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CWBC > SEC Filings for CWBC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for COMMUNITY WEST BANCSHARES / | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COMMUNITY WEST BANCSHARES /


9-Aug-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.

Forward Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q") contains certain forward-looking statements about the financial condition, results of operations and business of the Company. These statements may include statements regarding the projected performance of the Company for the period following the completion of this form 10-Q. You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," "intends," "will," "plans" or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and shareholder values of the Company following this Form 10-Q may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Accordingly, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company's financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:

general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the real estate or securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;

changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;

legislative or regulatory changes which may adversely affect the Company's business, including but not limited to the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations required to be promulgated thereunder;

the Company's success in implementing its new business initiatives, including expanding its product line, adding new branches and ATM centers and successfully building its brand image;

changes in interest rates which may reduce net interest margin and net interest income;

increases in competitive pressure among financial institutions or non-financial institutions;

technological changes which may be more difficult to implement or expensive than anticipated;

changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities which may adversely affect the business;

changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;

the ability to originate and purchase loans with attractive terms and acceptable credit quality;

the ability to utilize deferred tax assets;

the ability to attract and retain key members of management; and

the ability to realize cost efficiencies.


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All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in or incorporated by reference into this Form 10-Q. The forward-looking statements contained in this Form 10-Q are made as of the date hereof, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, events or circumstances after the date of this Form 10-Q, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required. For a discussion of additional factors that could adversely affect the Company's future performance, see "RISK FACTORS in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 and in item 1A of Part II of this Quarterly Report.

Financial Overview and Highlights

Community West Bancshares is a financial services company headquartered in Goleta, California that provides full service banking and lending through its wholly owned subsidiary Community West Bank, which has five California branch banking offices in Goleta, Santa Barbara, Santa Maria, Ventura and Westlake Village.

Financial Result Highlights for the Second Quarter of 2013

Net income available to common shareholders of the Company of $1.9 million, or $0.30 per basic common share and $0.23 per diluted common share for the second quarter of 2013 compared to a net loss available to common shareholders of $859,000 or $0.14 loss per basic and diluted common shares for the second quarter of 2012.
The significant factors impacting the Company's second quarter earnings performance were:

Net income of $2.1 million for the second quarter 2013 compared to a net loss of $0.6 million for the second quarter of 2012.

Net interest income decreased by 10.6 % to $5.9 million for the second quarter 2013 compared to $6.6 million for the second quarter of 2012 as a result of decreased interest earning assets yields partially offset by decreased interest bearing liabilities and cost of funds.

Net interest margin for the second quarter of 2013 improved to 4.81% compared to 4.78% for the second quarter of 2012.

Provision for loan losses was ($1.1 million) for the second quarter of 2013 compared to $1.9 million for the second quarter of 2012, resulting from decreased net charge-offs to $0.4 million for the second quarter of 2013 from $1.2 million for the second quarter of 2012 and improvement in credit quality and loan loss factors. The ratio of the allowance for loan losses to loans held for investment was 3.14% at June 30, 2013 compared to 3.66% at December 31, 2012 and 3.59% at June 30, 2012.

Net nonaccrual loans decreased to $20.7 million at June 30, 2013, compared to $22.4 million at December 31, 2012 and $32.8 million at June 30, 2012.

Net charge-offs (annualized) to average loans outstanding declined to 0.09% in the second quarter of 2013 from 0.24% in the second quarter of 2012.

Other assets acquired through foreclosure increased to $4.1 million at June 30, 2013 from $1.9 million at December 31, 2012 and $2.3 million at June 30, 2012.

During the second quarter of 2013, $6.1 million debentures converted to common stock. Outstanding debentures at June 30, 2013 were $1.7 million. Common shares outstanding at June 30, 2013 were 7.8 million.

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 overall comparative performance for the three and six months ended June 30, 2013 throughout the analysis sections of this report.


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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. The Bank has taken action to comply with the terms of the OCC Agreement, which actions have been discussed in previous filings with the Securities and Exchange Commission. In addition to the actions so identified, the Bank has taken the following actions:

The Bank has achieved the required minimum capital ratios required by Article III of the OCC Agreement, and as of June 30, 2013, the Bank's Tier 1 Leverage Capital ratio was 11.65% and the Total Risk-Based Capital ratio was 16.10%.

The Bank's Board of Directors continues to prepare 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.

At its monthly meetings, the Compliance Committee continues to review the Bank's processes, personnel and control systems to ensure they are adequate in accordance with the Article IV of the OCC Agreement.

