UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013 or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission File Number:  000-23575
 
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
 
California
77-0446957
(State or other jurisdiction of incorporation  or organization)
(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California
93117
 (Address of principal executive offices)
(Zip Code)
(805) 692-5821
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock of the registrant issued and outstanding of 7,866,783 as of October 31, 2013.
 



Table of Contents

Index
Page
Part I.  Financial Information
 
 
Item 1 – Financial Statements
 
 
 
  3
 
 
 4
 
 
5
 
 
 
  6
 
 
  7
 
 
  8
 
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
 
 
 
 
33
 
49
 
50
 
 
 
 
Part II.  Other Information
 
 
50
 
Item 1A – Risk Factors
50
 
50
 
50
 
51
 
51
 
Item 6 – Exhibits
51
 
 
 
 
52
2

PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements (unaudited)

COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(Unaudited)
   
 
 
 
(in thousands, except share amounts)
 
Assets:
 
   
 
Cash and due from banks
 
$
42,546
   
$
27,866
 
Federal funds sold
   
24
     
25
 
Cash and cash equivalents
   
42,570
     
27,891
 
Interest-bearing deposits in other financial institutions
   
3,282
     
3,653
 
Investment securities - available-for-sale, at fair value; amortized cost of $15,813 at September 30, 2013 and $11,944 at December 31, 2012
   
15,436
     
12,004
 
Investment securities - held-to-maturity, at amortized cost; fair value of $10,600 at September 30, 2013 and $12,765 at December 31, 2012
   
10,149
     
12,036
 
Federal Home Loan Bank stock, at cost
   
2,281
     
3,283
 
Federal Reserve Bank stock, at cost
   
1,373
     
1,373
 
Loans:
               
Held for sale, at lower of cost or fair value
   
64,187
     
68,694
 
Held for investment, net of allowance for loan losses of $11,654 at September 30, 2013 and $14,464 at December 31, 2012
   
375,258
     
380,507
 
Total loans
   
439,445
     
449,201
 
Other assets acquired through foreclosure, net
   
3,975
     
1,889
 
Premises and equipment, net
   
2,985
     
3,068
 
Other assets
   
13,985
     
17,703
 
Total assets
 
$
535,481
   
$
532,101
 
Liabilities:
               
Deposits:
               
Non-interest-bearing demand
 
$
55,462
   
$
53,605
 
Interest-bearing demand
   
253,978
     
269,466
 
Savings
   
16,176
     
16,351
 
Certificates of deposit
   
105,475
     
94,798
 
Total deposits
   
431,091
     
434,220
 
Other borrowings
   
34,000
     
34,000
 
Convertible debentures
   
1,442
     
7,852
 
Other liabilities
   
4,300
     
2,980
 
Total liabilities
   
470,833
     
479,052
 
 
               
Stockholders’ equity:
               
 
               
Preferred stock — no par value, 10,000,000 shares authorized; 15,600 shares issued and outstanding at September 30, 2013 and December 31, 2012
   
15,542
     
15,341
 
Common stock — no par value, 20,000,000 shares authorized; 7,865,558shares issued and outstanding at September 30, 2013 and 5,994,510  at December 31, 2012
   
40,146
     
33,555
 
Retained earnings
   
9,182
     
4,118
 
Accumulated other comprehensive (loss) income, net
   
(222
)
   
35
 
Total stockholders’ equity
   
64,648
     
53,049
 
Total liabilities and stockholders’ equity
 
$
535,481
   
$
532,101
 

See the accompanying notes.
3

COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (unaudited)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Interest income:
 
(in thousands, except per share amounts)
 
Loans, including fees
 
$
6,871
   
$
7,324
   
$
20,515
   
$
23,236
 
Investment securities and other
   
187
     
188
     
532
     
631
 
Total interest income
   
7,058
     
7,512
     
21,047
     
23,867
 
Interest expense:
                               
Deposits
   
719
     
970
     
2,238
     
3,287
 
Other borrowings and convertible debt
   
328
     
433
     
1,136
     
1,386
 
Total interest expense
   
1,047
     
1,403
     
3,374
     
4,673
 
Net interest income
   
6,011
     
6,109
     
17,673
     
19,194
 
Provision for credit losses
   
(1,563
)
   
1,293
     
(2,843
)
   
5,176
 
Net interest income after provision for credit losses
   
7,574
     
4,816
     
20,516
     
14,018
 
Non-interest income:
                               
Other loan fees
   
229
     
302
     
844
     
847
 
Gains from loan sales, net
   
62
     
366
     
334
     
1,521
 
Document processing fees
   
114
     
109
     
369
     
283
 
Service Charges
   
75
     
98
     
245
     
327
 
Loan servicing, net
   
70
     
105
     
169
     
180
 
Other
   
134
     
77
     
292
     
300
 
Total non-interest income
   
684
     
1,057
     
2,253
     
3,458
 
Non-interest expense:
                               
Salaries and employee benefits
   
3,114
     
2,899
     
9,999
     
8,526
 
Occupancy expense, net
   
452
     
451
     
1,365
     
1,365
 
Loan servicing and collection
   
511
     
366
     
1,111
     
1,257
 
Professional services
   
308
     
372
     
913
     
993
 
FDIC assessment
   
283
     
311
     
809
     
1,046
 
Advertising and marketing
   
94
     
59
     
374
     
218
 
Depreciation
   
78
     
78
     
226
     
231
 
Net loss on sales/write-downs of foreclosed real estate and repossessed assets
   
168
     
189
     
274
     
969
 
Data processing
   
128
     
127
     
403
     
407
 
Other
   
487
     
408
     
1,445
     
1,623
 
Total non-interest expense
   
5,623
     
5,260
     
16,919
     
16,635
 
Income before provision for income taxes
   
2,635
     
613
     
5,850
     
841
 
Income taxes
   
     
     
     
 
Net income
   
2,635
     
613
     
5,850
     
841
 
Dividends and accretion on preferred stock
   
262
     
253
     
786
     
785
 
Net income available to common stockholders
 
$
2,373
   
$
360
   
$
5,064
   
$
56
 
Earnings per share:
                               
Basic
 
$
0.30
   
$
0.06
   
$
0.75
   
$
0.01
 
Diluted
 
$
0.29
   
$
0.06
   
$
0.60
   
$
0.01
 
Weighted average number of common shares outstanding:
                               
Basic
   
7,865
     
5,990
     
6,731
     
5,990
 
Diluted
   
8,395
     
8,233
     
8,883
     
8,233
 
Dividends declared per common share
 
$
   
$
   
$
   
$
 
 
See the accompanying notes.
4

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(in thousands)
 
Net income
 
$
2,635
   
$
613
   
$
5,850
   
$
841
 
Other comprehensive income, net:
                               
Unrealized (loss) gain on securities available-for-sale (AFS), net (tax effect of $83, $(5), $180, $(2) for each respective period presented)
   
(119
)
   
7
     
(257
)
   
2
 
Realized gain on sale of securities AFS included in income, net (tax effect of $22)
   
     
     
     
(99
)
Net other comprehensive (loss) income
   
(119
)
   
7
     
(257
)
   
(97
)
Comprehensive income
 
$
2,516
   
$
620
   
$
5,593
   
$
744
 

See the accompanying notes.
5

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)

 
 
   
   
   
   
Accumulated
   
   
 
 
 
Preferred Stock
   
Common Stock
   
Other
   
   
Total
 
 
 
   
   
   
   
Comprehensive
   
Retained
   
Stockholders'
 
 
 
Shares
   
Amount
   
Shares
   
Amount
   
Income (Loss)
   
Earnings
   
Equity
 
 
 
(in thousands)
 
Balance, December 31, 2012:
   
16
   
$
15,341
     
5,995
   
$
33,555
   
$
35
   
$
4,118
   
$
53,049
 
Net income
   
     
     
     
     
     
5,850
     
5,850
 
Exercise of stock options
   
     
     
6
     
21
     
     
     
21
 
Conversion of debentures
   
     
     
1,865
     
6,527
                     
6,527
 
Stock option expense
   
     
     
     
43
     
     
     
43
 
Dividends on preferred stock
   
     
     
     
     
     
(585
)
   
(585
)
Accretion on preferred stock
   
     
201
     
     
     
     
(201
)
   
 
Other comprehensive loss, net
   
     
     
     
     
(257
)
   
     
(257
)
Balance, September 30, 2013
   
16
   
$
15,542
     
7,866
   
$
40,146
   
$
(222
)
 
$
9,182
   
$
64,648
 
 
See the accompanying notes.

6

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
 
Nine Months Ended September 30,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Cash flows from operating activities:
 
   
 
Net income
 
$
5,850
   
$
841
 
 
               
Adjustments to reconcile net income to cash provided by operating activities:
               
Provision for loan losses
   
(2,843
)
   
5,176
 
Depreciation
   
226
     
231
 
Stock-based compensation
   
43
     
27
 
Deferred income taxes
   
     
354
 
Net amortization of discounts and premiums for investment securities
   
     
(21
)
(Gains)/Losses on:
               
Sales of securities, AFS
   
     
(121
)
Sale of repossessed assets, net
   
360
     
1,076
 
Sale of loans, net
   
(334
)
   
(1,521
)
Loans originated for sale and principal collections, net
   
4,841
     
(2,379
)
Changes in:
               
Other assets
   
4,121
     
(630
)
Other liabilities
   
852
     
1,071
 
Servicing rights, net
   
133
     
(121
)
Net cash provided by operating activities
   
13,249
     
3,983
 
Cash flows from investing activities:
               
Proceeds from held for investment loan sales
   
5,101
     
 
Proceeds from sale of available-for-sale securities
   
     
4,137
 
Principal pay downs and maturities of available-for-sale securities
   
4,181
     
7,446
 
Purchase of available-for-sale securities
   
(8,033
)
   
 
Proceeds from principal pay downs and maturities of securities held-to-maturity
   
1,870
     
2,493
 
Loan originations and principal collections, net
   
(2,762
)
   
65,185
 
Liquidation of restricted stock
   
1,002
     
596
 
Net increase (decrease) in interest-bearing deposits in other financial institutions
   
371
     
(3,543
)
Purchase of premises and equipment, net
   
(143
)
   
(253
)
Proceeds from sale of other real estate owned and repossessed assets, net
   
2,951
     
8,181
 
Net cash provided by investing activities
   
4,538
     
84,242
 
Cash flows from financing activities:
               
Net decrease in deposits
   
(3,129
)
   
(51,296
)
Net decrease in borrowings
   
     
(27,000
)
Exercise of stock options
   
21
     
 
Cash dividends paid on preferred stock
   
     
(195
)
Net cash used in financing activities
   
(3,108
)
   
(78,491
)
Net  increase in cash and cash equivalents
   
14,679
     
9,734
 
Cash and cash equivalents at beginning of year
   
27,891
     
22,572
 
Cash and cash equivalents at end of period
 
$
42,570
   
$
32,306
 
Supplemental disclosure:
               
Cash paid during the period for:
               
Interest
 
$
3,399
   
$
4,631
 
Income taxes
   
462
     
712
 
Non-cash investing and financing activity:
               
Transfers to other assets acquired through foreclosure, net
   
5,753
     
6,317
 
Preferred stock dividends declared, not paid
   
585
     
388
 
Conversion of debentures
   
6,410
     
 

See the accompanying notes.
7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of operations
 
Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”).  These entities are collectively referred to herein as the “Company”.
 
Basis of presentation
 
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry.  The accounts of the Company and its consolidated subsidiary are included in these Consolidated Financial Statements.  All significant intercompany balances and transactions have been eliminated.
 
Use of estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses and fair value of other real estate owned.  Although Management believes these estimates to be reasonably accurate, actual amounts may differ.  In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.
 
Interim financial information
 
The accompanying unaudited consolidated financial statements as of September 30, 2013 and 2012 have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented.  Such adjustments are of a normal recurring nature.  The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year.  The interim financial information should be read in conjunction with the Company’s audited consolidated financial statements.
 
Reclassifications
 
Certain amounts in the consolidated financial statements as of December 31, 2012 and for the three and nine months ended September 30, 2012 have been reclassified to conform to the current presentation.  The reclassifications have no effect on net income or stockholders’ equity as previously reported.
 
Loans Held for Investment
 
Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.  Unearned income includes deferred loan origination fees reduced by loan origination costs.  Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.
 
