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CWBC > SEC Filings for CWBC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for COMMUNITY WEST BANCSHARES /

Form 10-Q for COMMUNITY WEST BANCSHARES /


12-Nov-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 report contains certain forward-looking statements, within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. In addition, the words "anticipates," "expects," "believes," "estimates" and "intends" or the negative of these terms or other comparable terminology constitute "forward-looking statements." Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
Except as required by law, the Company disclaims any obligation to update any such forward-looking statements or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Forward-looking statements contained in this Quarterly Report on Form 10-Q involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission and the following factors that could cause actual results to differ materially from those presented:

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 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.

For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012 and in item 1A of Part II of this Quarterly Report.


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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 Third Quarter of 2013

Net income available to common shareholders of the Company of $2.4 million, or $0.29 per diluted share for the third quarter of 2013 compared to a net income available to common shareholders of $0.4 million or $0.06 per diluted share for the third quarter of 2012.

The significant factors impacting the Company's third quarter earnings performance were:

Net income of $2.6 million for the third quarter 2013 compared to a net income of $0.6 million for the third quarter of 2012.

Net interest margin for the third quarter of 2013 improved to 4.89% compared to 4.65% for the third quarter of 2012.

Provision for loan losses was ($1.6 million) for the third quarter of 2013 compared to $1.3 million for the third quarter of 2012, resulting from net recoveries of $0.8 million for the third quarter of 2013 compared to net charge-offs of $1.7 million for the third quarter of 2012 and continued improvement in credit quality.

Net nonaccrual loans decreased to $15.3 million at September 30, 2013, compared to $22.4 million at December 31, 2012 and $33.3 million at September 30, 2012.

Allowance for loan losses was $11.7 million at September 30, 2013, or 3.01% of total loans held for investment compared to 3.66% at December 31, 2012 and 3.65% one year ago.

Other assets acquired through foreclosure increased to $4.0 million at September 30, 2013 from $1.9 million at December 31, 2012 and $3.8 million at September 30, 2012.

During the third quarter of 2013, $0.2 million debentures converted to common stock. Outstanding debentures at September 30, 2013 were $1.4 million. Common shares outstanding at September 30, 2013 were 7.9 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 nine months ended September 30, 2013 throughout the analysis sections of this report.

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 September 30, 2013, the Bank's Tier 1 Leverage Capital ratio was 12.06% and the Total Risk-Based Capital ratio was 17.11%.

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.


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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") pursuant to which the Company has agreed to take certain 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, September 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.


Table of Contents
RESULTS OF OPERATIONS

A summary of our results of operations and financial condition and select
metrics is included in the following table:

                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
                                                 2013            2012           2013           2012
                                                      (in thousands, except per share amounts)

Net income available to common stockholders   $     2,373      $     360     $    5,064      $      56
Basic earnings per share                             0.30           0.06           0.75           0.01
Diluted earnings per share                           0.29           0.06           0.60           0.01
Total assets                                      535,481        532,101
Gross loans                                       451,362        463,969
Total deposits                                    431,091        434,220
Net interest margin                                  4.89 %         4.65 %         4.82 %         4.63 %
Return on average assets                             1.95 %         0.43 %         1.47 %         0.19 %
Return on average stockholders' equity              16.54 %         4.79 %        13.62 %         2.21 %

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

                           Three Months Ended                             Nine Months Ended
                              September 30,             Increase            September 30,             Increase
                           2013           2012         (Decrease)         2013          2012         (Decrease)
                                                (in thousands, except per share amounts)
Consolidated Income
Statement Data:
Interest income         $     7,058     $   7,512     $       (454 )   $   21,047     $  23,867     $     (2,820 )
Interest expense              1,047         1,403             (356 )        3,374         4,673           (1,299 )
Net interest income           6,011         6,109              (98 )       17,673        19,194           (1,521 )
Provision for credit
losses                       (1,563 )       1,293           (2,856 )       (2,843 )       5,176           (8,019 )
Net interest income
after provision for
credit losses                 7,574         4,816            2,758         20,516        14,018            6,498
Non-interest income             684         1,057             (373 )        2,253         3,458           (1,205 )
Non-interest expenses         5,623         5,260              363         16,919        16,635              284
Income before income
taxes                         2,635           613            2,022          5,850           841            5,009
Income taxes                      -             -                -              -             -                -
Net income              $     2,635     $     613     $      2,022     $    5,850     $     841     $      5,009
Dividends and
accretion on
preferred stock                 262           253                9            786           785                1
Net income available
to common
stockholders            $     2,373     $     360     $      2,013     $    5,064     $      56     $      5,008
Income per share -
basic                   $      0.30     $    0.06     $       0.24     $     0.75     $    0.01     $       0.74
Income per share -
diluted                 $      0.29     $    0.06     $       0.22     $     0.60     $    0.01     $       0.59


