory rate as follows:

YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 2002 ------ ------ ------- Federal income tax at statutory rate 34.0% 34.0% (34.0)% State franchise tax, net of federal benefit 7.2% 7.0% (7.1)% Other 2.0% 0.1% 3.2% Valuation allowance (2.0)% (7.0)% 4.0% ------ ------ ------- 41.2% 34.1% (33.9)% ====== ====== =======

Significant components of the Company's net deferred taxes as of December 31 are as follows:

2004 2003 -------- -------- (IN THOUSANDS) Deferred tax assets: Allowance for loan losses $ - $ 263 Depreciation 453 516 Net operating loss - 194 Deferred loan costs 202 193 Other 100 931 -------- -------- 755 2,097 -------- -------- Less: valuation allowance - (193) -------- -------- 755 1,904 -------- -------- Deferred tax liabilities: Deferred loan fees (1,256) (2,801) Allowance for loan losses (189) - Deferred loan costs (161) - Other (150) (383) -------- -------- (1,756) (3,184) -------- -------- Net deferred taxes $(1,001) $(1,280) ======== ========

F-16 The Company had previously provided a valuation reserve for California net operating loss carryovers as the utilization of these losses was uncertain. In 2004, the Company determined the uncertainty was removed and accordingly reversed the related valuation allowance. 11. SUPPLEMENTAL DISCLOSURE TO THE CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Cash Flows Listed below are the supplemental disclosures to the Consolidated Statement of Cash Flows:

YEAR ENDED DECEMBER 31, ----------------------- 2004 2003 2002 ------ ------ ------- (IN THOUSANDS) Supplemental Disclosure of Cash Flow Information: Cash paid for interest $6,600 $9,006 $10,864 Cash paid for income taxes 2,497 947 3 Supplemental Disclosure of Noncash Investing Activity: Transfers to other real estate owned 89 1,570 939 Transfers from loans held for sale to loans held for investment - - 1,587

12. EMPLOYEE BENEFIT PLAN The Company has established a 401(k) plan for the benefit of its employees. Employees are eligible to participate in the plan after three months of consecutive service. Employees may make contributions to the plan and the Company may make discretionary profit sharing contributions, subject to certain limitations. The Company's contributions were determined by the Board of Directors and amounted to $137,000, $129,000 and $171,000, in 2004, 2003 and 2002, respectively. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following table represents the estimated fair values:

DECEMBER 31, ---------------------------------------------- 2004 2003 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE --------- ----------- --------- ----------- (IN THOUSANDS) Assets: Cash and cash equivalents $ 30,205 $ 30,205 $ 22,056 $ 22,056 Time deposits in other financial institutions 647 647 792 792 Federal Reserve and Federal Home Loan Bank stock 2,012 2,012 812 812 Investment securities 28,352 28,380 20,468 20,467 Interest-only strips 2,715 2,715 3,548 3,548 Net loans 290,506 291,483 244,274 247,460 Servicing assets 3,258 3,260 2,499 2,695 Liabilities: Deposits (other than time deposits) 152,149 152,149 96,091 96,091 Time deposits 132,419 132,186 128,764 129,564 Securities sold under agreements to repurchase 13,672 13,642 14,394 14,401 Federal Home Loan Bank advances 10,500 10,429 - - Bonds payable 13,910 14,154 26,100 27,114