Provision and Allowance for Loan Losses
 
The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”).  The ALL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio.  This process involves deriving probable loss estimates that are based on migration analysis and historical loss rates, in addition to qualitative factors that are based on management’s judgment.  The migration analysis and historical loss rate calculations are based on the annualized loss rates utilizing a twelve-quarter loss history.  Migration analysis is utilized for the Commercial Real Estate (“CRE”), Commercial, Commercial Agriculture, Small Business Association (“SBA”), Home Equity Line of Credit (“HELOC”), Single Family Residential, and Consumer portfolios.  The historical loss rate method is utilized primarily for the Manufactured Housing portfolio.  The migration analysis takes into account the risk rating of loans that are charged off in each loan category.  Loans that are considered Doubtful are typically charged off.  The following is a description of the characteristics of loan ratings.  Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.
 
Outstanding – This is the highest quality rating that is assigned to any loan in the portfolio.  These loans are made to the highest quality borrowers with strong financial statements and unquestionable repayment sources.  Collateral securing these types of credits are generally cash deposits in the bank or marketable securities held in custody.
8

Good – Loans rated in this category are strong loans, underwritten well, that bear little risk of loss to the Company.  Loans in this category are loans to quality borrowers with very good financial statements that present an identifiable strong primary source and good secondary source of repayment.  Generally, these credits are well collateralized by good quality and liquid assets or low loan to value market real estate.
 
Pass - Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company.  Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.  In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.
 
Watch – Acceptable credit that requires a temporary increase in attention by management.  This can be caused by declines in sales, margins, liquidity or working capital.  Generally the primary weakness is lack of current financial statements and industry issues.
 
Special Mention - A Special Mention loan has potential weaknesses that require management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
 
Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due.  They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.
 
Doubtful - A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
 
Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future.  Losses are taken in the period in which they are considered uncollectible.
 
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans.  The allowance is charged for losses when management believes that full recovery on the loan is unlikely.  The following is the Company’s policy regarding charging off loans.
 
Commercial, CRE and SBA Loans
 
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.  A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired Generally, loan balances are charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists.  In the event there is no perceived equity, the loan is charged-off in full.  Unsecured loans which are delinquent over 90 days are also charged-off in full.
 
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
 
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for possible charge-off.  Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is generally fully charged-off.  Other consumer loans which are not secured and unpaid over 90-120 days are charged-off in full.
 
Consumer Loans
 
All consumer loans (excluding real estate mortgages, home equity loans and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.
 
The ALL calculation for the different loan portfolios is as follows:
 
· Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required allowance for all non-impaired loans.  In addition, the migration results are adjusted based upon qualitative factors that affect this specific portfolio category.   Reserves on impaired loans are determined based upon the individual characteristics of the loan.
9

· Manufactured Housing – The allowance is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.  In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.
 
The Company evaluates and individually assesses for impairment loans generally greater than $500,000, classified as substandard or doubtful in addition to loans either on nonaccrual, considered a troubled debt restructuring (“TDR”) or when other conditions exist which lead management to review for possible impairment.   Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.  The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods:
 
· The expected future cash flows are estimated and then discounted at the effective interest rate.
· The value of the underlying collateral net of selling costs.  Selling costs are estimated based on industry standards, the Company’s actual experience or actual costs incurred as appropriate.  When evaluating real estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation.  When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old at time of evaluation.  Additionally for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
· The loan’s observable market price.
 
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
 
The Company determines the appropriate ALL on a monthly basis.  Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.  The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral.  Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience.  These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on the following factors:
 
· Concentrations of credit
· International risk
· Trends in volume, maturity, and composition
· Volume and trend in delinquency
· Economic conditions
· Outside exams
· Geographic distance
· Policy and changes
· Staff experience and ability
 
Foreclosed Real Estate and Repossessed Assets
 
Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell.  Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses.  Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets.  Subsequent to the legal ownership date, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell.  Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
 
Income Taxes
 
The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements.  Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting.  These items represent “temporary differences.”  Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized.
10

Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required  to establish a valuation allowance for deferred tax asset and record a charge to income if Management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax asset may not be realized.
 
Net income represents positive evidence for the reduction of the deferred tax valuation allowance.  The Company had net income of $5.9 million for the nine months ended September 30, 2013.  The Company expects to be in a Federal tax expense position for 2013.  A corresponding release of the valuation allowance equal to the current year tax expense of $1.4 million has been reflected at September 30, 2013.
 
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740).  ASC 740 prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions.  ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
 
Earnings Per Share
 
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income (loss) available to common shareholders.  Diluted earnings per share include the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include stock options, warrants and shares that could result from the conversion of debenture bonds.
 
Recent Accounting Pronouncements
 
In February 2013, the FASB issued guidance within ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  The amendments in ASU 2013-02 to Topic 220, Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12.  The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income.  The amendments are effective prospectively for reporting periods beginning after December 15, 2012.  The adoption of ASU No. 2013-02 resulted in presentation changes to the Company’s consolidated income statements.  The adoption of ASU No. 2013-02 had no impact on the Company’s balance sheets.

In July 2013, the FASB issued guidance within ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in ASU 2013-11 to Topic 740, Income Taxes, updates the presentation of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.  ASU 2013-11 is effective for the Company on January 1, 2014 and is not to be applied prospectively, although early adoption and retrospective adoption are permitted.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

11

2. INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of investment securities are as follows:
 
 
 
September 30, 2013
 
 
 
   
Gross
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
(Losses)
   
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
5,994
   
$
-
   
$
(318
)
 
$
5,676
 
U.S. government agency mortgage backed securities ("MBS")
   
62
     
3
     
-
     
65
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
9,691
     
13
     
(76
)
   
9,628
 
Equity securities: Farmer Mac class A stock
   
66
     
1
     
-
     
67
 
Total
 
$
15,813
   
$
17
   
$
(394
)
 
$
15,436
 
 
                               
Securities held-to-maturity
                               
U.S. government agency MBS
 
$
10,149
   
$
469
   
$
(18
)
 
$
10,600
 
Total
 
$
10,149
   
$
469
   
$
(18
)
 
$
10,600
 

 
 
December 31, 2012
 
 
 
   
Gross
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
(Losses)
   
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
1,998
   
$
-
   
$
(10
)
 
$
1,988
 
U.S. government agency MBS
   
163
     
8
     
-
     
171
 
U.S. government agency CMO
   
9,783
     
62
     
-
     
9,845
 
Total
 
$
11,944
   
$
70
   
$
(10
)
 
$
12,004
 
 
                               
Securities held-to-maturity
                               
U.S. government agency MBS
 
$
12,036
   
$
729
   
$
-
   
$
12,765
 
Total
 
$
12,036
   
$
729
   
$
-
   
$
12,765
 

At September 30, 2013 and December 31, 2012, $25.6 million and $24.0 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank San Francisco, as collateral for current and future advances.
 
The Company had no security sales in 2013.  For the nine months ended September 30, 2012, the Company sold $4.1 million of securities for a net gain on sale of $0.1 million.
 
In January 2013, CWB became an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs.  Under the Farmer Mac I program loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac.  CWB receives an origination fee and ongoing fee for serving the credit.  The Farmer Mac II program was authorized by Congress in 1991 to establish a uniform national secondary market for originators and investors using the United States Department of Agriculture (“USDA”) guaranteed loan programs.  Under this program, CWB can sell the guaranteed portions of USDA loans directly to Farmer Mac’s subsidiary, Farmer Mac II LLC, services the loans, and retains the unguaranteed portions of those loans in accordance with the terms of the existing USDA guaranteed loan programs.  Eligible loans include Farm Service Agency (“FSA”) and Business and Industrial loans.  To participate in the program, CWB was required to purchase 2,000 shares of Farmer Mac Class A Stock (“AGM”) which was classified as available-for-sale.

12

The maturity periods and weighted average yields of investment securities at September 30, 2013 are as follows:
 
 
 
Less than One Year
   
One to Five Years
   
Five to Ten Years
   
Over Ten Years
   
Total
 
 
 
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
 
Securities available-for-sale
 
(dollars in thousands)
 
U.S. government agency notes
 
$
5,676
     
1.2
%
 
$
-
     
-
   
$
-
     
-
   
$
-
     
-
   
$
5,676
     
1.2
%
U.S. government agency MBS
   
-
     
-
     
-
     
-
     
65
     
2.2
%
   
-
     
-
     
65
     
2.2
%
U.S. government agency CMO
   
-
     
-
     
2,427
     
0.7
%
   
4,355
     
0.5
%
   
2,846
     
0.8
%
   
9,628
     
0.7
%
Farmer Mac class A stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
67
     
-
 
Total
 
$
5,676
     
1.2
%
 
$
2,427
     
0.7
%
 
$
4,420
     
0.6
%
 
$
2,846
     
0.8
%
 
$
15,436
     
0.9
%
 
                                                                               
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
-
     
-
   
$
2,366
     
4.7
%
 
$
7,783
     
2.7
%
 
$
-
     
-
   
$
10,149
     
3.2
%
Total
 
$
-
     
-
   
$
2,366
     
4.7
%
 
$
7,783
     
2.7
%
 
$
-
     
-
   
$
10,149
     
3.2
%

The amortized cost and fair value of securities as of September 30, 2013 and December 31, 2012, by contractual maturities, are shown below:

 
 
September 30, 2013
   
December 31, 2012
 
 
 
Amortized
   
Estimated
   
Amortized
   
Estimated
 
 
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Securities available for sale
 
(in thousands)
 
Due in one year or less
 
$
5,994
   
$
5,676
   
$
4,923
   
$
4,913
 
After one year through five years
   
2,418
     
2,427
     
6,858
     
6,920
 
After five years through ten years
   
4,425
     
4,420
     
163
     
171
 
After ten years
   
2,910
     
2,846
     
-
     
-
 
Farmer Mac class A stock
   
66
     
67
     
-
     
-
 
 
 
$
15,813
   
$
15,436
   
$
11,944
   
$
12,004
 
Securities held to maturity
                               
Due in one year or less
 
$
-
   
$
-
   
$
-
   
$
-
 
After one year through five years
   
2,366
     
2,521
     
4,051
     
4,314
 
After five years through ten years
   
7,783
     
8,079
     
7,985
     
8,451
 
After ten years
   
-
     
-
     
-
     
-
 
 
 
$
10,149
   
$
10,600
   
$
12,036
   
$
12,765
 

The following tables show all securities that are in an unrealized loss position:

 
 
September 30, 2013
 
 
 
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
 
 
Gross
   
   
Gross
   
   
Gross
   
 
 
 
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
 
 
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
318
   
$
5,676
   
$
-
   
$
-
   
$
318
   
$
5,676
 
U.S. government agency CMO
   
76
     
5,427
   
$
-
   
$
-
     
76
     
5,427
 
 
 
$
394
   
$
11,103
   
$
-
   
$
-
   
$
394
   
$
11,103
 
Securities held-to-maturity
 
                 
U.S. Government-agency MBS
 
$
18
   
$
1,080
   
$
-
   
$
-
   
$
18
   
$
1,080
 
Total
 
$
18
   
$
1,080
   
$
-
   
$
-
   
$
18
   
$
1,080
 

13

 
 
December 31, 2012
 
 
 
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
 
 
Gross
   
   
Gross
   
   
Gross
   
 
 
 
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
 
 
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
10
   
$
1,988
   
$
-
   
$
-
   
$
10
   
$
1,988
 
U.S. government agency CMO
   
1
     
876
     
1
     
411
     
2
     
1,287
 
Total
 
$
11
   
$
2,864
   
$
1
   
$
411
   
$
12
   
$
3,275
 

As of September 30, 2013 and December 31, 2012, there were eight and four securities, respectively, in an unrealized loss position.
 
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.
 
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2013 and December 31, 2012, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.
 
3. LOAN SALES AND SERVICING
 
SBA Loan Sales - The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis.  The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts.
 
On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.
 
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  In connection with the sale of SBA loans during the first quarter of 2012, the Company recorded a servicing asset and has elected to measure this asset at fair value in accordance with ASC 825-10 – Fair Value Option to better reflect the impact of subsequent changes in interest rates.  The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed.  The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium.  The Company records servicing liabilities for the sold unguaranteed loans.  These servicing liabilities are calculated based on the present value of the estimated future servicing costs associated with each loan.  As of September 30, 2013 and December 31, 2012, the servicing liability was $32,000 and $39,000, respectively.
 
The Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.  As of September 30, 2013 and December 31, 2012, the Company had approximately $48.9 million and $55.7 million, respectively, in SBA loans included in loans held for sale.  As of September 30, 2013 and December 31, 2012, the principal balance of loans serviced was $29.4 million and $32.7 million, respectively.
 
The Company has expanded its agricultural lending program to include agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.  In the third quarter of 2012, the Company sold $2.5 million in USDA loans and recorded the related servicing asset at fair value.
 
