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CWBC > SEC Filings for CWBC > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for COMMUNITY WEST BANCSHARES /


13-May-2013

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 included herein and the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, and the other financial information appearing elsewhere in this report.

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

Net income available to common shareholders of the Company was $827,000 million, or $0.14 per basic common share and $0.11 per diluted common share for 1Q13 compared to $557,000 or $.09 per basic common share and $0.08 per diluted common share for 1Q12. The Company's 1Q13 earnings performance was impacted by:

? The provision for loan losses decreased from $2.0 million for 1Q12 to $(196,000) for 1Q13, resulting from net charge-offs decreasing from $2.5 million for 1Q12 to $318,000 for 1Q13 and improvement in the loss factors of the allowance for loan losses (ALLL) in 1Q13 compared to 1Q12. The ratio of the ALLL to loans held for investment increased from 3.19% at March 31, 2012 to 3.54% at March 31, 2013.

? A decrease in net interest income of $730,000, or 11.2%, from $6.5 million for 1Q12 to $5.7 million for 1Q13, primarily due to a decrease in both average interest-earning assets.

? Interest income declined by $1.4 million, or 16.3%, from $8.3 million for 1Q12 to $7.0 million for 1Q13, primarily due to lower average interest-earning assets of $492.3 million for 1Q13 compared to $586.4 million for 1Q12. The average yield on loans decreased by 0.03% from 6.01% in 1Q12 to 5.98% in 1Q13.

? Interest expense declined $627,000, or 35.0%, from $1.8 million for 1Q12 to $1.2 million for 1Q13, resulting from a combination of lower average interest-bearing liabilities of $416.0 million for 1Q13 compared to $527.5 million for 1Q12, and lower yields on interest-bearing liabilities of 1.14% for 1Q13 compared to 1.37% for 1Q12. The average yield on deposits decreased by 0.28% from 1.10% in 1Q12 to 0.82% in 1Q13.

? The combination of the decline in rates paid on deposits partially offset by a slight decline in yields on loans resulted in a margin improvement of 0.30% from 4.48% for 1Q12 to 4.78% for 1Q13.

? Total non-interest income decreased by $1.1 million, or 59.4%, from $1.9 million for 1Q12 to $767,000 for 1Q13, primarily due to the sale of $10.1 million in SBA loans with the resulting gain of $973,000 and the sale of $4.0 million of investment securities resulting in a gain of $121,000, both of which occurred in 1Q12.

Recent Regulatory Actions

Office of the Comptroller of the Currency

On January 26, 2012, the Bank entered into a consent agreement (the "OCC Agreement") with the Comptroller of the Currency (the "OCC"), the Bank's primary banking regulator, which requires the Bank to take certain corrective actions to address certain deficiencies in the operations of the Bank, as identified by the OCC In accordance with the terms of the OCC Agreement, the Bank took the following actions:

Article I of the OCC Agreement requires the formation of a compliance committee. The Bank established a Board Regulatory Compliance Committee ("Compliance Committee") on January 26, 2012. The Compliance Committee meets and reports to the Bank's Board of Directors on a monthly basis. The Compliance Committee's reports to the Bank's Board of Directors include information concerning the status of actions taken or needed to be taken to achieve full compliance with the OCC Agreement, the personnel of the Bank primarily responsible for implementing such action and the expected timing of such actions.


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Article II of the OCC Agreement requires an updated strategic plan covering at least a three-year period. The Bank has adopted, submitted and received approval from the OCC for the three-year strategic plan, and updates on an annual basis, which includes, among other things, strategic goals, objectives, key financial performance indicators and risk tolerances, identification and prioritization of initiatives and opportunities including timeframes, a management employment and succession program, assignment of responsibilities and accountability for the strategic planning process, and a description of systems designed to monitor the Bank's progress in meeting the goals set forth in the strategic plan.

Article III of the OCC Agreement requires a capital plan and requires that the Bank achieve and maintain a Tier 1 Leverage Capital ratio of 9% and a Total Risk-Based Capital ratio of 12% on or before May 25, 2012. The Bank's Board of Directors has incorporated a three-year capital plan into the Bank's strategic plan. The Bank successfully met the minimum capital requirements as of May 25, 2012 and has continued to exceed such requirements since then. Notwithstanding that the Bank has achieved the required minimum capital ratios required by the OCC Agreement, the existence of a requirement to maintain a specific capital level in the OCC Agreement means that the Bank may not be deemed "well capitalized" under applicable banking regulations. As of March 31, 2013, the Bank's Tier 1 Leverage Capital ratio was 11.34% and the Total Risk-Based Capital ratio was 15.63%.

The Bank's Board of Directors prepares a written evaluation of the Bank's performance against the capital plan on a quarterly basis, including a description of actions the Bank will take to address any shortcomings, which is documented in Board meeting minutes.