Pursuant to Article VII of the OCC Agreement the Bank continues to employ an external firm, acceptable to the OCC, to perform a semi-annual review of the Bank's loan portfolio. A review for all quarters of 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.

The Bank maintains and updates at least monthly, 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 in accordance with Article VIII of the OCC Agreement.

The Bank's Board of Directors conducts an external review of the Bank's allowance for loan and lease losses to ensure it is consistent with all regulatory and financial accounting requirements. This external review is performed quarterly prior to the timely quarterly filing of the Bank's Consolidated Report of Condition and Income ("Call Report") in accordance with Article IX of the OCC Agreement.

The Bank's Board of Directors reviews compliance with the Bank's liquidity risk management program on a monthly basis, and provides quarterly reports to the OCC, as required by Article XI of the OCC Agreement.

The Bank's Board of Directors and Compliance Committee continues to monitor the Bank's progress in correcting all violations of law, rules or regulations identified by the OCC on a monthly basis as required by Article XII of the OCC Agreement.

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 continues to submit 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.

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 corrective actions to address certain alleged violations of law and/or regulation which actions have been discussed in previous filings with the Securities and Exchange Commission.

In accordance with the FRB Agreement, the Company requested the FRB's approval to pay the dividends due on May 15, 2012, August 15, 2012, November 15, 2012, February 15, 2013, May 15, 2013 and August 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, June 30, 2013. As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.

The Company and Bank have 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 OPERATONS

The following table sets forth a summary financial overview for the comparable
three and six months ended June 30, 2013 and 2012:

                           Three Months Ended                             Six Months Ended
                                June 30,                Increase              June 30,               Increase
                           2013           2012         (Decrease)        2013          2012         (Decrease)
                                               (in thousands, except per share amounts)
Consolidated Income
Statement Data:
Interest income         $     7,025     $   8,034     $     (1,009 )   $  13,989     $  16,355     $     (2,366 )
Interest expense              1,161         1,477             (316 )       2,327         3,270             (943 )
Net interest income           5,864         6,557             (693 )      11,662        13,085           (1,423 )
Provision for credit
losses                       (1,084 )       1,900           (2,984 )      (1,280 )       3,883           (5,163 )
Net interest income
after provision for
credit losses                 6,948         4,657            2,291        12,942         9,202            3,740
Non-interest income             802           513              289         1,569         2,401             (832 )
Non-interest expense          5,624         5,761             (137 )      11,296        11,375              (79 )
Income before income
taxes                         2,126          (591 )          2,717         3,215           228            2,987
Income taxes                      -             -                -             -             -                -
Net income              $     2,126     $    (591 )   $      2,717     $   3,215     $     228     $      2,987
Dividends and
accretion on
preferred stock                 262           268               (6 )         524           530               (6 )
Net income available
to common
stockholders            $     1,864     $    (859 )   $      2,723     $   2,691     $    (302 )   $      2,993
Income per share -
basic                   $      0.30     $   (0.14 )   $       0.44     $    0.44     $   (0.05 )   $       0.49
Income per share -
diluted                 $      0.23     $   (0.14 )   $       0.37     $    0.35     $   (0.05 )   $       0.40

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 June 30,
                                            2013                                            2012
                                                          Average                                         Average
                          Average                       Yield/Cost        Average                       Yield/Cost
                          Balance        Interest           (2)           Balance        Interest           (2)
Interest-Earning
Assets                                                         (in thousands)
Federal funds sold and
interest-earning
deposits                  $   3,446      $       1              0.12 %    $   5,770      $       3              0.24 %
Investment securities        29,049            174              2.40 %       35,964            201              2.25 %
Loans (1)                   456,783          6,850              6.01 %      509,505          7,830              6.18 %
Total earnings assets       489,278          7,025              5.76 %      551,239          8,034              5.86 %
Interest-Bearing
Liabilities
Interest-bearing
demand deposits             259,035            301              0.47 %      282,230            459              0.65 %
Savings deposits             16,272             75              1.85 %       18,611             81              1.75 %
Time deposits               103,831            384              1.48 %      137,281            512              1.50 %
Total interest-bearing
deposits                    379,138            760              0.80 %      438,122          1,052              0.97 %
Convertible debentures        6,833            153              8.98 %        7,852            176              9.00 %
Other borrowings             34,000            248              2.93 %       34,189            249              2.93 %
Total interest-bearing
liabilities                 419,971          1,161              1.11 %      480,163          1,477              1.24 %

Net interest income
and margin (3)                           $   5,864              4.81 %                   $   6,557              4.78 %
Net interest spread
(4)                                                             4.65 %                                          4.62 %


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(1) Includes nonaccrual loans.