As of September 30, 2013 and December 31, 2012, the Company had $14.2 million and $4.8 million of USDA loans included in loans held for sale, respectively. As of September 30, 2013 and December 31, 2012, the principal balance of USDA loans serviced was $2.5 million.
14

The following table presents the I/O strips activity as of the periods presented:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
(in thousands)
 
Beginning balance
 
$
394
   
$
456
   
$
426
   
$
419
 
Adjustment to fair value
   
(18
)
   
(5
)
   
(50
)
   
32
 
Ending balance
 
$
376
   
$
451
   
$
376
   
$
451
 

The key data assumptions used in estimating the fair value of the I/O strips as of the periods presented were as follows:

 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Weighted-average constant prepayment rate
   
5.17
%
   
5.66
%
Weighted-average life (in years)
   
6
     
6
 
Weighted-average discount rate
   
12.74
%
   
12.94
%

A sensitivity analysis of the fair value of the I/O strips to changes in certain key assumptions is presented in the following table:

 
 
September 30,
 
 
 
2013
   
2012
 
 
 
( in thousands)
 
Discount Rate
 
   
 
Increase in fair value from 100 basis points ("bps") decrease
 
$
11
   
$
13
 
Decrease in fair value from 100 bps increase
   
(10
)
   
(13
)
Constant Prepayment Rate
               
Increase in fair value from 10 percent decrease
   
5
     
7
 
Decrease in fair value from 10 percent increase
   
(5
)
   
(7
)

The following is a summary of the activity for servicing rights accounted for under the amortization method:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
(in thousands)
 
Beginning balance
 
$
326
   
$
441
   
$
383
   
$
625
 
Amortization
   
(28
)
   
(29
)
   
(85
)
   
(213
)
Ending balance
 
$
298
   
$
412
   
$
298
   
$
412
 

The following is a summary of the activity for servicing rights accounted for under the fair value method:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
(in thousands)
 
Beginning balance
 
$
304
   
$
253
   
$
348
   
$
-
 
Additions through loan sales
   
-
     
72
     
-
     
349
 
Adjustment to fair value
   
(4
)
   
8
     
(48
)
   
(16
)
Ending balance
 
$
300
   
$
333
   
$
300
   
$
333
 

15

 
The key data and assumptions used in estimating the fair value of servicing rights as of the periods presented were as follows:

 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Weighted-average constant prepayment rate
   
4.62
%
   
5.19
%
Weighted-average life (in years)
   
9
     
9
 
Weighted-average discount rate
   
13.48
%
   
13.93
%

A sensitivity analysis of the fair value of servicing rights to change in certain key assumptions is presented in the following table:

 
 
September 30,
 
 
 
2013
   
2012
 
 
 
( in thousands)
 
Discount Rate
 
   
 
Increase in fair value from 100 basis points ("bps") decrease
 
$
12
   
$
13
 
Decrease in fair value from 100 bps increase
   
(11
)
   
(13
)
Constant Prepayment Rate
               
Increase in fair value from 10 percent decrease
   
6
     
7
 
Decrease in fair value from 10 percent increase
   
(5
)
   
(7
)

This sensitivity analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s servicing rights usually is not linear.  In addition, the effect of changing one key assumption without changing other assumptions is not a viable option.
 
Mortgage Loan Sales – From time to time, the Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers.  In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor.  This forward sale agreement requires delivery of the loan on a “best efforts” basis but does not obligate the Company to deliver if the mortgage loan does not fund.
 
The mortgage rate lock agreement and the forward sale agreement qualify as derivatives.  The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates.  These derivative financial instruments are recorded at fair value if material.  Although the Company does not attempt to qualify these transactions for the special hedge accounting, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge.  At September 30, 2013 and December 31, 2012, the Company had $1.2 million and $15.8 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments.  The value of related derivative instruments was not material to the Company’s financial position or results of operations.
16

4. LOANS HELD FOR INVESTMENT
 
The composition of the Company’s loans held for investment loan portfolio follows:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Manufactured housing
 
$
172,126
   
$
177,391
 
Commercial real estate
   
132,034
     
126,677
 
Commercial
   
31,453
     
32,496
 
SBA
   
25,753
     
30,688
 
HELOC
   
15,616
     
17,852
 
Single family real estate
   
10,007
     
9,939
 
Consumer
   
186
     
232
 
 
   
387,175
     
395,275
 
Allowance for loan losses
   
11,654
     
14,464
 
Deferred costs, net
   
(92
)
   
(128
)
Discount on SBA loans
   
355
     
432
 
Total loans held for investment, net
 
$
375,258
   
$
380,507
 

The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans:

 
 
September 30, 2013
 
 
 
   
   
   
   
   
   
Recorded
 
 
 
   
   
   
   
   
   
Investment
 
 
 
   
30-59 Days
   
60-89 Days
   
Over 90 Days
   
Total
   
   
Over 90 Days
 
 
 
Current
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Total
   
and Accruing
 
 
 
(in thousands)
 
Manufactured housing
 
$
171,923
   
$
144
   
$
59
   
$
-
   
$
203
   
$
172,126
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
84,191
     
-
     
-
     
-
     
-
     
84,191
     
-
 
SBA 504 1st trust deed
   
33,315
     
-
     
-
     
490
     
490
     
33,805
     
-
 
Land
   
1,972
     
-
     
-
     
-
     
-
     
1,972
     
-
 
Construction
   
12,066
     
-
     
-
     
-
     
-
     
12,066
     
-
 
Commercial
   
27,952
     
-
     
3,501
     
-
     
3,501
     
31,453
     
-
 
SBA (1)
   
24,953
     
98
     
-
     
702
     
800
     
25,753
     
-
 
HELOC
   
15,616
     
-
     
-
     
-
     
-
     
15,616
     
-
 
Single family real estate
   
9,739
     
-
     
-
     
268
     
268
     
10,007
     
-
 
Consumer
   
186
     
-
     
-
     
-
     
-
     
186
     
-
 
Total
 
$
381,913
   
$
242
   
$
3,560
   
$
1,460
   
$
5,262
   
$
387,175
   
$
-
 
 
(1) $0.7 million of the $0.8 million SBA loans past due are guaranteed by the SBA.
17

 
 
December 31, 2012
 
 
 
   
   
   
   
   
   
Recorded
 
 
 
   
   
   
   
   
   
Investment
 
 
 
   
30-59 Days
   
60-89 Days
   
Over 90 Days
   
Total
   
   
Over 90 Days
 
 
 
Current
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Total
   
and Accruing
 
 
 
(in thousands)
 
Manufactured housing
 
$
176,249
   
$
467
   
$
258
   
$
417
   
$
1,142
   
$
177,391
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
81,682
     
-
     
-
     
830
     
830
     
82,512
     
-
 
SBA 504 1st trust deed
   
34,502
     
-
     
-
     
-
     
-
     
34,502
     
-
 
Land
   
4,556
     
-
     
-
     
-
     
-
     
4,556
     
-
 
Construction
   
5,107
     
-
     
-
     
-
     
-
     
5,107
     
-
 
Commercial
   
32,324
     
40
     
-
     
132
     
172
     
32,496
     
-
 
SBA (1)
   
23,906
     
713
     
-
     
6,069
     
6,782
     
30,688
     
-
 
HELOC
   
17,852
     
-
     
-
     
-
     
-
     
17,852
     
-
 
Single family real estate
   
9,895
     
32
     
-
     
12
     
44
     
9,939
     
12
 
Consumer
   
232
     
-
     
-
     
-
     
-
     
232
     
-
 
Total
 
$
386,305
   
$
1,252
   
$
258
   
$
7,460
   
$
8,970
   
$
395,275
   
$
12
 

(1) $5.6 million of the $6.8 million SBA loans past due are guaranteed by the SBA.

Allowance for Credit Losses
 
The following table summarizes the changes in the allowance for loan losses:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
(in thousands)
 
Beginning balance
 
$
12,456
   
$
15,446
   
$
14,464
   
$
15,270
 
Charge-offs
   
(692
)
   
(1,946
)
   
(1,959
)
   
(6,403
)
Recoveries
   
1,453
     
262
     
1,992
     
1,012
 
Net charge-offs
   
761
     
(1,684
)
   
33
     
(5,391
)
Provision
   
(1,563
)
   
1,293
     
(2,843
)
   
5,176
 
Ending balance
 
$
11,654
   
$
15,055
   
$
11,654
   
$
15,055
 

As of September 30, 2013 and December 31, 2012, the Company had reserves for credit losses on undisbursed loans of $0.1 million which were included in Other liabilities.
18

The following tables summarize the changes in the allowance for loan losses by portfolio type:

 
 
For the Three Months Ended September 30,
 
 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Total
 
2013
 
(in thousands)
 
Beginning balance
 
$
5,691
   
$
2,654
   
$
1,529
   
$
2,073
   
$
311
   
$
197
   
$
1
   
$
12,456
 
Charge-offs
   
(379
)
   
(157
)
   
(32
)
   
(76
)
   
-
     
(48
)
   
-
     
(692
)
Recoveries
   
119
     
1,135
     
45
     
149
     
1
     
4
     
-
     
1,453
 
Net charge-offs
   
(260
)
   
978
     
13
     
73
     
1
     
(44
)
   
-
     
761
 
Provision
   
(80
)
   
(1,266
)
   
(365
)
   
132
     
(32
)
   
48
     
-
     
(1,563
)
Ending balance
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 
 
                                                               
2012
 
 
Beginning balance
 
$
5,187
   
$
3,175
   
$
3,064
   
$
3,148
   
$
671
   
$
199
   
$
2
   
$
15,446
 
Charge-offs
   
(1,212
)
   
(396
)
   
-
     
(241
)
   
(74
)
   
(23
)
   
-
     
(1,946
)
Recoveries
   
3
     
31
     
81
     
140
     
-
     
2
     
5
     
262
 
Net charge-offs
   
(1,209
)
   
(365
)
   
81
     
(101
)
   
(74
)
   
(21
)
   
5
     
(1,684
)
Provision
   
2,022
     
151
     
(521
)
   
(238
)
   
(111
)
   
(5
)
   
(5
)
   
1,293
 
Ending balance
 
$
6,000
   
$
2,961
   
$
2,624
   
$
2,809
   
$
486
   
$
173
   
$
2
   
$
15,055
 

 
 
For the Nine Months Ended September 30,
 
 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Total
 
2013
 
(in thousands)
 
Beginning balance
 
$
5,945
   
$
2,627
   
$
2,325
   
$
2,733
   
$
634
   
$
198
   
$
2
   
$
14,464
 
Charge-offs
   
(1,088
)
   
(161
)
   
(149
)
   
(355
)
   
(39
)
   
(136
)
   
(31
)
   
(1,959
)
Recoveries
   
248
     
1,185
     
154
     
396
     
2
     
7
     
-
     
1,992
 
Net charge-offs
   
(840
)
   
1,024
     
5
     
41
     
(37
)
   
(129
)
   
(31
)
   
33
 
Provision
   
246
     
(1,285
)
   
(1,153
)
   
(496
)
   
(317
)
   
132
     
30
     
(2,843
)
Ending balance
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 
 
                                                               
2012
 
 
Beginning balance
 
$
4,629
   
$
3,528
   
$
2,734
   
$
3,877
   
$
349
   
$
150
   
$
3
   
$
15,270
 
Charge-offs
   
(3,115
)
   
(1,687
)
   
(656
)
   
(600
)
   
(76
)
   
(261
)
   
(8
)
   
(6,403
)
Recoveries
   
52
     
32
     
118
     
750
     
50
     
5
     
5
     
1,012
 
Net charge-offs
   
(3,063
)
   
(1,655
)
   
(538
)
   
150
     
(26
)
   
(256
)
   
(3
)
   
(5,391
)
Provision
   
4,434
     
1,088
     
428
     
(1,218
)
   
163
     
279
     
2
     
5,176
 
Ending balance
 
$
6,000
   
$
2,961
   
$
2,624
   
$
2,809
   
$
486
   
$
173
   
$
2
   
$
15,055
 

19

The following tables present impairment method information related to loans and allowance for loan losses by loan portfolio segment:

 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
Total
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Loans
 
Loans Held for Investment as of September 30, 2013:
 
(in thousands)
 
Recorded Investment:
 
   
   
   
   
   
   
   
 