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below: F-17 Cash and cash equivalents - The carrying amounts approximate fair value because of the short-term nature of these instruments. Time deposits in other financial institutions - The carrying amounts approximate fair value because of the relative short-term nature of these instruments. Federal Reserve Stock - The carrying value approximates the fair value because the stock can be sold back to the Federal Reserve at anytime. Federal Home Loan Bank Stock - The carrying value approximates the fair value because the stock can be sold back to the Federal Home Loan Bank at anytime. Investment securities - The fair value is based on quoted market prices from security brokers or dealers. Interest Only Strips - The fair value of the interest-only strips has been determined by the discounted cash flow method, using market discount and prepayment rates. Loans - The fair value of loans is estimated for portfolios of loans with similar financial characteristics, primarily fixed and adjustable rate interest terms. The fair value of fixed-rate mortgage loans is based upon discounted cash flows utilizing the rate that the Company currently offers as well as anticipated prepayment schedules. The fair value of adjustable rate loans is also based upon discounted cash flows utilizing discount rates that the Company currently offers, as well as anticipated prepayment schedules. Servicing Assets - Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated to the total asset level. Deposits - The fair values of deposits are estimated based upon the type of deposit products. Demand accounts, which include savings and transaction accounts, are presumed to have equal book and fair values, since the interest rates paid on these accounts are based on prevailing market rates. The estimated fair values of time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a yield curve that approximates the prevailing rates offered to depositors as of the measurement date. Securities sold under agreements to repurchase - The fair value is estimated using discounted cash flow analysis based on rates for similar types of borrowing arrangements. Bonds Payable - The fair value is estimated using discounted cash flow analysis based on rates for similar types of borrowing arrangements. Commitments to Extend Credit, Commercial and Standby Letters of Credit - Due to the proximity of the pricing of these commitments to the period end, the fair values of commitments are immaterial to the financial statements. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2004 and 2003. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 14. REGULATORY MATTERS The Company (on a consolidated basis) and CWB are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and CWB's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and CWB must meet specific capital guidelines that involve quantitative measures of the Company's and CWB's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and CWB's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") contains rules as to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions and new regulations concerning internal controls, accounting and operations. The prompt corrective action regulations of FDICIA define specific capital categories based on the institutions' capital ratios. The capital categories, in declining order, are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". To be considered "well capitalized", an institution must have a core capital ratio of at least 5% and a total risk-based capital ratio of at least 10%. F-18 Additionally, FDICIA imposes Tier I risk-based capital ratio of at least 6% to be considered "well capitalized". Tier I risk-based capital is, primarily, common stock and retained earnings, net of goodwill and other intangible assets. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). The Company's and CWB's actual capital amounts and ratios as of December 31, 2004 and 2003 are also presented in the table below:

RISK- ADJUSTED TOTAL TIER 1 TIER 1 (DOLLARS IN TOTAL TIER 1 WEIGHTED AVERAGE CAPITAL CAPITAL LEVERAGE THOUSANDS) CAPITAL CAPITAL ASSETS ASSETS RATIO RATIO RATIO -------- -------- --------- --------- -------- -------- --------- DECEMBER 31, 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

As of December 31, 2004, management believed that CWB met all applicable capital adequacy requirements and is correctly categorized as "well capitalized" under the regulatory framework for prompt corrective action. 15. COMMITMENTS AND CONTINGENCIES Commitments ----------- In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. As of December 31, 2004 and 2003, the Company had commitments to extend credit of approximately $42.1 million and $40.7 million, respectively, including obligations to extend standby letters of credit of approximately $403,000 and $522,000, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. All guarantees are short-term and expire within one year. The Company uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Loans Sold ----------- The Company has sold loans that are guaranteed or insured by government agencies for which the Company retains all servicing rights and responsibilities. The Company is required to perform certain monitoring functions in connection with these loans to preserve the guarantee by the government agency and prevent loss to the Company in the event of nonperformance by the borrower. Management believes that the Company is in compliance with these requirements. The outstanding balance of the sold portion of such loans was approximately $167.1 million, $126.8 million and $150.2 million at December 31, 2004, 2003 and 2002, respectively. The Company retains a substantial degree of risk relating to the servicing activities and retained interest in sold SBA loans. In addition, during the period of time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower default, foreclosure and the risk that a rapid F-19 increase in interest rates would result in a decline of the value of loans held for sale to potential purchasers. In connection with its loan sales, the Company enters agreements which generally require the Company to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company to the loan purchaser, any misrepresentation during the mortgage loan origination process or, in some cases, upon any fraud or early default on such mortgage loans. Executive Salary Continuation ------------------------------- The Company has an agreement with a former officer/director, which provides for a monthly cash payment to the officer or beneficiaries in the event of death, disability or retirement, beginning in December 2003 and extending for a period of fifteen years. The Company purchased a life insurance policy as an investment. The cash surrender value of the policy was $714,000 and $693,000 at December 31, 2004 and 2003, respectively, and is included in other assets. The present value of the Company's liability under the agreement was calculated using a discount rate of 6% and is included in accrued interest payable and other liabilities in the accompanying consolidated balance sheets. In 2004, the Company paid $54,000 to the former officer/director under the terms of this agreement. The accrued executive salary continuation liability was $473,000 and $499,000 at December 31, 2004 and 2003, respectively. The Company also has certain Key Man life insurance policies related to a former officer/director. The combined cash surrender value of the policies was $183,000 and $178,000 at December 31, 2004 and 2003, respectively. Litigation ---------- The Company is involved in litigation of a routine nature that is handled and defended in the ordinary course of the Company's business. In the opinion of management, based in part on consultation with legal counsel, the resolution of these other litigation matters will not have a material impact on the Company's financial position or results of operations. 16. COMMUNITY WEST BANCSHARES FINANCIAL STATEMENTS (PARENT COMPANY ONLY)