Article IV of the OCC Agreement requires the Bank to take steps to improve the management and oversight of the Bank. In that regard, the Bank has appointed several key officers, including the Bank's appointment of its President and Chief Executive Officer, the appointment of a new Chief Credit Officer; and several other officers in key areas of the Bank. The Bank believes that these management changes have facilitated clearer lines of responsibility and authority. At its monthly meetings, the Compliance Committee reviews the Bank's processes, personnel and control systems to ensure they are adequate.

Article V of the OCC Agreement requires the Bank to have a written program designed to ensure that the risks associated with the Bank's loan portfolio are properly reflected and accounted for on the Bank's books and records. The Bank's Board of Directors has adopted such a written program, including with respect to risk grading and valuation of loans, that losses are charged off, as appropriate, and that current information is gathered and maintained regarding loans and collateral. The Bank has submitted written information regarding the foregoing to the OCC. The Bank's Board of Directors and Management will continue to review this program and take steps, as appropriate, to ensure the Bank complies with the requirements of the OCC Agreement.

Article VI of the OCC Agreement requires the Bank to have a written program to ensure compliance with applicable financial accounting standards. The Bank's Board of Directors has adopted such a program, which includes specific measures for monitoring of loans, and identification of, and accounting for, loan impairment, loss recognition and troubled debt restructurings.

Article VII of the OCC Agreement requires that the Bank employ an external firm, acceptable to the OCC, to perform a semi-annual review of the Bank's loan portfolio. The Bank has done so, and a review for all quarters of 2012 and 2013 has been performed, and the findings from those reviews were considered by the Bank in performing an assessment of the Bank's loan portfolio and related allowance for loan losses.

Article VIII of the OCC Agreement requires the Bank to have a program to monitor assets which have been criticized by internal or external loan reviews or by the OCC. As so required, the Bank maintains a Criticized Assets Report, which reports the status of assets that have been identified by the Bank as evidencing a higher degree of risk of loss. The report is updated at least monthly.

Article IX of the OCC Agreement requires the Bank to have a program for the maintenance of an appropriate allowance for loan and lease losses. The Bank's Board of Directors has adopted such a written plan, which is designed to ensure that the Bank's allowance for loan and lease losses is consistent with all regulatory and financial accounting requirements. An external review is performed quarterly prior to the timely quarterly filing of the Bank's Consolidated Report of Condition and Income ("Call Report").


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Article X of the OCC Agreement requires the Bank to review and revise the Bank's other real estate owned ("OREO") section of the Bank's loan policy. The Bank's Board of Directors has adopted an updated policy concerning OREO, which has been incorporated into the Bank's three-year strategic plan. The OREO policy reflects updates to ensure compliance with applicable regulatory and financial accounting requirements, including procedures to ensure that periodic, appropriate appraisals and valuations are performed.

Article XI of the OCC Agreement requires the Bank to adhere to and implement the Bank's liquidity risk management program. The Bank has adopted and implemented a liquidity risk management program, which is designed to address current and projected funding needs, ensure the Bank has sufficient liquidity to meet such needs, reduce reliance on high cost and wholesale funding sources, and comply with applicable restrictions on brokered deposits. The Bank's Board of Directors reviews its compliance with this policy on a monthly basis, and provides quarterly reports to the OCC, as required by the OCC Agreement.

Article XII of the OCC Agreement requires that the Bank take steps to correct all violations of law, rules or regulations identified by the OCC. The Bank's Board of Directors and Compliance Committee monitor the Bank's progress on a monthly basis.

The OCC Agreement requires that the Bank furnish periodic written progress reports to the OCC detailing the form and manner of any actions taken to secure compliance with the OCC Agreement. The Bank has submitted such progress reports on a monthly basis, as required by the OCC Agreement.

While the Bank believes that it is in substantial compliance with the OCC Agreement, no assurance can be given that the OCC will concur with the Bank's assessment. Failure to comply with the provisions of the OCC Agreement may subject the Bank to further regulatory action, including but not limited to, being deemed undercapitalized for purposes of the OCC Agreement, and the imposition by the OCC of prompt corrective action measures or civil money penalties which may have a material adverse impact on the Company's financial condition and results of operations.