Impaired loans with an allowance recorded
 
$
5,726
   
$
1,480
   
$
471
   
$
1,471
   
$
224
   
$
77
   
$
-
   
$
9,449
 
Impaired loans with no allowance recorded
   
3,023
     
1,970
     
3,548
     
100
     
298
     
693
     
-
     
9,632
 
Total loans individually evaluated for impairment
   
8,749
     
3,450
     
4,019
     
1,571
     
522
     
770
     
-
     
19,081
 
Loans collectively evaluated for impairment
   
163,377
     
128,584
     
27,434
     
24,182
     
15,094
     
9,237
     
186
     
368,094
 
Total loans held for investment
 
$
172,126
   
$
132,034
   
$
31,453
   
$
25,753
   
$
15,616
   
$
10,007
   
$
186
   
$
387,175
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
6,121
   
$
1,497
   
$
813
   
$
6,477
   
$
231
   
$
77
   
$
-
   
$
15,216
 
Impaired loans with no allowance recorded
   
4,900
     
3,974
     
3,558
     
1,878
     
300
     
786
     
-
     
15,396
 
Total loans individually evaluated for impairment
   
11,021
     
5,471
     
4,371
     
8,355
     
531
     
863
     
-
     
30,612
 
Loans collectively evaluated for impairment
   
163,377
     
128,584
     
27,434
     
24,182
     
15,094
     
9,237
     
186
     
368,094
 
Total loans held for investment
 
$
174,398
   
$
134,055
   
$
31,805
   
$
32,537
   
$
15,625
   
$
10,100
   
$
186
   
$
398,706
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
777
   
$
133
   
$
68
   
$
190
   
$
24
   
$
10
   
$
-
   
$
1,202
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
777
     
133
     
68
     
190
     
24
     
10
     
-
     
1,202
 
Loans collectively evaluated for impairment
   
4,574
     
2,233
     
1,109
     
2,088
     
256
     
191
     
1
     
10,452
 
Total loans held for investment
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 
 
 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
Total
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Loans
 
Loans Held for Investment as of December 31, 2012:
 
(in thousands)
 
Recorded Investment:
 
   
   
   
   
   
   
   
 
Impaired loans with an allowance recorded
 
$
5,748
   
$
519
   
$
5,044
   
$
503
   
$
269
   
$
80
   
$
-
   
$
12,163
 
Impaired loans with no allowance recorded
   
4,687
     
11,389
     
49
     
1,238
     
-
     
121
     
-
     
17,484
 
Total loans individually evaluated for impairment
   
10,435
     
11,908
     
5,093
     
1,741
     
269
     
201
     
-
     
29,647
 
Loans collectively evaluated for impairment
   
166,956
     
114,769
     
27,403
     
28,947
     
17,583
     
9,738
     
232
     
365,628
 
Total loans held for investment
 
$
177,391
   
$
126,677
   
$
32,496
   
$
30,688
   
$
17,852
   
$
9,939
   
$
232
   
$
395,275
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
5,922
   
$
570
   
$
5,430
   
$
2,536
   
$
271
   
$
80
   
$
-
   
$
14,809
 
Impaired loans with no allowance recorded
   
6,828
     
17,624
     
50
     
6,736
     
-
     
197
     
-
     
31,435
 
Total loans individually evaluated for impairment
   
12,750
     
18,194
     
5,480
     
9,272
     
271
     
277
     
-
     
46,244
 
Loans collectively evaluated for impairment
   
166,956
     
114,769
     
27,403
     
28,947
     
17,583
     
9,738
     
232
     
365,628
 
Total loans held for investment
 
$
179,706
   
$
132,963
   
$
32,883
   
$
38,219
   
$
17,854
   
$
10,015
   
$
232
   
$
411,872
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
1,103
   
$
4
   
$
569
   
$
58
   
$
49
   
$
11
   
$
-
   
$
1,794
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
1,103
     
4
     
569
     
58
     
49
     
11
     
-
     
1,794
 
Loans collectively evaluated for impairment
   
4,842
     
2,623
     
1,756
     
2,675
     
585
     
187
     
2
     
12,670
 
Total loans held for investment
 
$
5,945
   
$
2,627
   
$
2,325
   
$
2,733
   
$
634
   
$
198
   
$
2
   
$
14,464
 

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment.  In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table above as “Impaired loans without specific valuation allowance under ASC 310.”  The valuation allowance disclosed above is included in the allowance for credit losses reported in the consolidated balance sheets as of September 30, 2013 and December 31, 2012.
20

The following tables summarize impaired loans by class of loans:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Manufactured housing
 
$
8,749
   
$
10,435
 
Commercial real estate :
               
Commercial real estate
   
2,681
     
10,615
 
SBA 504 1st trust deed
   
769
     
1,293
 
Land
   
-
     
-
 
Construction
   
-
     
-
 
Commercial
   
4,019
     
5,093
 
SBA
   
1,571
     
1,741
 
HELOC
   
522
     
269
 
Single family real estate
   
770
     
201
 
Consumer
   
-
     
-
 
Total
 
$
19,081
   
$
29,647
 

The following tables summarize average investment in impaired loans by class of loans and the related interest income recognized as of and for the periods ended:

 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Average Investment
   
Interest
   
Average Investment
   
Interest
 
 
 
in Impaired Loans
   
Income
   
in Impaired Loans
   
Income
 
 
 
(in thousands)
 
Manufactured housing
 
$
9,454
   
$
85
   
$
11,050
   
$
110
 
Commercial real estate:
                               
Commercial real estate
   
7,811
     
10
     
16,399
     
99
 
SBA 504 1st
   
1,089
     
4
     
2,042
     
16
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
3,189
     
-
 
Commercial
   
2,789
     
142
     
5,442
     
70
 
SBA
   
1,790
     
34
     
1,696
     
69
 
HELOC
   
397
     
3
     
383
     
7
 
Single family real estate
   
747
     
1
     
251
     
3
 
Consumer
   
-
     
-
     
2
     
-
 
Total
 
$
24,077
   
$
279
   
$
40,454
   
$
374
 

21

 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Average Investment
   
Interest
   
Average Investment
   
Interest
 
 
 
in Impaired Loans
   
Income
   
in Impaired Loans
   
Income
 
 
 
(in thousands)
 
Manufactured housing
 
$
9,528
   
$
182
   
$
7,782
   
$
214
 
Commercial real estate:
                               
Commercial real estate
   
8,875
     
94
     
19,071
     
315
 
SBA 504 1st
   
1,163
     
28
     
4,496
     
116
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
5,937
     
108
 
Commercial
   
3,831
     
208
     
5,591
     
235
 
SBA
   
1,432
     
136
     
1,796
     
130
 
HELOC
   
313
     
3
     
248
     
7
 
Single family real estate
   
452
     
10
     
350
     
10
 
Consumer
   
-
     
-
     
7
     
-
 
Total
 
$
25,594
   
$
661
   
$
45,278
   
$
1,135
 

The following table reflects the recorded investment in certain types of loans at the periods indicated:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Nonaccrual loans
 
$
21,055
   
$
29,643
 
SBA guaranteed portion of loans included above
   
(5,778
)
   
(7,218
)
Total nonaccrual loans, net
 
$
15,277
   
$
22,425
 
 
               
Troubled debt restructured loans, gross
 
$
12,288
   
$
19,931
 
Loans 30 through 89 days past due with interest accruing
 
$
74
   
$
521
 
Allowance for loan losses to gross loans held for investment
   
3.01
%
   
3.66
%

The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA directly.  After the foreclosure and collection process is complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA.  Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore a repurchase reserve has not been established related to these loans.
 
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent.  Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
22

The following table presents the composition of nonaccrual loans, net of SBA guarantee, by class of loans:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Manufactured housing
 
$
5,327
   
$
7,542
 
Commercial real estate:
               
Commercial real estate
   
2,681
     
10,615
 
SBA 504 1st
   
490
     
490
 
Land
   
-
     
-
 
Construction
   
-
     
-
 
Commercial
   
4,019
     
1,945
 
SBA
   
1,545
     
1,442
 
HELOC
   
522
     
269
 
Single family real estate
   
693
     
121
 
Consumer
   
-
     
1
 
Total
 
$
15,277
   
$
22,425
 

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”.  Substandard loans are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Loans classified as Doubtful, have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.  Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be affected in the future.  Losses are taken in the period in which they surface as uncollectible. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.  The following tables present gross loans by risk rating:
23

 
 
September 30, 2013
 
 
 
   
Special
   
   
   
 
 
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(in thousands)
 
Manufactured housing
 
$
159,086
   
$
-
   
$
13,040
   
$
-
   
$
172,126
 
Commercial real estate:
                                       
Commercial real estate
   
72,511
     
4,301
     
7,379
     
-
     
84,191
 
SBA 504 1st trust deed
   
32,205
     
253
     
1,347
     
-
     
33,805
 
Land
   
1,149
     
823
     
-
     
-
     
1,972
 
Construction
   
12,066
     
-
     
-
     
-
     
12,066
 
Commercial
   
25,583
     
672
     
5,169
     
29
     
31,453
 
SBA
   
15,193
     
59
     
2,343
     
14
     
17,609
 
HELOC
   
6,963
     
3,119
     
5,534
     
-
     
15,616
 
Single family real estate
   
9,064
     
-
     
943
     
-
     
10,007
 
Consumer
   
186
     
-
     
-
     
-
     
186
 
Total, net
 
$
334,006
   
$
9,227
   
$
35,755
   
$
43
   
$
379,031
 
SBA guarantee
   
-
     
-
     
7,324
     
820
     
8,144
 
Total
 
$
334,006
   
$
9,227
   
$
43,079
   
$
863
   
$
387,175
 

 
 
December 31, 2012
 
 
 
   
Special
   
   
   
 
 
 
Pass
   
Mention
   
Substandard
   
Doubtful
   
Total
 
 
 
(in thousands)
 
Manufactured housing
 
$
164,269
   
$
-
   
$
13,122
   
$
-
   
$
177,391
 
Commercial real estate:
                                       
Commercial real estate
   
63,793
     
6,478
     
12,241
     
-
     
82,512
 
SBA 504 1st trust deed
   
31,385
     
1,461
     
1,656
     
-
     
34,502
 
Land
   
3,333
     
300
     
923
     
-
     
4,556
 
Construction
   
5,107
     
-
     
-
     
-
     
5,107
 
Commercial
   
27,015
     
997
     
4,413
     
71
     
32,496
 
SBA
   
16,302
     
1,514
     
2,504
     
54
     
20,374
 
HELOC
   
9,432
     
245
     
8,175
     
-
     
17,852
 
Single family real estate
   
9,622
     
-
     
317
     
-
     
9,939
 
Consumer
   
231
     
-
     
1
     
-
     
232
 
Total, net
 
$
330,489
   
$
10,995
   
$
43,352
   
$
125
   
$
384,961
 
SBA guarantee
   
-
     
-
     
7,551
     
2,763
     
10,314
 
Total
 
$
330,489
   
$
10,995
   
$
50,903
   
$
2,888
   
$
395,275
 

A loan is considered a troubled debt restructure (“TDR”) when the bank grants a concession to a borrower for reasons related to the  borrower’s financial difficulties it would not otherwise consider.  These concessions include but are not limited to term extensions, rate reductions and principal reductions.  Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions.  TDR loans are also considered impaired.  A loan is considered impaired when, based on current information; it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell.  All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.  Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
24

The following tables summarize the financial effects of TDR loans by loan class for the periods presented:

 
 
For the Three Months Ended September 30, 2013
 
 
 
   
Effect on
   
Balance of
   
Average Rate
   
Balance of
   
Average
 
 
 
   
Allowance for
   
Loans with
   
Reduction
   
Loans with
   
Extension
 
 
 
Balance
   
Loan Losses
   
Rate Reduction
   
(basis points)
   
Term Extension
   
(in months)
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
265
   
$
15
   
$
265
     
225
   
$
265
     
112
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial
   
3,501
     
221
     
-
     
-
     
3,501
     
31
 
SBA
   
-
     
-
     
-
     
-
     
-
     
-
 
HELOC
   
-
     
-
     
-
     
-
     
-
     
-
 
Single family real estate
   
147
     
12
     
146
     
100
     
147
     
12
 
Total
 
$
3,913
   
$
248
   
$
411
     
200
   
$
3,913
     
65
 

 
 
For the Nine Months Ended September 30, 2013
 
 
 
   
Effect on
   
Balance of
   
Average Rate
   
Balance of
   
Average
 
 
 
   
Allowance for
   
Loans with
   
Reduction
   
Loans with
   
Extension
 
 
 
Balance
   
Loan Losses
   
Rate Reduction
   
(basis points)
   
Term Extension
   
(in months)
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
1,405
   
$
170
   
$
444
     
171
   
$
1,405
     
135
 
Commercial real estate
   
655
     
45
     
-
     
-
     
655
     
8
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial
   
4,011
     
256
     
-
     
-
     
4,011
     
41
 
SBA
   
87
     
16
     
-
     
-
     
87
     
4
 
HELOC
   
-
     
-
     
-
     
-
     
-
     
-
 
Single family real estate
   
147
     
12
     
147
     
100
     
147
     
12
 
Total
 
$
6,305
   
$
499
   
$
591
     
163
   
$
6,305
     
96
 

 
 
