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CWBC > SEC Filings for CWBC > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for COMMUNITY WEST BANCSHARES /

Form 10-Q for COMMUNITY WEST BANCSHARES /


10-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It should be read in conjunction with the Company's unaudited interim consolidated financial statements and notes thereto the audited consolidated financial statement and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This Report on Form 10-Q 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 (the "Exchange Act"), 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. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.

The following discussion should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above.

Overview of Earnings Performance

For the 3Q11, net loss was $2.3 million compared to net income of $1.0 million for 3Q10.

The significant factors impacting net income for 3Q11 were:

Provision for loan losses of $4.5 million for 3Q11 compared to $1.5 million for 3Q10 as net charge-offs increased to $5.5 million for 3Q11 from $2.0 million for 3Q10.

A decline in interest income of $959,000 resulting from a combination of lower average earning assets, $614.4 million for 3Q11 compared to $645.8 million for 3Q10 and lower yields on earning assets of 5.66% for 3Q11 compared to 5.98% for 3Q10.

Margin declined for 3Q11 to 4.38% compared to 4.49% for 3Q10. The decline in rates paid on funding sources from 1.67% for 3Q10 to 1.49% for 3Q11 partially offset the lower yields on interest earning assets.

Also contributing to lower yields on interest-earning assets and the decline in the margin was approximately $1.1 million in lost interest on nonaccrual loans for 3Q11 compared to approximately $300,000 for 3Q10.

Loss on sale and writedowns of foreclosed real estate and repossessed assets increased to $1.4 million for 3Q11 compared to $128,000 for 3Q10.

Critical Accounting Policies

A number of critical accounting policies are used in the preparation of the Company's consolidated financial statements. These policies relate to areas of the financial statements that involve estimates and judgments made by management. These include provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company's 2010 Form 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.


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Results of Operations - Third Quarter Comparison

The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:

                                                                Three Months Ended
                                                                  September 30,                     Increase
                                                            2011                  2010             (Decrease)
                                                          (dollars in thousands, except per share amounts)
Interest income                                       $          8,768         $     9,727       $         (959 )
Interest expense                                                 1,989               2,419                 (430 )
Net interest income                                              6,779               7,308                 (529 )
Provision for loan losses                                        4,511               1,518                2,993
Net interest income after provision for loan losses              2,268               5,790               (3,522 )
Non-interest income                                                801               1,023                 (222 )
Non-interest expenses                                            6,985               5,035                1,950
Income (loss) before provision for income taxes                 (3,916 )             1,778               (5,694 )
Provision (benefit) for income taxes                            (1,609 )               733               (2,342 )
Net income (loss)                                     $         (2,307 )       $     1,045       $       (3,352 )
Preferred stock dividends                                          261                 261                    -
Net income (loss) applicable to common shareholders   $         (2,568 )       $       784       $       (3,352 )
Earnings (loss) per common share:
Basic                                                 $          (0.43 )       $      0.13       $        (0.56 )
Diluted                                               $          (0.43 )       $      0.12       $        (0.55 )
Dividends per common share                            $              -         $         -       $            -
Comprehensive income (loss)                           $         (2,298 )       $     1,079       $       (3,377 )

The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:

                                              Three Months Ended
                                                 September 30,
                                               2011 versus 2010
                                        Total            Change due to
                                        change        Rate         Volume
                                                (in thousands)
Loans, net                           $     (893 )   $   (357 )   $    (536 )
Investment securities and other             (66 )        (78 )          12
Total interest-earning assets              (959 )       (435 )        (524 )

Deposits                                   (398 )       (161 )        (237 )
Other borrowings                            (32 )        (14 )         (18 )
Total interest-bearing liabilities         (430 )       (175 )        (255 )
Net interest income                  $     (529 )   $   (260 )   $    (269 )

Net Interest Income
Net interest income declined by $529,000 for 3Q11 compared to 3Q10. Total interest income declined by $959,000. Of this decline, $524,000 was due to the decline in average earning assets from $645.8 million for 3Q10 to $614.4 million for 3Q11. The yield on interest earning assets also declined from 5.98% for 3Q10 to 5.66% for 3Q11. Also contributing to this decline in interest income was approximately $1.1 million lost interest on nonaccrual loans for 3Q11 compared to approximately $300,000 for 3Q10.