(2) Annualized.

(3) Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and 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.

(4) Net interest margin is computed by dividing net interest income by total 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 must be 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.

                                                         Six Months Ended June 30,
                                           2013                                            2012
                                                         Average                                         Average
                         Average                       Yield/Cost        Average                       Yield/Cost
                         Balance        Interest           (2)           Balance        Interest           (2)
Interest-Earning
Assets                                                        (in thousands)
Federal funds sold
and interest-earning
deposits                 $   3,604      $       3              0.17 %    $   4,406      $       5              0.24 %
Investment securities       28,513            342              2.42 %       39,281            438              2.24 %
Loans (1)                  458,751         13,644              6.00 %      525,144         15,912              6.09 %
Total earnings assets      490,868         13,989              5.75 %      568,831         16,355              5.78 %
Interest-Bearing
Liabilities
Interest-bearing
demand deposits            260,543            602              0.47 %      286,350          1,085              0.76 %
Savings deposits            16,329            154              1.90 %       19,009            164              1.73 %
Time deposits               99,837            763              1.54 %      144,370          1,068              1.49 %
Total
interest-bearing
deposits                   376,709          1,519              0.81 %      449,729          2,317              1.04 %
Convertible
debentures                   7,314            315              8.69 %        7,852            352              9.00 %
Other borrowings            34,000            493              2.92 %       46,247            601              2.61 %
Total
interest-bearing
liabilities                418,023          2,327              1.12 %      503,828          3,270              1.31 %

Net interest income
and margin (3)                          $  11,662              4.79 %                   $  13,085              4.63 %
Net interest spread
(4)                                                            4.63 %                                          4.48 %

(1) Includes nonaccrual loans.

(2) Annualized.

(3) Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and 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..

(4) Net interest margin is computed by dividing net interest income by total 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 must be 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 table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.


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                               Three Months Ended June 30,                  Six Months Ended June 30,
                                    2013 versus 2012                             2013 versus 2012
                                   Increase (Decrease)                         Increase (Decrease)
                                    Due to Changes in                           Due to Changes in
                          Volume            Rate          Total         Volume         Rate          Total
                                                           (in thousands)

Loans, net              $     (790 )     $     (190 )   $    (980 )   $   (1,975 )   $    (293 )   $  (2,268 )
Investment securities
and other                      (50 )             21           (29 )         (123 )          25           (98 )
Total interest income         (840 )           (169 )      (1,009 )       (2,098 )        (268 )      (2,366 )

Deposits                      (118 )           (174 )        (292 )         (293 )        (505 )        (798 )
Other borrowings               (12 )            (12 )         (24 )         (250 )         105          (145 )
Total interest
expense                       (130 )           (186 )        (316 )         (543 )        (400 )        (943 )
Net increase
(decrease)              $     (710 )     $       17     $    (693 )   $   (1,555 )   $     132     $  (1,423 )

Comparison of interest income, interest expense and net interest margin

The Company's primary source of revenue is interest income. Interest income for the three and six months ended June 30, 2013 was $7.0 million and $14.0 million, respectively a decrease from $8.0 million and $16.4 million, respectively for the three and six months ended June 30, 2012. The majority of the declines in interest income resulted from lower average earning assets in both the quarter and year to date 2013. The yield on interest earning assets for the second quarter 2013 compared to 2012 declined by 10 basis points to 5.76% due to a decrease in yields on loans of 17 basis points partially offset by increases in yields on investment securities. The yield for the first six months of 2013 compared to 2012 declined slightly to 5.75% from 5.78% mostly the result of lower yields on loans.

Interest expense for the three and six months ended June 30, 2013 compared to 2012 decreased by $0.3 million and $0.9 million, respectively to $1.2 million and $2.3 million, respectively. This decline for both periods was primarily due to decreased average cost of deposits, which declined 17 basis points to 0.80% for the three months ended June 30, 2013 compared to the same period in 2012 and declined 23 basis points to 0.81% for the six months ended June 30, 2013 compared to 2012.

The net impact of the decrease in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 4.78% for the second quarter of 2012 compared to 4.81% for the second quarter of 2013 and an increase year to date 2013 to 4.79% from 4.63% in 2012.

Provision for Loan Losses

The provision for loan losses in each period is reflected as a charge against earnings in that period. The provision for loan losses is equal to the amount required to maintain the allowance for credit losses at a level that is adequate to absorb probable credit losses inherent in the loan portfolio. The provision . . .

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