For the Three Months Ended September 30, 2012
 
 
 
   
Effect on
   
Balance of
   
Average Rate
   
Balance of
   
Average
 
 
 
   
Allowance for
   
Loans with
   
Reduction
   
Loans with
   
Extension
 
 
 
Balance
   
Loan Losses
   
Rate Reduction
   
(basis points)
   
Term Extension
   
(in months)
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
1,474
   
$
341
   
$
-
     
-
   
$
1,474
     
171
 
Commercial real estate
   
-
     
-
     
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial
   
289
     
30
     
-
     
-
     
289
     
49
 
SBA
   
74
     
17
     
-
     
-
     
74
     
103
 
HELOC
   
-
     
-
     
-
     
-
     
-
     
-
 
Single family real estate
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
1,837
   
$
388
   
$
-
     
-
   
$
1,837
     
161
 

25

 
 
For the Nine Months Ended September 30, 2012
 
 
 
   
Effect on
   
Balance of
   
Average Rate
   
Balance of
   
Average
 
 
 
   
Allowance for
   
Loans with
   
Reduction
   
Loans with
   
Extension
 
 
 
Balance
   
Loan Losses
   
Rate Reduction
   
(basis points)
   
Term Extension
   
(in months)
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
5,715
   
$
888
   
$
294
     
325
   
$
5,715
     
159
 
Commercial real estate
   
3,590
     
292
     
-
     
-
     
3,590
     
56
 
Construction
   
3,147
     
315
     
3,146
     
300
     
3,147
     
15
 
Commercial
   
1,021
     
139
     
-
     
-
     
1,021
     
55
 
SBA
   
411
     
56
     
-
     
-
     
411
     
78
 
HELOC
   
-
     
-
     
-
     
-
     
-
     
-
 
Single family real estate
   
77
     
2
     
-
     
-
     
77
     
4
 
Total
 
$
13,961
   
$
1,692
   
$
3,440
     
320
   
$
13,961
     
144
 

The following tables present TDR's by class that occurred in the past twelve months for which there was a payment default during the period:

 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
   
Effect on
   
   
   
Effect on
   
 
 
 
   
Allowance for
   
Number
   
   
Allowance for
   
Number
 
 
 
Balance
   
Loan Losses
   
of Loans
   
Balance
   
Loan Losses
   
of Loans
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
-
   
$
-
     
-
   
$
124
   
$
4
     
3
 
Total
 
$
-
   
$
-
     
-
   
$
124
   
$
4
     
3
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
   
Effect on
   
   
   
Effect on
   
 
 
 
   
Allowance for
   
Number
   
   
Allowance for
   
Number
 
 
 
Balance
   
Loan Losses
   
of Loans
   
Balance
   
Loan Losses
   
of Loans
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
375
   
$
9
     
5
   
$
124
   
$
4
     
3
 
SBA 504 1st
   
-
     
-
     
-
     
173
     
-
     
1
 
SBA
   
-
     
-
     
-
     
68
     
-
     
1
 
Total
 
$
375
   
$
9
     
5
   
$
365
   
$
4
     
5
 

A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to repossessed assets.
 
At September 30, 2013 there were no material loan commitments outstanding on TDR loans.
 
5. FAIR VALUE MEASUREMENT
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities.  FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the measurement date.  ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
26

· Level 1— Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
· Level 2— Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market.
· Level 3— Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market.  These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques may include use of discounted cash flow models and similar techniques.
 
The availability of observable inputs varies based on the nature of the specific financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
 
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
 
FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
 
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2013 or December 31, 2012.  The estimated fair value amounts for September 30, 2013 and December 31, 2012 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates.  As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.
 
This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
 
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following tables summarize the fair value of assets measured on a recurring basis:

 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
 
Quoted Prices
   
   
   
 
 
 
in Active
   
Significant
   
   
 
 
 
Markets for
   
Other
   
Significant
   
 
 
 
Identical
   
Observable
   
Unobservable
   
 
 
 
Assets
   
Inputs
   
Inputs
   
Fair
 
September 30, 2013
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Value
 
Assets:
 
(in thousands)
 
Investment securities available-for-sale
 
$
67
   
$
15,369
   
$
-
   
$
15,436
 
Interest only strips
   
-
     
-
     
376
     
376
 
Servicing assets
   
-
     
-
     
300
     
300
 
 
 
$
67
   
$
15,369
   
$
676
   
$
16,112
 

27

 
 
Fair Value Measurements at the End of the Reporting Period Using:
 
 
 
Quoted Prices
   
   
   
 
 
 
in Active
   
Significant
   
   
 
 
 
Markets for
   
Other
   
Significant
   
 
 
 
Identical
   
Observable
   
Unobservable
   
 
 
 
Assets
   
Inputs
   
Inputs
   
Fair
 
December 31, 2012
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Value
 
Assets:
 
(in thousands)
 
Investment securities available-for-sale
 
$
-
   
$
12,004
   
$
-
   
$
12,004
 
Interest only strips
   
-
     
-
     
426
     
426
 
Servicing assets
   
-
     
-
     
348
     
348
 
 
 
$
-
   
$
12,004
   
$
774
   
$
12,778
 

Market valuations of our investment securities which are classified as level 2 are provided by an independent third party.  The fair values are determined by using several sources for valuing fixed income securities.  Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information.  In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  I/O strips are classified as level 3 in the fair value hierarchy.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.  For additional information see Note 3 “Loan Sales and Servicing” beginning on page 14.
 
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  In connection with the sale of SBA and USDA loans in 2012 the Company recorded servicing assets and elected to measure those assets at fair value in accordance with ASC 825-10.  Significant assumptions in the valuation of servicing rights include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
 
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.  These assets include loans held for sale, foreclosed real estate and repossessed assets and loans that are considered impaired per generally accepted accounting principles.
28

The following summarizes the fair value measurements of assets measured on a non-recurring basis:

 
 
Fair Value Measurements at the End of the Reporting Period Using
 
 
 
   
Quoted Prices
   
   
 
 
 
   
in Active
   
Active
   
 
 
 
   
Markets for
   
Markets for
   
Unobservable
 
 
 
   
Identical Assets
   
Similar Assets
   
Inputs
 
 
 
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
 
 
(in thousands)
 
As of September 30, 2013:
 
   
   
   
 
Impaired loans
 
$
17,879
   
$
-
   
$
9,632
   
$
8,247
 
Loans held for sale
   
68,405
     
-
     
68,405
     
-
 
Foreclosed real estate and repossesed assets
   
3,975
     
-
     
3,975
     
-
 
 
 
$
90,259
   
$
-
   
$
82,012
   
$
8,247
 
 
                               
As of December 31, 2012:
 
 
Impaired loans
 
$
27,853
   
$
-
   
$
17,430
   
$
10,423
 
Loans held for sale
   
72,514
     
-
     
72,514
     
-
 
Foreclosed real estate and repossesed assets
   
1,889
     
-
     
1,889
     
-
 
 
 
$
102,256
   
$
-
   
$
91,833
   
$
10,423
 

The Company records certain loans at fair value on a non-recurring basis.  When a loan is considered impaired an allowance for a loan loss is established.  The fair value measurement and disclosure requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans.  Impaired loans are measured at an observable market price, if available or at the fair value of the loan’s collateral, if the loan is collateral dependent.  The fair value of the loan’s collateral is determined by appraisals or independent valuation.  When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy.  For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
 
Loans held for sale are carried at the lower of cost or fair value.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed-upon sale price.  As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy.  At September 30, 2013 and December 31, 2012, the Company had loans held for sale with an aggregate carrying value of $64.2 million and $68.7 million respectively.
 
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated costs to sell.  Fair value is based upon independent market prices obtained from certified appraisers or the current listing price, if lower.  When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2.  When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
 
FAIR VALUES OF FINANCIAL INSTRUMENTS
 
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.  However, considerable judgment is required to interpret market data to develop estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
29

The estimated fair value of the Company’s financial instruments is as follows:

 
 
September 30, 2013
 
 
 
Carrying
   
Fair Value
 
 
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
42,570
   
$
42,570
   
$
-
   
$
-
   
$
42,570
 
Interest-bearing deposits in other financial institutions
   
3,282
     
3,282
     
-
     
-
     
3,282
 
FRB and FHLB stock
   
3,654
     
-
     
3,654
             
3,654
 
Investment securities
   
25,585
     
67
     
25,969
     
-
     
26,036
 
Loans, net
   
439,445
     
-
     
442,166
     
8,247
     
450,413
 
Financial liabilities:
                                       
Deposits
   
325,616
     
-
     
325,616
     
-
     
325,616
 
Time deposits
   
105,475
     
-
     
105,764
     
-
     
105,764
 
Other borrowings
   
35,442
     
-
     
36,206
     
-
     
36,206
 

 
 
December 31, 2012
 
 
 
Carrying
   
Fair Value
 
 
 
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
27,891
   
$
27,891
   
$
-
   
$
-
   
$
27,891
 
Interest-bearing deposits in other financial institutions
   
3,653
     
3,653
     
-
     
-
     
3,653
 
FRB and FHLB stock
   
4,656
     
-
     
4,656
             
4,656
 
Investment securities
   
24,040
     
-
     
24,769
     
-
     
24,769
 
Loans, net
   
449,201
     
-
     
446,776
     
10,423
     
457,199
 
Financial liabilities:
                                       
Deposits
   
339,422
     
-
     
339,422
     
-
     
339,422
 
Time deposits
   
94,798
     
-
     
96,404
     
-
     
96,404
 
Other borrowings
   
41,852
     
-
     
43,238
     
-
     
43,238
 

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below:
 
Cash and cash equivalents - The carrying amounts approximate fair value because of the short-term nature of these instruments.
Interest-bearing deposits in other financial institutions - The carrying amounts approximate fair value because of the relative short-term nature of these instruments.
 
Federal Reserve Stock - The carrying value approximates the fair value because the stock can be sold back to the Federal Reserve at any time at par.
Federal Home Loan Bank Stock – CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB.  This investment is carried at cost since no ready market exists for it, and it has no quoted market value.  The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists.  The fair values have been categorized as Level 2 in the fair value hierarchy.
 
Investment securities – Market valuations of our investment securities are provided by an independent third party.  The fair values are determined by using several sources for valuing fixed income securities.  Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
Loans – For most loan categories, the fair value is estimated using discounted cash flows utilizing an appropriate discount rate and historical prepayment speeds.  For certain adjustable loans that reprice on a frequent basis carrying value approximates fair value.  As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy.
 
Deposits – The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date.  The fair value measurement of deposit liabilities is categorized as Level 2 in the fair value hierarchy.
 
Other borrowings – The fair value is estimated using a discounted cash flow analysis based on rates for similar types of borrowing arrangements.   The carrying value of FRB advances approximates the fair value due to the short term nature of these borrowings.  The fair value measurement of other borrowings is categorized as Level 2.
30

Commitments to Extend Credit, Commercial and Standby Letters of Credit – Due to the proximity of the pricing of these commitments to the period end, the fair values of commitments are immaterial to the financial statements.
 
Interest rate risk
 
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations.  As a result, the fair values of the Company’s financial instruments as well as its future net interest income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
 
6. BORROWINGS
 
Federal Home Loan Bank AdvancesCWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”).  FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities.  Total FHLB advances were $34.0 million at September 30, 2013 and December 31, 2012, borrowed at fixed rates with a weighted average rate of 2.89%.  At September 30, 2013, CWB had pledged to the FHLB, $25.6 million of securities and $23.8 million of loans.  At September 30, 2013, CWB had $69.2 million available for additional borrowing.  At December 31, 2012, CWB had pledged to the FHLB, $24.0 million of securities and $25.5 million of loans. At December 31, 2012, CWB had $65.8 million available for additional borrowing. Total FHLB interest expense for the three and nine months ended September 30, 2013 and 2012 was $0.3 million and $0.7 million and $0.3 million and $0.9 million, respectively.
 
Federal Reserve BankCWB has established a credit line with the Federal Reserve Bank (“FRB”).  Advances are collateralized in the aggregate by eligible loans for up to 28 days.  There were no outstanding FRB advances as of September 30, 2013 and December 31, 2012.  CWB had $123.7 million and $66.3 million in borrowing capacity as of September 30, 2013 and December 31, 2012, respectively.
 