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The decline in interest expense of $430,000 resulted from both lower rates paid on interest bearing liabilities, 1.49% for 3Q11 compared to 1.67% for 3Q10, and a decline in the average balance of interest-bearing liabilities from $574.3 million for 3Q10 to $530.8 million for 3Q11. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was a decline in the margin from 4.49% for 3Q10 to 4.38% for 3Q11.

Provision for Loan Losses
The provision for loan losses was $4.5 million for 3Q11 compared to $1.5 million
for 3Q10. Charge-offs increased to $5.5 million for 3Q11 compared to $2.2
million for 3Q10. The increase in charge-offs is reflective of ongoing
weaknesses in economic conditions and the Bank's initiative in recognizing
potential losses on a timely basis.

The following schedule summarizes the provision, charge-offs and recoveries by
loan category for the three months ended September 30, 2011:

                             Allowance                                                                                    Allowance
                              6/30/11        Provision        Charge-offs         Recoveries        Net Charge-offs        9/30/11
                                                              (in thousands)
Manufactured housing        $     4,295     $    (1,054 )   $         (1,127 )   $           -     $          (1,127 )   $     2,114
Commercial real estate            4,416           1,709               (2,547 )               -                (2,547 )         3,578
Commercial                        2,253           2,020                 (111 )               3                  (108 )         4,165
SBA                               3,351           1,218               (1,152 )              33                (1,119 )         3,450
HELOC                               649             131                    -                 -                     -             780
Single family real estate           199             555                 (601 )               3                  (598 )           156
Consumer                             74             (68 )                  -                 -                     -               6
Total                       $    15,237     $     4,511     $         (5,538 )   $          39     $          (5,499 )   $    14,249

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended September 30, 2010:

                             Allowance                                                                                   Allowance
                              6/30/10        Provision        Charge-offs         Recoveries       Net Charge-offs        9/30/10
                                                              (in thousands)
Manufactured housing        $     2,894     $     1,738     $           (861 )   $         38     $            (823 )   $     3,809
Commercial real estate            2,414             408                 (392 )              6                  (386 )         2,436
Commercial                        2,532            (219 )               (100 )             14                   (86 )         2,227
SBA                               5,303            (413 )               (760 )            143                  (617 )         4,273
HELOC                               496             (32 )                  -                3                     3             467
Single family real estate           126              50                  (53 )              2                   (51 )           125
Consumer                             72             (14 )                  -                -                     -              58
Total                       $    13,837     $     1,518     $         (2,166 )   $        206     $          (1,960 )   $    13,395

Included in the Company's held-to-maturity portfolio are home equity loans, "HELOC", which guidance issued by the SEC characterizes as higher-risk. The HELOC portfolio of $20.6 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties. In 3Q11, there were no charge-offs in this portfolio. As of September 30, 2011, there were no past due credits in this portfolio. The allowance for loan losses for this portfolio is $780,000, or 3.8%. The Company believes that, overall, this portfolio is adequately supported by real estate collateral.

The percentage of net nonaccrual loans to the total loan portfolio has increased to 6.5% as of September 30, 2011 from 2.13% at December 31, 2010.

The allowance for loan losses compared to net nonaccrual loans has declined to 38.9% as of September 30, 2011 from 105% as of December 31, 2010.

Non-Interest Income
Non-interest income includes gains from sale of loans, loan document fees, service charges on deposit accounts, loan servicing fees and other revenues not derived from interest on earning assets. Total non-interest income decreased by $222,000, or 21.7%, for 3Q11 compared to 3Q10, primarily due to lower loan origination fees and referral fees on SBA 504 loans.


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Non-Interest Expenses
Non-interest expenses increased $2.0 million, or 38.7%, for 3Q11 compared to 3Q10. The loss on sale and writedowns of foreclosed real estate and repossessed assets increased $1.2 million to $1.4 million for 3Q11 compared to $128,000 for 3Q10. The expense related to the reserve on undisbursed loans also increased $330, 000 for 3Q11 compared to a negative adjustment of $19,000 for 3Q10, an increase of $349,000.