Table of Contents
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 September 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     $    3,299     $        1              0.12 %   $    4,793     $        3              0.24 %
interest-earning
deposits
Investment securities          28,810            186              2.56 %       33,082            185              2.22 %
Loans (1)                     455,646          6,871              5.98 %      484,944          7,324              6.01 %
Total earnings assets         487,755          7,058              5.74 %      522,819          7,512              5.72 %
Nonearning Assets
Cash and due from banks        39,919                                          28,405
Allowance for loan            (12,621 )                                       (15,434 )
losses
Other assets                   20,499                                          28,819
Total assets               $  535,552                                      $  564,609
Interest-Bearing
Liabilities
Interest-bearing demand       255,008            300              0.47 %      279,866            414              0.59 %
deposits
Savings deposits               16,456             71              1.71 %       16,319             81              1.96 %
Time deposits                 106,131            348              1.30 %      120,614            475              1.57 %
Total interest-bearing        377,595            719              0.76 %      416,799            970              0.93 %
deposits
Convertible debentures          1,443             77             21.17 %        7,852            183              9.25 %
Other borrowings               34,000            251              2.93 %       34,000            250              2.93 %
Total interest-bearing        413,038          1,047              1.01 %      458,651          1,403              1.22 %
liabilities
Noninterest-Bearing
Liabilities
Noninterest-bearing            55,130                                          52,437
demand deposits
Other liabilities               4,170                                           2,725
Stockholders' equity           63,214                                          50,796
Total Liabilities and      $  535,552                                      $  564,609
Stockholders' Equity
Net interest income and                   $    6,011              4.89 %                  $    6,109              4.65 %
margin (3)
Net interest spread (4)                                           4.73 %                                          4.50 %

(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.


Table of Contents
                                                        Nine Months Ended September 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                  $    3,445     $        4              0.16 %   $    4,536     $        8              0.24 %
Investment securities         28,613            528              2.47 %       37,200            623              2.24 %
Loans (1)                    457,705         20,515              5.99 %      511,646         23,236              6.07 %
Total earnings assets        489,763         21,047              5.75 %      553,382         23,867              5.76 %
Nonearning Assets
Cash and due from banks       32,492                                          24,631
Allowance for loan
losses                       (13,652 )                                       (15,199 )
Other assets                  21,681                                          30,277
Total assets              $  530,284                                      $  593,091
Interest-Bearing
Liabilities
Interest-bearing demand
deposits                     258,663            902              0.47 %      284,173          1,499              0.70 %
Savings deposits              16,372            225              1.84 %       18,106            244              1.80 %
Time deposits                101,957          1,111              1.46 %      136,393          1,544              1.51 %
Total interest-bearing
deposits                     376,992          2,238              0.79 %      438,672          3,287              1.00 %
Convertible debentures         5,336            393              9.85 %        7,852            534              9.08 %
Other borrowings              34,000            743              2.92 %       42,135            852              2.70 %
Total interest-bearing
liabilities                  416,328          3,374              1.08 %      488,659          4,673              1.28 %
Noninterest-Bearing
Liabilities
Noninterest-bearing
demand deposits               52,985                                          51,215
Other liabilities              3,532                                           2,428
Stockholders' equity          57,439                                          50,789
Total Liabilities and
Stockholders' Equity      $  530,284                                      $  593,091
Net interest income and
margin (3)                               $   17,673              4.82 %                  $   19,194              4.63 %
Net interest spread (4)                                          4.67 %                                          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.


Table of Contents
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.

                              Three Months Ended September 30,                 Nine Months Ended September 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              $     (442 )     $      (11 )     $     (453 )   $     (2,417 )     $     (304 )   $  (2,721 )
Investment securities
and other                      (34 )             33               (1 )           (160 )             61           (99 )
Total interest income         (476 )             22             (454 )         (2,577 )           (243 )      (2,820 )

Deposits                       (75 )           (176 )           (251 )           (364 )           (685 )      (1,049 )
Other borrowings               (59 )            (46 )           (105 )           (308 )             58          (250 )
Total interest
expense                       (134 )           (222 )           (356 )           (672 )           (627 )      (1,299 )
Net increase
(decrease)              $     (342 )     $      244       $      (98 )   $     (1,905 )     $      384     $  (1,521 )

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 nine months ended September 30, 2013 was $7.1 million and $21.0 million, respectively a decrease from $7.5 million and $23.9 million, respectively for the three and nine months ended September 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 as a result of strategic planning to reduce the balance sheet. The yield on interest earning assets for . . .

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