DECEMBER 31, ---------------- BALANCE SHEETS 2004 2003 -------------- ------- ------- (IN THOUSANDS) Assets Cash and equivalents $ 3,073 $ 2,776 Time deposits in financial institutions 99 297 Investment in subsidiary 35,144 31,898 Loans, net of allowance for loan losses of $11,000 in 2004 and $17,000 in 2003 207 225 Other assets - 302 ------- ------- Total assets $38,523 $35,498 ======= ======= Liabilities and stockholders' equity Other liabilities $ 882 $ 1,152 Common stock 30,020 29,874 Retained earnings 7,621 4,472 ------- ------- Total stockholders equity 37,641 34,346 ------- ------- Total liabilities and stockholders' equity $38,523 $35,498 ======= =======

YEAR ENDED DECEMBER 31, ------------------------- INCOME STATEMENT 2004 2003 2002 ---------------- ------- ------ -------- (IN THOUSANDS) Total income $ 12 $ 17 $ 105 Total expense 188 198 474 Equity in undistributed subsidiaries: Net income (loss) from subsidiaries 3,933 2,303 (1,026) ------- ------ -------- Income (loss) before income tax provision (benefit) 3,757 2,122 (1,395) Income tax provision (benefit) (78) 61 (125) ------- ------ -------- Net income (loss) $3,835 $2,183 $(1,270) ======= ====== ========

F-20

YEAR ENDED DECEMBER 31, ---------------------------- STATEMENT OF CASH FLOWS 2004 2003 2002 ----------------------- -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net (loss) income $ 3,835 $ 2,183 $(1,270) Adjustments to reconcile net income (loss) to cash used in operating activities: Equity in undistributed (income) loss from subsidiaries (3,933) (2,303) 1,026 Net change in other liabilities (270) (33) (1,828) Net change in other assets 321 (3) (13) -------- -------- -------- Net cash used in operating activities (47) (156) (2,085) Cash flows from investing activities: Net decrease in time deposits in other financial institutions 198 891 3,299 Net dividends from and investments in subsidiaries 686 - (1,250) -------- -------- -------- Net cash provided by investing activities 884 891 2,049 Cash flows from financing activities: Proceeds from issuance of common stock 146 76 - Cash dividend payments to shareholders (686) - - -------- -------- -------- Net cash (used in) provided by financing activities (540) 76 - Net increase (decrease) in cash and cash equivalents 297 811 (36) Cash and cash equivalents at beginning of year 2,776 1,965 2,001 -------- -------- -------- Cash and cash equivalents, at end of year $ 3,073 $ 2,776 $ 1,965 ======== ======== ========