Results of Operations - Nine-Month Comparison

The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:

                                                                Nine Months Ended
                                                                 September 30,                       Increase
                                                            2011                 2010               (Decrease)
                                                            (dollars in thousands, except per share amounts)
Interest income                                       $         27,234       $     29,372       $           (2,138 )
Interest expense                                                 6,300              7,538                   (1,238 )
Net interest income                                             20,934             21,834                     (900 )
Provision for loan losses                                        8,651              7,464                    1,187
Net interest income after provision for loan losses             12,283             14,370                   (2,087 )
Non-interest income                                              2,354              2,795                     (441 )
Non-interest expenses                                           17,909             15,403                    2,506
Income (loss) before provision for income taxes                 (3,272 )            1,762                   (5,034 )
Provision (benefit) for income taxes                            (1,340 )              728                   (2,068 )
Net income (loss)                                     $         (1,932 )     $      1,034       $           (2,966 )
Preferred stock dividends                                          785                785                        -
Net income (loss) applicable to common shareholders   $         (2,717 )     $        249       $           (2,966 )
Earnings (loss) per common share:
Basic                                                 $          (0.45 )     $       0.04       $            (0.49 )
Diluted                                               $          (0.45 )     $       0.04       $            (0.49 )
Dividends per common share                            $              -       $          -       $                -
Comprehensive income (loss)                           $         (1,966 )     $      1,044       $           (3,010 )


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The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:

                                            Nine Months Ended
                                              September 30,
                                             2011 versus 2010
                                      Total          Change due to
                                      change       Rate       Volume
                                               (in thousands)
Loans, net                           $ (1,841 )   $ (490 )   $ (1,351 )
Investment securities and other          (297 )     (302 )          5
Total interest-earning assets          (2,138 )     (792 )     (1,346 )

Deposits                               (1,273 )     (726 )       (547 )
Other borrowings                           35        155         (120 )
Total interest-bearing liabilities     (1,238 )     (571 )       (667 )
Net interest income                  $   (900 )   $ (221 )   $   (679 )

Net Interest Income
Net interest income declined by $900,000 for the first nine months of 2011 compared to the same period in 2010. Total interest income declined by $2.1 million. Of this decline, $1.3 million was due to the decline in average earning assets from $651.9 million for the nine months ended September 30, 2010 to $622.7 million for the same period in 2011. Yields on interest earning assets also declined to 5.85% from 6.02% for the first nine months of 2011 compared to 2010. Also contributing to this decline in interest income was approximately $2.6 million lost interest on nonaccrual loans for the first nine months of 2011 compared to approximately $1.5 million for the same period of 2010.

The decline in interest expense of $1.2 million for the first nine months of 2011 compared to the same period of 2010 resulted from both lower rates paid on interest bearing liabilities, 1.55% to 1.75%, respectively, and a decline in the average balance of interest-bearing liabilities to $544.1 million from $576.2 million, respectively. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was a very slight increase in margin to 4.49%.

Provision for Loan Losses
The provision for loan losses was $8.7 million for first nine months of 2011
compared to $7.5 million for same period of 2010.

The following schedule summarizes the provision, charge-offs and recoveries by
loan category for the nine months ended September 30, 2011:

                             Allowance                                                                                Allowance
                             12/31/10        Provision       Charge-offs       Recoveries       Net Charge-offs        9/30/11
                                                                       (in thousands)
Manufactured housing        $     4,168     $      (407 )   $      (1,675 )   $         28     $          (1,647 )   $     2,114
Commercial real estate            2,532           4,041            (2,997 )              2                 (2995 )         3,578
Commercial                        2,094           2,600              (575 )             46                  (529 )         4,165
SBA                               3,753           1,456            (1,929 )            170                (1,759 )         3,450
HELOC                               547             233                 -                -                     -             780
Single family real estate           135             795              (789 )             15                  (774 )           156
Consumer                             73             (67 )               -                -                     -               6
Total                       $    13,302     $     8,651     $      (7,965 )   $        261     $          (7,704 )   $    14,249


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The following schedule summarizes the provision, charge-offs and recoveries by loan category for the nine months ended September 30, 2010:

                             Allowance                                                                                Allowance
                             12/31/09        Provision       Charge-offs       Recoveries       Net Charge-offs        9/30/10
                                                                       (in thousands)
Manufactured housing        $     2,255     $     3,247     $      (1,734 )   $         41     $          (1,693 )   $     3,809
Commercial real estate            2,843             627            (1,040 )              6                (1,034 )         2,436
Commercial                        3,448            (481 )            (828 )             88                  (740 )         2,227
SBA                               4,837           3,308            (4,150 )            278                (3,872 )         4,273
HELOC                               124             696              (359 )              6                  (353 )           467
Single family real estate           143             116              (139 )              5                  (134 )           125
Consumer                             83             (49 )               -               24                    24              58
Total                       $    13,733     $     7,464     $      (8,250 )   $        448     $          (7,802 )   $    13,395

Non-Interest Income
Total non-interest income declined by $441,000, or 15.8%, for the first nine months of 2011 compared to the same period in 2010. The decline was primarily due to lower loan origination fees and fees earned on the SBA 504 loans.