Convertible Debentures - In 2010, the Company completed an offering of $8.1 million convertible subordinated debentures.  The debentures are a general unsecured obligation and are subordinated in right of payment to all present and future senior indebtedness.  The debentures pay interest at 9% until conversion, redemption or maturity and will mature on August 9, 2020.  The debentures may be redeemed by the Company after January 1, 2014.  Prior to maturity or redemption, the debentures can be converted into common stock at the election of the holder at $4.50 per share between July 2, 2013 and July 1, 2016 and $6.00 per share from July 2, 2016 until maturity or redemption.  For the nine months ended September 30, 2013, $6.4 million of principal and $0.1 million of accrued interest had been converted to equity.  At September 30, 2013 and December 31, 2012, the balance of the convertible debentures was $1.4 million and $7.9 million, respectively.
 
7. STOCKHOLDERS’ EQUITY
 
The following summarizes the changes in the unrealized gains and losses on the available-for –sale securities component of accumulated other comprehensive income, net of tax for the periods indicated:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(in thousands)
 
Beginning balance
 
$
(103
)
 
$
35
   
$
35
   
$
139
 
Other comprehensive income before reclassifications
   
(119
)
   
7
     
(257
)
   
2
 
Amounts reclassified from accumulated other comprehensive income
   
-
     
-
     
-
     
(99
)
Net current-period other comprehensive income
   
(119
)
   
7
     
(257
)
   
(97
)
Ending Balance
 
$
(222
)
 
$
42
   
$
(222
)
 
$
42
 

Preferred Stock
 
The Company’s Series A Preferred Stock pays cumulative dividends at a rate of 5% per year  until December 19, 2013 then increases to  a rate of 9% per year thereafter, but will be paid only if, as and when declared by the Company's Board of Directors subject to any regulatory approval requirements as may then be imposed.  The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.
31

In December 2012, Treasury sold all of the Series A Preferred Stock to third party purchasers unaffiliated with the Company. The Company did not receive any proceeds from this auction, nor were any of the terms modified in connection with the sales.
On June 4, 2013, four members of the Board of Directors purchased 1.1 million shares of the Company’s Series A Cumulative Perpetual Preferred stock from private investors.
 
During the nine months ended September 30, 2013 and 2012, the Company recorded $0.6 million of dividends and $0.2 million in accretion of the discount on preferred stock.
 
The Company has paid all the quarterly dividends on such Series A Preferred Stock through February 15, 2012.  While the Company declared and accrued for the subsequent six quarters of dividends, the Company’s request to the FRB was denied, as such, the Company has not paid the dividends.  The aggregate amount of the dividends that would have been paid was $1.2 million.   The deferral of the dividends on the Series A Preferred Stock is permitted under its terms and does not constitute an event of default.
 
Common Stock Warrant
 
The Warrant issued as part of the TARP provides for the purchase of up to 521,158 shares of the common stock, at an exercise price of $4.49 per share (“Warrant Shares”).  The Warrant is immediately exercisable and has a 10-year term.  The exercise price and the ultimate number of shares of common stock that may be issued under the Warrant are subject to certain anti-dilution adjustments, such as upon stock splits or distributions of securities or other assets to holders of the common stock, and upon certain issuances of the common stock at or below a specified price relative to the then current market price of the common stock.  On June 6, 2013, the Treasury sold its warrant position to private investors.   Pursuant to the Securities Purchase Agreement, the private investors have agreed not to exercise voting power with respect to any Warrant Shares.
 
8. EARNINGS PER SHARE
 
The following table presents a reconciliation of basic earnings per share and diluted earnings per share:

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
(dollars in thousands, except per share amounts)
 
Net income
 
$
2,635
   
$
613
   
$
5,850
   
$
841
 
Less: dividends and accretion on preferred stock
   
262
     
253
     
786
     
785
 
Net income available to common stockholders
 
$
2,373
   
$
360
   
$
5,064
   
$
56
 
Add: debenture interest expense and costs, net of income taxes
   
23
     
-
     
222
     
-
 
Net income for diluted calculation of earnings per common share
 
$
2,396
   
$
360
   
$
5,286
   
$
56
 
Weighted average number of common shares outstanding - basic
   
7,865
     
5,990
     
6,731
     
5,990
 
Weighted average number of common shares outstanding - diluted
   
8,395
     
8,233
     
8,883
     
8,233
 
Earnings per share:
                               
Basic
 
$
0.30
   
$
0.06
   
$
0.75
   
$
0.01
 
Diluted
 
$
0.29
   
$
0.06
   
$
0.60
   
$
0.01
 

32

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.
33

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.
34

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.
35

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
 

36

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 Balance
   
Interest
   
Average Yield/Cost
(2)
   
Average Balance
   
Interest
   
Average Yield/Cost
(2)
 
Interest-Earning Assets
 
(in thousands)
 
Federal funds sold and interest-earning deposits
 
$
3,299
   
$
1
     
0.12
%
 
$
4,793
   
$
3
     
0.24
%
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 losses
   
(12,621
)
                   
(15,434
)
               
Other assets
   
20,499
                     
28,819
                 
Total assets
 
$
535,552
                   
$
564,609
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
255,008
     
300
     
0.47
%
   
279,866
     
414
     
0.59
%
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 deposits
   
377,595
     
719
     
0.76
%
   
416,799
     
970
     
0.93
%
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 liabilities
   
413,038
     
1,047
     
1.01
%
   
458,651
     
1,403
     
1.22
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
55,130
                     
52,437
                 
Other liabilities
   
4,170
                     
2,725
                 
Stockholders' equity
   
63,214
                     
50,796
                 
Total Liabilities and Stockholders' Equity
 
$
535,552
                   
$
564,609
                 
Net interest income and margin (3)
         
$
6,011
     
4.89
%
         
$
6,109
     
4.65
%
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.
37

 
 
Nine Months Ended September 30,
 
 
  2013     2012  
 
 
Average Balance
   
Interest
   
Average Yield/Cost
(2)
   
Average Balance
   
Interest
   
Average Yield/Cost
(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.
38

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 the third quarter 2013 compared to 2012 increased slightly to 5.74% due to increased yields on investment securities offset by decreased yields on loans.  The yield for the first nine months of 2013 compared to 2012 declined slightly to 5.75% from 5.76% mostly the result of lower yields on loans.
 
Interest expense for the three and nine months ended September 30, 2013 compared to 2012 decreased by $0.4 million and $1.3 million, respectively to $1.0 million and $3.4 million, respectively.  This decline for both periods was primarily due to decreased average cost of deposits, which declined 17 basis points to 0.76% for the three months ended September 30, 2013 compared to the same period in 2012 and declined 21 basis points to 0.79% for the nine months ended September 30, 2013 compared to 2012.
 
The net impact of the changes in yields on interest earning assets and interest-bearing liabilities was an increase in the margin from 4.65% for the third quarter of 2012 compared  to 4.89% for the third quarter of 2013 and an increase during the year to date 2013 to 4.82% 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 for loan losses decreased from $1.3 million for the third quarter of 2012 to $(1.6 million) for the third quarter of 2013.  For the year to date 2013, provision was $(2.8 million) compared to $5.2 million in 2012.  The Company has been experiencing a downward trend in net charge-offs and increased credit quality, which resulted in a release of reserves.  Total held for investment loans have also declined since December 31, 2012 by $8.1 million further resulting in a release of reserves.  The ratio of allowance for loan losses to loans held for investment decreased from 3.65% at September 30, 2012 to 3.01% at September 30, 2013.
39

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three and nine months ended September 30, 2013 and 2012:

 
 
For the Three Months Ended September 30,
 
 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Total
 
2013
 
(in thousands)
 
Beginning balance
 
$
5,691
   
$
2,654
   
$
1,529
   
$
2,073
   
$
311
   
$
197
   
$
1
   
$
12,456
 
Charge-offs
   
(379
)
   
(157
)
   
(32
)
   
(76
)
   
-
     
(48
)
   
-
     
(692
)
Recoveries
   
119
     
1,135
     
45
     
149
     
1
     
4
     
-
     
1,453
 
Net charge-offs
   
(260
)
   
978
     
13
     
73
     
1
     
(44
)
   
-
     
761
 
Provision
   
(80
)
   
(1,266
)
   
(365
)
   
132
     
(32
)
   
48
     
-
     
(1,563
)
Ending balance
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 
 
                                                               
2012
 
 
Beginning balance
 
$
5,187
   
$
3,175
   
$
3,064
   
$
3,148
   
$
671
   
$
199
   
$
2
   
$
15,446
 
Charge-offs
   
(1,212
)
   
(396
)
   
-
     
(241
)
   
(74
)
   
(23
)
   
-
     
(1,946
)
Recoveries
   
3
     
31
     
81
     
140
     
-
     
2
     
5
     
262
 
Net charge-offs
   
(1,209
)
   
(365
)
   
81
     
(101
)
   
(74
)
   
(21
)
   
5
     
(1,684
)
Provision
   
2,022
     
151
     
(521
)
   
(238
)
   
(111
)
   
(5
)
   
(5
)
   
1,293
 
Ending balance
 
$
6,000
   
$
2,961
   
$
2,624
   
$
2,809
   
$
486
   
$
173
   
$
2
   
$
15,055
 

 
 
For the Nine Months Ended September 30,
 
 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Total
 
2013
 
(in thousands)
 
Beginning balance
 
$
5,945
   
$
2,627
   
$
2,325
   
$
2,733
   
$
634
   
$
198
   
$
2
   
$
14,464
 
Charge-offs
   
(1,088
)
   
(161
)
   
(149
)
   
(355
)
   
(39
)
   
(136
)
   
(31
)
   
(1,959
)
Recoveries
   
248
     
1,185
     
154
     
396
     
2
     
7
     
-
     
1,992
 
Net charge-offs
   
(840
)
   
1,024
     
5
     
41
     
(37
)
   
(129
)
   
(31
)
   
33
 
Provision
   
246
     
(1,285
)
   
(1,153
)
   
(496
)
   
(317
)
   
132
     
30
     
(2,843
)
Ending balance
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 
 
                                                               
2012
 
 
Beginning balance
 
$
4,629
   
$
3,528
   
$
2,734
   
$
3,877
   
$
349
   
$
150
   
$
3
   
$
15,270
 
Charge-offs
   
(3,115
)
   
(1,687
)
   
(656
)
   
(600
)
   
(76
)
   
(261
)
   
(8
)
   
(6,403
)
Recoveries
   
52
     
32
     
118
     
750
     
50
     
5
     
5
     
1,012
 
Net charge-offs
   
(3,063
)
   
(1,655
)
   
(538
)
   
150
     
(26
)
   
(256
)
   
(3
)
   
(5,391
)
Provision
   
4,434
     
1,088
     
428
     
(1,218
)
   
163
     
279
     
2
     
5,176
 
Ending balance
 
$
6,000
   
$
2,961
   
$
2,624
   
$
2,809
   
$
486
   
$
173
   
$
2
   
$
15,055
 

40

Non-Interest Income
 
The following table summarizes the Company's non-interest income for the periods indicated:
 
 
 
Three Months Ended
   
   
Nine Months Ended
   
 
 
 
September 30,
   
Increase
   
September 30,
   
Increase
 
 
 
2013
   
2012
   
(Decrease)
   
2013
   
2012
   
(Decrease)
 
 
 
(in thousands)
 
Other loan fees
 
$
229
   
$
302
   
$
(73
)
 
$
844
   
$
847
   
$
(3
)
Gains from loan sales, net
   
62
     
366
     
(304
)
   
334
     
1,521
     
(1,187
)
Document processing fees
   
114
     
109
     
5
     
369
     
283
     
86
 
Loan servicing, net
   
70
     
105
     
(35
)
   
169
     
180
     
(11
)
Service charges
   
75
     
98
     
(23
)
   
245
     
327
     
(82
)
Gains from sales of available-for-sale securities
   
-
     
-
     
-
     
-
     
121
     
(121
)
Other
   
134
     
77
     
57
     
292
     
179
     
113
 
Total non-interest income
 
$
684
   
$
1,057
   
$
(373
)
 
$
2,253
   
$
3,458
   
$
(1,205
)

Total non-interest income decreased by $0.4 million, or 35.3%, for the third quarter 2013 compared to 2012, primarily due to decreased gains from loan sales and other loan fees.  Gains from loan sales declined primarily due to $0.3 million of gains on FSA commercial agriculture loans in the third quarter of 2012 and a slight decrease in gains on mortgage loan sales in the third quarter 2013 compared to 2012.  Other loan fees declined for the third quarter 2013 compared to 2012 due to declined loan volumes.
 
Total non-interest income for the nine months ended September 30, 2013 compared to 2012 declined by $1.2 million mostly due to the sale of $10.1 million in SBA loans with the resulting gain of $1.0 million, gains from commercial agriculture loans of $0.3 million and the sale of $4.0 million of investment securities resulting in a gain of $0.1 million during 2012 partially offset by increased other fees in 2013 of $0.1 million.
 