17. QUARTERLY FINANCIAL DATA (UNAUDITED) Results of operations on a quarterly basis were as follows:

YEAR ENDED DECEMBER 31, 2004 ----------------------------------------------------------- Q4 Q3 Q2 Q1 TOTALS ---------- ---------- ----------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Interest income $ 5,728 $ 5,711 $ 5,245 $ 5,161 $ 21,845 Interest expense 2,007 1,954 1,945 1,939 7,845 ---------- ---------- ----------- ---------- ---------- Net interest income 3,721 3,757 3,300 3,222 14,000 Provision for loan losses 167 186 (30) 95 418 ---------- ---------- ----------- ---------- ---------- Net interest income after provision for loan losses 3,554 3,571 3,330 3,127 13,582 Non-interest income 2,433 2,157 3,438 2,434 10,462 Non-interest expenses 4,359 4,086 5,000 4,076 17,521 ---------- ---------- ----------- ---------- ---------- Income before income taxes 1,628 1,642 1,768 1,485 6,523 Provision for income taxes 674 675 728 611 2,688 ---------- ---------- ----------- ---------- ---------- NET INCOME $ 954 $ 967 $ 1,040 $ 874 $ 3,835 ========== ========== =========== ========== ========== Earnings per share - basic $ 0.17 $ 0.17 $ 0.18 $ 0.15 $ 0.67 Earnings per share - diluted 0.16 0.16 0.18 0.15 0.65 Weighted average shares: Basic 5,729,869 5,719,647 5,714,168 5,707,415 5,717,813 Diluted 5,928,946 5,868,973 5,834,584 5,834,439 5,867,236

F-21

YEAR ENDED DECEMBER 31, 2003 ---------------------------------------------------------- Q4 Q3 Q2 Q1 TOTALS ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest income $ 4,985 $ 5,020 $ 5,199 $ 5,179 $ 20,383 Interest expense 2,099 2,198 2,427 2,618 9,342 ---------- ---------- ---------- ---------- ---------- Net interest income 2,886 2,822 2,772 2,561 11,041 Provision for loan losses 664 298 363 344 1,669 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 2,222 2,524 2,409 2,217 9,372 Non-interest income 2,476 3,013 2,517 2,669 10,675 Non-interest expenses 4,014 4,196 4,171 4,355 16,736 ---------- ---------- ---------- ---------- ---------- Income before income taxes 684 1,341 755 531 3,311 Provision for income taxes 232 456 257 183 1,128 ---------- ---------- ---------- ---------- ---------- NET INCOME $ 452 $ 885 $ 498 $ 348 $ 2,183 ========== ========== ========== ========== ========== Earnings per share - basic $ .08 $ 0.16 $ 0.09 $ 0.06 $ .38 Earnings per share - diluted .08 0.15 0.09 0.06 .38 Weighted average shares: Basic 5,701,932 5,692,732 5,690,224 5,690,224 5,693,807 Diluted 5,827,918 5,773,400 5,734,690 5,711,031 5,758,200

F-22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND -------- ------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------- None ITEM 9A. CONTROLS AND PROCEDURES -------- ------------------------- Under the supervision and with the participation of the Company's management, the Chief Executive Officer and the Chief Financial Officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2004. Based on and as of the time of such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company's reports that it files with or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934. There have been no changes in the Company's internal control over financial reporting that occurred during the Company's quarter ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION --------- ------------------ None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; --------- ------------------------------------------------------------------ COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT -------------------------------------------------------- The information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors" contained in the definitive proxy statement ("Proxy Statement") of the Company to be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. The Company has adopted a code of ethics that applies to all its principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A copy of the code of ethics is available on the Company's website at www.communitywest.com. ITEM 11. EXECUTIVE COMPENSATION --------- ----------------------- Information concerning executive compensation is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------- -------------------------------------------------------------- Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the section entitled "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --------- -------------------------------------------------- Information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled "Proposal 1 - Election of Directors" contained in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES --------- ------------------------------------------ Information concerning principal accountant fees and services is incorporated herein by reference from the section entitled "Independent Auditors" contained in the Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------- --------------------------------------------------------------- (a)(1) The following consolidated financial statements of Community West Bancshares are filed as part of this Annual Report. Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2 Consolidated Income Statements for each of the three years in the period ended December 31, 2004 F-3 Consolidated Statements of Stockholders' Equity for each of the three years ended in the period ended December 31, 2004 F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004 F-5 Notes to Consolidated Financial Statements F-6 (a)(2) Financial Statement Schedules Financial statement schedules other than those listed above have been omitted because they are either not applicable or the information is otherwise included. (b) A report on Form 8-K was filed as follows: January 28, 2004, Item 5 - Other Events July 1, 2004, Item 5 - Other Events (c) Exhibits. The following is a list of exhibits filed as a part of this report.