Non-Interest Expenses
Non-interest expenses increased $2.5 million, or 16.3%, to $17.9 million for the first nine months of 2011 compared to $15.4 million for the same period in 2010. The loss on sale and writedowns of foreclosed real estate and repossessed assets increased $1.3 million for the first nine months of 2011 compared to 2010. The increase in "Other" expense was $1.0 million and included an increase of $399,000 related to foreclosed real estate and repossessed assets for the first nine months of 2011 compared to the same period in 2010. The provision related to undisbursed loans was $397,000 for the first nine months of 2011 compared to a negative adjustment of $293,000 for same period of 2010, an increase of $690,000.


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Interest Rates and Differentials

The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated:

                                               Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,

                                               2011            2010           2011             2010
Interest-earning assets:                     (dollars in thousands)           (dollars in thousands)
Interest-earning deposits in other
financial institutions including Federal
funds sold:
Average balance                            $       1,245     $   1,519     $     1,253     $   2,699
Interest income                                        2             6               8            20
Average yield                                       0.78 %        1.45 %          0.81 %        1.00 %
Investment securities:
Average balance                            $      46,023     $  44,013     $    45,420     $  44,674
Interest income                                      267           328             817         1,102
Average yield                                       2.30 %        2.96 %          2.41 %        3.30 %
Gross loans:
Average balance                            $     567,149     $ 600,233     $   576,055     $ 604,514
Interest income                                    8,499         9,393          26,409        28,250
Average yield                                       5.95 %        6.21 %          6.13 %        6.25 %
Total interest-earning assets:
Average balance                            $     614,417     $ 645,765     $   622,728     $ 651,887
Interest income                                    8,768         9,727          27,234        29,372
Average yield                                       5.66 %        5.98 %          5.85 %        6.02 %
Interest-bearing liabilities:
Interest-bearing demand deposits:
Average balance                            $     281,263     $ 236,786     $   279,044     $ 224,989
Interest expense                                     696           722           2,184         2,357
Average cost of funds                               0.98 %        1.21 %          1.05 %        1.40 %
Savings deposits:
Average balance                            $      20,898     $  18,963     $    21,011     $  19,316
Interest expense                                      89           112             302           335
Average cost of funds                               1.70 %        2.35 %          1.92 %        2.32 %
Time certificates of deposit:
Average balance                            $     156,015     $ 243,461     $   172,643     $ 255,555
Interest expense                                     629           978           2,070         3,137
Average cost of funds                               1.60 %        1.59 %          1.60 %        1.64 %
Convertible debentures:
Average balance                            $       7,854     $   4,694     $     7,884     $   1,570
Interest expense                                     178           106             531           106
Average cost of funds                               9.00 %        9.00 %          9.00 %        9.00 %
Other borrowings:
Average balance                            $      64,742     $  70,355     $    63,531     $  74,762
Interest expense                                     397           501           1,213         1,603
Average cost of funds                               2.43 %        2.83 %          2.55 %        2.87 %
Total interest-bearing liabilities:
Average balance                            $     530,772     $ 574,259     $   544,113     $ 576,192
Interest expense                                   1,989         2,419           6,300         7,538
Average cost of funds                               1.49 %        1.67 %          1.55 %        1.75 %

Net interest income                        $       6,779     $   7,308     $    20,934     $  21,834
Net interest spread                                 4.18 %        4.30 %          4.30 %        4.27 %
Average net margin                                  4.38 %        4.49 %          4.49 %        4.48 %


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In calculating interest rates and differentials:

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 periods indicated. Amounts outstanding are averages of daily balances during the applicable periods.

Nonaccrual loans are included in the average balance of loans outstanding.

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 . . .

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