Actions required of the Bank in response to the OCC Agreement have prompted the Bank to reassess future financial results and financial forecasts. In addition, financial results are subject to many external factors, including the interest rate environment, loan demand, deposit pricing and the economy as a whole, both locally and nationally. The Bank does not currently expect future financial results to be significantly impacted by specific responses to, or actions taken pursuant to, the OCC Agreement. However, the Bank is implementing a number of measures to mitigate any potential impact that such external factors could have on the Bank's future financial results, which measures have been incorporated into the Bank's ongoing risk management and strategic planning processes. No assurances can be provided that these measures will be successful in mitigating any such potential impact. In that regard, the Bank does not currently expect credit quality trends to be significantly impacted by the actions required of the Bank pursuant to the OCC Agreement. However, in connection with the Bank's risk management process, the allowance for loan losses requires continuous oversight to ensure its adequacy and responsiveness to changes in risk within the Bank's credit portfolio. The Bank has not made changes to its methodology for calculating the allowance for loan losses in specific response to the OCC Agreement. However, from time to time, in connection with the Bank's periodic evaluation of the credit portfolio and related allowance for loan losses methodology, the Bank may make changes as the Bank deems appropriate. Any significant changes to the Bank's allowance for loan losses methodology will be appropriately disclosed, including any material impact to CWBC's financial statements.

Federal Reserve Bank of San Francisco

On April 23, 2012, the Company entered into a written agreement (the "FRB Agreement") with the Federal Reserve Board (the "FRB"). Without admitting or denying any of the alleged charges of unsafe or unsound banking practices and any violations of law, the Company has agreed to take the following corrective actions to address certain alleged violations of law and/or regulation:

? Take appropriate steps to fully utilize the Company's financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure the Bank's compliance with the OCC Agreement and any other supervisory action taken by the Bank's federal and state regulators;

? Refrain from declaring or paying dividends absent prior regulatory approval;

? Refrain from taking dividends or any form of payment from the Bank representing a reduction in the Bank's capital absent prior regulatory approval;

? Refrain from incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock absent prior regulatory approval;


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? Develop and submit for regulatory approval a written capital plan to maintain sufficient capital on a consolidated basis, which capital plan should, at a minimum, address, consider and include current and future capital requirements on a consolidated basis and compliance with federal regulations and guidelines; the adequacy of the Bank's capital, the sources and timing of funds necessary to fulfill future capital requirements; and the requirements of federal law that the Company serve as a source of strength to the Bank. The FRB accepted the capital plan on July 10, 2012;

? Develop and submit for regulatory approval a cash flow projection of the Company's planned sources and uses of cash for debt service, operating expenses and other purposes. The FRB accepted the cash flow projection on July 10, 2012;

? Comply with appropriate regulatory notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDIC's implementing regulations; and

? Furnish written progress reports to the FRB detailing the form and manner of any actions taken to secure compliance with the Regulatory Agreement.

In accordance with the FRB Agreement, the Company requested the FRB's approval to pay the dividend due on May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 on the Company's Series A Preferred Stock. Those requests were denied. Consequently, the Company did not pay the dividends and the dividends remain accrued as of, and subsequent to, March 31, 2013. As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.

Since the appointment of a new Chief Executive Officer in November 2011 and Chief Credit Officer in July 2011, the Bank has maintained a focus on addressing the areas of concern that have been raised by the regulators. As a result, all of the prudent actions required in the OCC Agreement and FRB Agreement have been addressed, and either have been or will be completed in the near future. No assurances can be provided that CWBC and CWB will achieve full compliance with the regulatory agreements and the regulatory response in the event of any non-compliance.

The Board and Management will continue to work closely with the OCC and FRB to achieve compliance with the terms of both agreements and improve the Company's and Bank's strength, security and performance.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2012 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 - First Quarter Comparison

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

                                                           Three Months Ended March 31,
                                                                                                     Increase
                                                           2013                     2012            (Decrease)
                                                          (dollars in thousands, except per share amounts)
Interest income                                      $          6,964         $          8,321     $     (1,357 )
Interest expense                                                1,166                    1,793             (627 )
Net interest income                                             5,798                    6,528             (730 )
Provision for (recovery of) loan losses                          (196 )                  1,983            2,179
Net interest income after provision for (recovery
of) loan losses                                                 5,994                    4,545            1,449
Non-interest income                                               767                    1,888           (1,121 )
Non-interest expenses                                           5,672                    5,614               58
Income before provision for income taxes                        1,089                      819              270
Provision for income taxes                                          -                        -                -
Net income                                           $          1,089         $            819     $        270
Dividends and accretion on preferred stock                        262                      262                -
Net income available to common shareholders          $            827         $            557     $        270
Earnings per common share:
Basic                                                $           0.14         $           0.09     $       0.05
Diluted                                              $           0.11         $           0.08     $       0.03
Dividends per common share                           $              -         $              -     $          -
Comprehensive income                                 $          1,066         $            671     $        395

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

                                            Three Months Ended
                                                March 31,
                                             2013 versus 2012
                                      Total          Change due to
                                      change       Rate       Volume
                                              (in thousands)
Loans, net                           $ (1,288 )   $  (75 )   $ (1,213 )
Investment securities and other           (69 )       20          (89 )
Total interest-earning assets          (1,357 )      (55 )     (1,302 )

Deposits                                 (506 )     (239 )       (267 )
Other borrowings                         (121 )      116         (237 )
Total interest-bearing liabilities       (627 )     (123 )       (504 )
Net interest income                  $   (730 )   $   68     $   (798 )

Net Interest Income
Net interest income declined by $730,000 for 1Q13 compared to 1Q12. Total interest income declined by $1.4 million for 1Q13 compared to 1Q12. Of this decline, $1.3 million was due to the decline in average earning assets from $586.4 million for 1Q12 to $492.3 million for 1Q13. The yield on interest earning assets increased slightly from 5.71% for 1Q12 to 5.74% for 1Q13.