Non-Interest Expenses

The following table summarizes the Company's non-interest expenses for the periods indicated:

 
 
Three Months Ended
   
   
Nine Months Ended
   
 
 
 
September 30,
   
Increase
   
September 30,
   
Increase
 
 
 
2013
   
2012
   
(Decrease)
   
2013
   
2012
   
(Decrease)
 
 
 
(in thousands)
 
Salaries and employee benefits
 
$
3,114
   
$
2,899
   
$
215
   
$
9,999
   
$
8,526
   
$
1,473
 
Occupancy expense, net
   
452
     
451
     
1
     
1,365
     
1,365
     
-
 
Loan servicing and collection
   
511
     
366
     
145
     
1,111
     
1,257
     
(146
)
Professional services
   
308
     
372
     
(64
)
   
913
     
993
     
(80
)
FDIC assessment
   
283
     
311
     
(28
)
   
809
     
1,046
     
(237
)
Advertising and marketing
   
94
     
59
     
35
     
374
     
218
     
156
 
Depreciation
   
78
     
78
     
-
     
226
     
231
     
(5
)
 
                                               
Net loss on sales/write-downs of foreclosed real estate and repossessed assets
   
168
     
189
     
(21
)
   
274
     
969
     
(695
)
Data processing
   
128
     
127
     
1
     
403
     
407
     
(4
)
Other
   
487
     
408
     
79
     
1,445
     
1,623
     
(178
)
Total non-interest expense
 
$
5,623
   
$
5,260
   
$
363
   
$
16,919
   
$
16,635
   
$
284
 

41

Total non-interest expense increased $0.4 million, or 6.9% for the third quarter 2013 compared to 2012 primarily due to increased salaries and employee benefits of $0.2 million, loan servicing and collection expenses of $0.1 million and other expense of $0.1 million.  Salaries and benefits increased for the comparable third quarters mostly due to increased staffing in the first quarter of 2013 primarily in the areas of loan production and credit administration.  Loan servicing and collection expense and other expenses increased as a result of increased loan collection expense related to legal and forced placed insurance of $0.2 million partially offset by a decrease in repossessed asset expenses of $0.1 million.  Other expenses increased primarily due to increased appraisal and other loan related expenses of $0.1 million.
 
Total non-interest expenses for the nine months ended September 30, 2013 compared to 2012 increased by $0.3 million primarily due to increased salaries and benefit costs of $1.5 million as a result of increased staffing mostly in the loan production and credit administration departments as well as severance incurred for the closure of the Roseville SBA office.  Advertising and marketing expense also increased by $0.2 million due to increased print and radio advertising.  These increases in expenses were mostly offset by decreased foreclosed asset and loan collection expenses of $0.7 million and $0.1 million, respectively reflecting continued improvement in credit quality.  Other expenses declined as the result of a $0.4 million pre-payment penalty paid in the second quarter of 2012 on FHLB advances.  In addition, the FDIC assessment expense for 2013 compared to 2012 declined by $0.2 million as the company has experienced a decrease in deposit levels.
 
Financial Condition
 
The ability to originate new loans and attract new deposits is essential to the Company’s asset growth.  Total assets increased to $535.5 million at September 30, 2013 from $532.1 million at December 31, 2012.  Total gross loans including loans held for sale, decreased to $451.1 million at September 30, 2013 from $463.7 million at December 31, 2012.  Total deposits decreased to $431.1 million at September 30, 2013 from $434.2 million at December 31, 2012.
 
The book value per common share was $6.24 at September 30, 2013 and $6.29 at December 31, 2012.   The decrease was due to new stock issued at dilutive price of $3.50 in conjunction with the debenture conversions.

Selected Balance Sheet Accounts

 
 
   
   
Percent
 
 
 
September 30,
   
December 31,
   
Increase
   
Increase
 
 
 
2013
   
2012
   
(Decrease)
   
(Decrease)
 
 
 
(dollars in thousands)
 
Cash and cash equivalents
 
$
42,570
   
$
27,891
   
$
14,679
     
52.6
%
Investment securities available-for-sale
   
15,436
     
12,004
     
3,432
     
28.6
%
Investment securities held-to-maturity
   
10,149
     
12,036
     
(1,887
)
   
(15.7
)%
Loans - held for sale
   
64,187
     
68,694
     
(4,507
)
   
(6.6
)%
Loans - held for investment, net
   
375,258
     
380,507
     
(5,249
)
   
(1.4
)%
Total assets
   
535,481
     
532,101
     
3,380
     
0.6
%
 
                               
Total deposits
   
431,091
     
434,220
     
(3,129
)
   
(0.7
)%
Other borrowings and convertible debentures
   
35,442
     
41,852
     
(6,410
)
   
(15.3
)%
 
                               
Total stockholder's equity
   
64,648
     
53,049
     
11,599
     
21.9
%

42

The following table shows the amounts of loans held for investment by type of loan at the end of each of the periods indicated.

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Manufactured housing
 
$
172,126
   
$
177,391
 
Commercial real estate
   
132,034
     
126,677
 
Commercial
   
31,453
     
32,496
 
SBA
   
25,753
     
30,688
 
HELOC
   
15,616
     
17,852
 
Single family real estate
   
10,007
     
9,939
 
Consumer
   
186
     
232
 
 
   
387,175
     
395,275
 
Allowance for loan losses
   
11,654
     
14,464
 
Deferred costs, net
   
(92
)
   
(128
)
Discount on SBA loans
   
355
     
432
 
Total loans held for investment, net
 
$
375,258
   
$
380,507
 

Credit Quality
 
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations.  The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans.  Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans.
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Nonaccrual loans, net
 
$
15,277
   
$
33,320
 
Troubled debt restructured loans, gross
   
12,288
     
26,623
 
Nonaccrual loans to gross loans
   
3.38
%
   
7.01
%
Net charge-offs (annualized) to average loans
   
(0.67
)%
   
1.39
%
Allowance to loan losses to nonaccrual loans
   
76.28
%
   
45.18
%

The overall credit quality of the loan portfolio has improved as reflected in the decline in past due loans of $3.7 million or 41.0%, from $9.0 million at December 31, 2012 to $5.3 million at September 30, 2013 mostly due to declined past due loans in the SBA portfolio which decreased $6.0 million, from $6.8 million at December 31, 2012 to $0.8 million at September 30, 2013.  Past due manufactured housing loans also declined by $0.9 million to $0.2 million at September 30, 2013 from $1.1 million at December 31, 2012.  These declines were partially offset by increased past due commercial loans of $3.5 million at September 30, 2013 from $0.2 million at December 31, 2012.
43

The following table reflects the recorded investment in certain types of loans at the dates indicated:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
Nonaccrual loans
 
$
21,055
   
$
29,643
 
SBA guaranteed portion of loans included above
   
(5,778
)
   
(7,218
)
Total nonaccrual loans, net
 
$
15,277
   
$
22,425
 
 
               
Troubled debt restructured loans, gross
 
$
12,288
   
$
19,931
 
Loans 30 through 89 days past due with interest accruing
 
$
74
   
$
521
 
Allowance for loan losses to gross loans held for investment
   
3.01
%
   
3.66
%

Impaired loans
 
A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  All other loans are measured for impairment based on the present value of future cash flows.  Impairment is measured on a loan-by-loan basis for all loans in the portfolio.
 
The following table summarizes the composite of nonaccrual loans net of SBA guarantee:
 
 
 
At September 30, 2013
   
At December 31, 2012
 
 
 
Nonaccrual
   
   
Percent of
   
Nonaccrual
   
   
Percent of
 
 
 
Balance
   
%
   
Total Loans
   
Balance
   
%
   
Total Loans
 
 
 
(dollars in thousands)
 
Manufactured housing
 
$
5,327
     
34.86
%
   
1.18
%
 
$
7,542
     
33.63
%
   
1.63
%
Commercial real estate
   
3,171
     
20.76
%
   
0.70
%
   
11,105
     
49.52
%
   
2.39
%
Commercial
   
4,019
     
26.31
%
   
0.89
%
   
1,945
     
8.68
%
   
0.42
%
SBA
   
1,545
     
10.11
%
   
0.34
%
   
1,442
     
6.43
%
   
0.31
%
HELOC
   
522
     
3.42
%
   
0.12
%
   
269
     
1.20
%
   
0.06
%
Single family real estate
   
693
     
4.54
%
   
0.15
%
   
121
     
0.54
%
   
0.03
%
Consumer
   
-
     
0.00
%
   
0.00
%
   
1
     
0.00
%
   
0.00
%
Total nonaccrual loans
 
$
15,277
     
100.00
%
   
3.38
%
 
$
22,425
     
100.00
%
   
4.84
%

Net nonaccrual loans decreased $7.1 million or 31.7%, from $22.4 million at December 31, 2012 to $15.3 million at September 30, 2013.  The percentage of net nonaccrual loans to the total loan portfolio has decreased to 3.39% as of September 30, 2013 from 7.01% at September 30, 2012.  During the third quarter 2013, the Company sold $5.1 million of nonaccrual commercial real estate loans to third parties.
 
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is usually no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
CWB generally repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days.  After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance.  Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.
44

Total gross troubled debt restructured loans (“TDR”) have declined $14.3 million or 53.8% to $12.3 million at September 30, 2013 from $26.6 million at September 30, 2012.  At September 30, 2013, there were $5.8 million of manufactured housing TDR loans, $4.0 million of commercial loan TDRs, $1.2 million of commercial real estate TDRs, $0.8 million of SBA 504 1st TDRs, $0.2 million residential real estate TDR loans, $0.2 million HELOC TDR loans and $0.1 million SBA TDR loans compared to $10.8 million of commercial real estate TDR loans, $6.3 million manufactured housing TDR loans, $5.1 million commercial TDR loans, $3,1 million construction TDR loans, $0.7 million SBA 504 1st trust deed TDR loans, $0.5 million SBA TDR loans and $0.1 million residential real estate TDR loans at September 30, 2012
 
The allowance for loan losses compared to net nonaccrual loans has increased to 76.3% as of September 30, 2013 from 45.2% as of September 30, 2012.
 
The following schedule summarizes impaired loans and specific reserves by loan class as of the periods indicated:

 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
Total
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Loans
 
Loans Held for Investment as of September 30, 2013:
 
(in thousands)
 
Recorded Investment:
 
   
   
   
   
   
   
   
 
Loans collectively evaluated for impairment
 
$
163,377
   
$
128,584
   
$
27,434
   
$
24,182
   
$
15,094
   
$
9,237
   
$
186
   
$
368,094
 
Loans individually evaluated for impairment
   
8,749
     
3,450
     
4,019
     
1,571
     
522
     
770
     
-
     
19,081
 
Total
 
$
172,126
   
$
132,034
   
$
31,453
   
$
25,753
   
$
15,616
   
$
10,007
   
$
186
   
$
387,175
 
Related Allowance for Loan Losses
                                                               
Loans collectively evaluated for impairment
   
4,574
     
2,233
     
1,109
     
2,088
     
256
     
191
     
1
     
10,452
 
Loans individually evaluated for impairment
   
777
     
133
     
68
     
190
     
24
     
10
     
-
     
1,202
 
Total
 
$
5,351
   
$
2,366
   
$
1,177
   
$
2,278
   
$
280
   
$
201
   
$
1
   
$
11,654
 

 
 
Manufactured
   
Commercial
   
   
   
   
Single Family
   
   
Total
 
 
 
Housing
   
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Real Estate
   
Consumer
   
Loans
 
Impaired Loans as of December 31, 2012:
 
(in thousands)
 
Recorded Investment:
 
   
   
   
   
   
   
   
 
Impaired loans with an allowance recorded
 
$
5,748
   
$
519
   
$
5,044
   
$
503
   
$
269
   
$
80
   
$
-
   
$
12,163
 
Impaired loans with no allowance recorded
   
4,687
     
11,389
     
49
     
1,238
     
-
     
121
     
-
     
17,484
 
Total loans individually evaluated for impairment
   
10,435
     
11,908
     
5,093
     
1,741
     
269
     
201
     
-
     
29,647
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
1,103
   
$
4
   
$
569
   
$
58
   
$
49
   
$
11
   
$
-
   
$
1,794
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
1,103
     
4
     
569
     
58
     
49
     
11
     
-
     
1,794
 
Total impaired loans, net
 
$
9,332
   
$
11,904
   
$
4,524
   
$
1,683
   
$
220
   
$
190
   
$
-
   
$
27,853
 

45

The following schedule summarizes the average investment in impaired loans by loan class and the interest income recognized:

 
 
Three Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Average Investment
   
Interest
   
Average Investment
   
Interest
 
 
 
in Impaired Loans
   
Income
   
in Impaired Loans
   
Income
 
 
 
(in thousands)
 