2.1 Plan of reorganization (1) 2.2 Definitive Agreement to sell Palomar (4) 3.1 Articles of Incorporation (3) 3.2 Bylaws (3) 4.1 Common Stock Certificate (2) 10.1 1997 Stock Option Plan and Form of Stock Option Agreement (1) 10.3 Salary Continuation Agreement between Goleta National Bank and Llewellyn Stone, President and CEO (3) 10.4 Agreement between the Company's subsidiary, Goleta National Bank, and ACE Cash Express Inc (5) 10.6 Memorandum of Understanding between the Company and the Federal Reserve Bank of San Francisco, dated February 22, 2001 (6) 10.7 Consulting Agreement between the Goleta National Bank and Llewellyn Stone (6) 10.9 Indemnification Agreement between the Company and Lynda Nahra, dated December 20, 2001 (6) 10.13 Consent Order between Goleta National Bank and the Comptroller of the Currency of the United States, dated October 28, 2002 (7) 10.14 Stipulation and Consent to the Issuance of a Consent Order by the Office of the Comptroller of the Currency, dated October 28, 2002 (7) 10.15 Amendment Number 3 to Master Loan Agency Agreement between Goleta National Bank and Ace Cash Express, Inc., dated as of November 1, 2002 (7) 10.16 Amendment Number 1 to Collection Servicing Agreement between Goleta National Bank and Ace Cash Express, Inc., dated as of November 1, 2002 (7) 10.17 Indemnification Agreement between the Company and Charles G. Baltuskonis, dated March 18, 2003 (8) 10.18 Letter issued by the Comptroller of the Currency and Order Terminating the Consent Order, dated October 21, 2003 (9) 10.19 Letter dated November 6, 2003 from the Federal Reserve Bank of San Francisco rescinding the Memorandum of Understanding, dated February 2001 (9) 10.20 Employment and Confidentiality Agreement, Goleta National Bank, between the Company and Lynda J. Nahra dated April 23, 2003 (9) 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 31.1 Certification of the Chief Executive Officer 31.2 Certification of the Chief Financial Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350

__________________________ (1) Incorporated by reference from the Registrant's Registration Statement on Form S-8 filed with the Commission on December 31, 1997. (2) Incorporated by reference from the Registrant's Amendment to Registration Statement on Form 8-A filed with the Commission on March 12, 1998. (3) Incorporated by reference from the Registrant's Annual Report on Form 10-K filed with the Commission on March 26, 1998. (4) Filed as an exhibit to the Registrant's Form 8-K filed with the Commission on December 5, 2000. (5) Incorporated by reference from the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2001 filed by the Registrant with the Commission on November 16, 2001. (6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 filed by the Registrant with the Commission on April 16, 2002. (7) Incorporated by reference from the Registrant's Form 8-K filed with the Commission on November 4, 2002. (8) Incorporated by reference from the Registrants Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Commission on March 31, 2003. (9) Incorporated by reference from the Registrants Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Commission on March 29, 2004. SIGNATURES ---------- Pursuant to the requirements of Section 13 of 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY WEST BANCSHARES (Registrant) Date: March 24, 2005 By: /s/ William R. Peeples ------------------------- William R. Peeples Chairman of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date --------- ------ ---- /s/ William R. Peeples Director and March 24, 2005 -------------------------- Chairman of the Board William R. Peeples /s/ Charles G. Baltuskonis Executive Vice President and March 24, 2005 -------------------------- Chief Financial Officer Charles G. Baltuskonis /s/ Robert H. Bartlein Director March 24, 2005 -------------------------- Robert H. Bartlein /s/ Jean W. Blois Director March 24, 2005 -------------------------- Jean W. Blois /s/ John D. Illgen Director and Secretary March 24, 2005 -------------------------- of the Board John D. Illgen /s/ Lynda J. Nahra Director, President and March 24, 2005 -------------------------- Chief Executive Officer Lynda J. Nahra /s/ James R. Sims Jr. Director March 24, 2005 -------------------------- James R. Sims Jr. /s/ Kirk B. Stovesand Director March 24, 2005 -------------------------- Kirk B. Stovesand /s/ C. Richard Whiston Director March 24, 2005 --------------------------- C Richard Whiston