The decline in interest expense of $627,000 resulted from both lower rates paid on interest-bearing liabilities, 1.14% for 1Q13 compared to 1.37% for 1Q12, and a decline in the average balance of interest-bearing liabilities from $527.5 million for 1Q12 to $416.0 million for 1Q13. The net impact of the increase in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 4.48% for 1Q12 to 4.78% for 1Q13.


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Provision for Loan Losses
The provision for loan losses decreased from $2.0 million for 1Q12 to a recovery of $(196,000) for 1Q13, resulting from net charge-offs decreasing from $2.5 million for 1Q12 to $318,000 for 1Q13 and improvement in ALLL loss factors in 1Q13 compared to 1Q12. The ratio of Allowance for loan losses to loans held for investment increased from 3.19% at March 31, 2012 to 3.54% at March 31, 2013 due primarily to a decline in loans held for investment.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2013:

                             Allowance                                                             Net Charge-offs       Allowance
                             12/31/12        Provision        Charge-offs         Recoveries        (Recoveries)          3/31/13
                                                              (in thousands)
Manufactured housing        $     5,945     $       238     $           (427 )   $        115     $            (312 )   $     5,871
Commercial real estate            2,627              65                   (4 )             14                    10           2,702
Commercial                        2,325            (401 )                (16 )             61                    45           1,969
SBA                               2,733              39                 (115 )            177                    62           2,834
HELOC                               634            (213 )                (39 )              -                   (39 )           382
Single family real estate           198              48                  (57 )              2                   (55 )           191
Consumer                              2              28                  (29 )              -                   (29 )             1
Total                       $    14,464     $      (196 )   $           (687 )   $        369     $            (318 )   $    13,950

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2012:

                             Allowance                                                            Net Charge-offs       Allowance
                             12/31/11        Provision        Charge-offs         Recoveries        (Recoveries)         3/31/12
                                                              (in thousands)
Manufactured housing        $     4,629     $     1,205     $           (998 )   $          1     $           (997 )   $     4,837
Commercial real estate            3,528             162                 (822 )              -                 (822 )         2,868
Commercial                        2,734             433                 (629 )             17                 (612 )         2,555
SBA                               3,877            (261 )               (379 )            340                  (39 )         3,577
HELOC                               349             312                   (2 )             50                   48             709
Single family real estate           150             133                 (128 )              2                 (126 )           157
Consumer                              3              (1 )                  -                -                    -               2
Total                       $    15,270     $     1,983     $         (2,958 )   $        410     $         (2,548 )   $    14,705

Credit Quality

The overall credit quality of the loan portfolio has improved as reflected in the decline in past due loans of $4.2 million or 46.4%, from $9.0 million at December 31, 2012 to $4.8 million at March 31, 2013. Past due loans in the SBA portfolio decreased $3.7 million, from $6.8 million at December 31, 2012 to $3.1 million at March 31, 2013.

Nonaccrual loans decreased $2.7 million or 12.1%, from $22.4 million at December 31, 2012 to $19.7 million at March 31, 2013. The percentage of net non-accrual loans to the total loan portfolio has decreased to 4.32% as of March 31, 2013 from 7.37% at March 31, 2012.

The manufactured housing portfolio, representing 44.3% of gross loans held for investment, has experienced net charge-offs due to borrowers that filed Chapter 7 bankruptcy and received credit discharges from the bankruptcy court. These borrowers were individually evaluated for new loans which required charge-offs based on the value of the underlying collateral. However, the net loan charge-offs in this portfolio have decreased from $997,000 in 1Q12 to $312,000 in 1Q13. As of March 31, 2013, $1.1 million was past due in this portfolio and the allowance for loan losses was $5.9 million on the $174.9 million portfolio. The balance of troubled debt restructurings for this portfolio at March 31, 2013 was $5.8 million. The Company monitors this portfolio to ensure adequate support for the collateral.


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The allowance for loan losses compared to net non-accrual loans has increased to 70.8% as of March 31, 2013 from 38.4% as of March 31, 2012.

See "ITEM 8. FINANCIAL STATEMENTS, NOTE 4. LOANS HELD FOR INVESTMENT."

Non-Interest Income
The following table summarizes the Company's non-interest income for the periods
indicated:

                                                        Three Months
                                                      Ended March 31,
. . .
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