Manufactured housing
 
$
9,454
   
$
85
   
$
11,050
   
$
110
 
Commercial real estate:
                               
Commercial real estate
   
7,811
     
10
     
16,399
     
99
 
SBA 504 1st
   
1,089
     
4
     
2,042
     
16
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
3,189
     
-
 
Commercial
   
2,789
     
142
     
5,442
     
70
 
SBA
   
1,790
     
34
     
1,696
     
69
 
HELOC
   
397
     
3
     
383
     
7
 
Single family real estate
   
747
     
1
     
251
     
3
 
Consumer
   
-
     
-
     
2
     
-
 
Total
 
$
24,077
   
$
279
   
$
40,454
   
$
374
 

 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2013
   
2012
 
 
 
Average Investment
   
Interest
   
Average Investment
   
Interest
 
 
 
in Impaired Loans
   
Income
   
in Impaired Loans
   
Income
 
 
 
(in thousands)
 
Manufactured housing
 
$
9,528
   
$
182
   
$
7,782
   
$
214
 
Commercial real estate:
                               
Commercial real estate
   
8,875
     
94
     
19,071
     
315
 
SBA 504 1st
   
1,163
     
28
     
4,496
     
116
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
5,937
     
108
 
Commercial
   
3,831
     
208
     
5,591
     
235
 
SBA
   
1,432
     
136
     
1,796
     
130
 
HELOC
   
313
     
3
     
248
     
7
 
Single family real estate
   
452
     
10
     
350
     
10
 
Consumer
   
-
     
-
     
7
     
-
 
Total
 
$
25,594
   
$
661
   
$
45,278
   
$
1,135
 

Investment Securities
 
Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements.  Held-to-maturity securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts.  Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions.  Investment securities identified as available-for-sale are carried at fair value.  Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity.  Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
 
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits and to manage liquidity, capital, and interest rate risk.
46

The carrying value of investment securities at September 30, 2013 and December 31, 2012 was as follows:

 
 
September 30,
   
December 31,
 
 
 
2013
   
2012
 
 
 
(in thousands)
 
U.S. government agency notes
 
$
5,676
   
$
1,988
 
U.S. government agency mortgage backed securities ("MBS")
   
10,214
     
12,207
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
9,628
     
9,845
 
Equity securities: Farmer Mac class A stock
   
67
     
-
 
 
 
$
25,585
   
$
24,040
 

Deposits

The following table provides the balance and percentage change in the Company’s deposits:

 
 
   
   
Percent
 
 
 
September 30,
   
December 31,
   
Increase
   
Increase
 
 
 
2013
   
2012
   
(Decrease)
   
(Decrease)
 
 
 
(dollars in thousands)
 
Non-interest bearing demand deposits
 
$
55,462
   
$
53,605
   
$
1,857
     
3.5
%
Interest-bearing demand deposits
   
253,978
     
269,466
     
(15,488
)
   
(5.7
)%
Savings
   
16,176
     
16,351
     
(175
)
   
(1.1
)%
Time deposits of $100,000 or more
   
92,351
     
80,710
     
11,641
     
14.4
%
Other time deposits
   
13,124
     
14,088
     
(964
)
   
(6.8
)%
Total deposits
 
$
431,091
   
$
434,220
   
$
(3,129
)
   
(0.7
)%

Liquidity and Capital Resources

Liquidity Management
 
The Company has established policies as well as analytical tools to manage liquidity.  Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost effective manner.  The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits.  Ultimately, public confidence is gained through profitable operations, sound credit quality and a strong capital position.  The Company’s liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective.  Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk.  The Company has asset and liability management committees (“ALCO”) at the Board and Bank management level to review asset and liability management and liquidity issues.
 
CWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”).  Advances are collateralized in the aggregate by CWB’s eligible loans and securities.  Total FHLB advances were $34.0 million at September 30, 2013 and December 31, 2012, borrowed at fixed rates.  At September 30, 2013, CWB had pledged to the FHLB, $25.5 million of securities and $23.8 million of loans.  At September 30, 2013, CWB had $69.2 million available for additional borrowing.  At December 31, 2012, CWB had pledged to the FHLB, $24.0 million of securities and $25.5 million of loans. At December 31, 2012, CWB had $65.8 million available for additional borrowing.
 
CWB has established a credit line with the Federal Reserve Bank (“FRB”).  There were no outstanding FRB advances as of September 30, 2013 and December 31, 2012.  CWB had $123.7 million and $66.3 million in borrowing capacity as of September 30, 2013 and December 31, 2012, respectively.
47

CWB also maintains four federal funds purchased lines for a total borrowing capacity of $23.5 million.  Of the $23.5 million in borrowing capacity, two of the lines for $10.0 million require the Company to furnish acceptable collateral.  There was no amount outstanding as of September 30, 2013 and December 31, 2012.
 
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits.  The liquidity ratio of the Company was 23.4% and 21.1% at September 30, 2013 and December 31, 2012, respectively.  The Company’s liquidity ratio fluctuates in conjunction with loan funding demands.  The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.
 
CWBC’s routine funding requirements primarily consist of certain operating expenses, preferred dividends and interest payments on the convertible debentures.  Normally, CWBC obtains funding to meet its obligations from dividends collected from the Bank and has the capability to issue debt securities.  Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval.  Further, under the terms of the FRB Agreement, CWBC has agreed that, absent prior regulatory approval, CWBC will refrain from taking dividends or any form of payment from the Bank representing a reduction in the Bank’s capital. CWBC anticipates that for the foreseeable future, it will fund its expenses, including preferred dividends, to the extent declared and paid, and interest payments on the debenture from its own funds and will not receive dividends from the Bank. See “Part II, Item 3. DEFAULTS UPON SENIOR SECURITIES’ herein.
 
Capital Resources
 
The Company (on a consolidated basis) and CWB are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and CWB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and CWB must meet specific capital guidelines that involve quantitative measures of the Company’s and CWB’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and CWB’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.
 
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) contains rules as to the legal and regulatory environment for insured depository institutions, including increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions and regulations concerning internal controls, accounting and operations.  The prompt corrective action regulations of FDICIA define specific capital categories based on the institutions’ capital ratios.  The capital categories, in declining order, are “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”.  To be considered “well capitalized”, an institution must have a core or leverage capital ratio of at least 5%, a Tier I risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.  Tier I risk-based capital is, primarily, common stock and retained earnings, net of goodwill and other intangible assets.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and CWB to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital (as defined) to adjusted average assets (as defined).
48

The Company’s and CWB’s actual capital amounts and ratios as of September 30, 2013 and December 31, 2012 are presented in the table below:
 
 
 
   
   
Risk-
   
Adjusted
   
Total Risk-
   
Tier 1
   
Tier 1
 
 
 
Total
   
Tier 1
   
Weighted
   
Average
   
Based Capital
   
Risk-Based
   
Leverage
 
 
 
Capital
   
Capital
   
Assets
   
Assets
   
Ratio
   
Capital Ratio
   
Ratio
 
September 30, 2013
 
(dollars in thousands)
 
CWBC (Consolidated)
 
$
71,400
   
$
64,810
   
$
405,263
   
$
535,493
     
17.62
%
   
15.99
%
   
12.10
%
Capital in excess of  well capitalized
                                 
$
30,874
   
$
40,494
   
$
38,035
 
 
                                                       
CWB
 
$
69,296
   
$
64,150
   
$
405,102
   
$
532,094
     
17.11
%
   
15.84
%
   
12.06
%
Capital in excess of  well capitalized
                                 
$
28,786
   
$
39,844
   
$
37,545
 
 
                                                       
December 31, 2012
                                                       
CWBC (Consolidated)
 
$
66,076
   
$
52,941
   
$
413,378
   
$
544,778
     
15.98
%
   
12.81
%
   
9.72
%
Capital in excess of  well capitalized
                                 
$
24,738
   
$
28,138
   
$
25,702
 
 
                                                       
CWB
 
$
63,089
   
$
57,808
   
$
413,199
   
$
540,985
     
15.27
%
   
13.99
%
   
10.69
%
Capital in excess of  well capitalized
                                 
$
21,769
   
$
33,016
   
$
30,759
 
                                                       
Minimum capital ratios required for CWB by the OCC
                                   
12.00
%
   
N/
A
   
9.00
%
Well-capitalized ratios
                                   
10.00
%
   
6.00
%
   
5.00
%
Minimum capital ratios
                                   
8.00
%
   
4.00
%
   
4.00
%
 
The OCC Agreement specified that the Bank shall achieve within 120 days and thereafter maintain the following minimum capital ratios:
 
· Tier 1 capital at least equal to 9.00% of adjusted total assets, and
· Total risk-based capital at least equal to 12.00% of risk weighted assets
 
Despite the Bank meeting both the capital requirements to be deemed “well capitalized” and the capital requirements of the OCC Agreement at September 30, 2013, the Bank is nevertheless deemed to be “adequately capitalized” as a result of the OCC Agreement’s requirement to achieve and maintain specific capital levels.
 
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, (i) determines that an unsafe or unsound condition or, an unsafe or unsound practice, warrants such treatment or (ii) imposes a captial directive on a bank that requires heightened regulatory capital requirements under the terms of a consent order or regulatory agreement.  Therefore, pursuant to the OCC Agreement, the Bank is considered adequately capitalized.  At each successive lower capital category, an insured bank is subject to more restrictions.  The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.

Supervision and Regulation
 
Banking is a complex, highly regulated industry. The banking regulatory system is designed to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy.  In addition of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry.  Consequently, the Company's growth and earnings performance, as well as that of CWB, may be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the FRB, FDIC and the OCC.  For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Certain qualitative and quantitative disclosures about market risk is set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K.  For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk.”
49

ITEM 4. CONTROLS AND PROCEDURES
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation, the Company’s management, which includes the Company's Chief Executive Officer and the Chief Financial Officer, has concluded that, as of the end of the period covered by this report, disclosure controls and procedures are effective in ensuring that information relating to the Company (including its consolidated subsidiary) required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended September 30, 2013 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
The Company is involved in various litigation of a routine nature that is being handled and defended in the ordinary course of business.  In the opinion of management, based in part on consultation with legal counsel, the resolution of these litigation matters is not likely to have a material adverse impact on the Company’s financial condition or results of operations.
 
ITEM 1A. RISK FACTORS
 
Investing in our common stock involves various risks which are particular to our Company, our industry and our market area.  Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K, with the exception of an update to our risk factor relating to recent regulatory action, as described below.
 
Regulatory Action
 
On April 23, 2012, the Company entered into the FRB Agreement with the Reserve Bank.  As discussed in “ITEM 3. DEFAULTS UPON SENIOR SECURITIES,” below, the FRB Agreement prohibits the Company from paying any dividends without prior regulatory approval, which requests were denied with respect to the quarterly dividend payments otherwise payable 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.  Accordingly, the Company did not pay dividends on the Series A Preferred Stock for these six quarterly dividend periods. The aggregate amount of the dividends that would have been paid on those dates was $1.2 million.  The deferral of dividends on the Series A Preferred Stock is permitted under its terms and does not constitute an event of default.  However, the non-payment of dividends for six quarterly dividend periods results in an automatic increase by two in the authorized number of directors.  Although these two vacancies are to be filled by persons approved by the holders of Series A Preferred Stock, these holders of Series A Preferred Stock have specifically agreed that they will not exercise any voting rights to fill these vacancies without the prior approval of the FRB.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
50

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
(a) Not applicable.
 
(b) On December 19, 2008, the Company issued 15,600 shares of the Company’s Series A Preferred Stock to the U.S. Treasury under its Troubled Asset Relief Program - Capital Purchase Program.  The terms of the Series A Preferred Stock provide for the payment of quarterly cumulative dividends at the rate of 5% per year for the first five years and then at the rate of 9% thereafter.   Under the terms of the Agreement by and between the Company and the Federal Reserve Bank of San Francisco (“FRB”), the Company is prohibited from paying dividends absent the prior approval of the FRB to do so.  Although the Company has paid all quarterly dividends on the Series A Preferred Stock through and including the quarterly dividend period ended February 15, 2012, the Company’s request to the FRB to pay dividends on the Series A Preferred Stock with respect to the quarterly dividend periods ended May 15, 2012, August 15, 2012, November 15, 2012, February 15, 2013, May 15, 2013 and August 15, 2013 were denied.  Accordingly, the Company did not pay dividends on the Series A Preferred Stock for these six quarterly dividend periods. The aggregate amount of the dividends that would have been paid on those dates was $1.2 million.  The deferral of dividends on the Series A Preferred Stock is permitted under its terms and does not constitute an event of default.  However, the non-payment of dividends for six quarterly dividend periods results in an automatic increase by two in the authorized number of directors.  Although these two vacancies are to be filled by persons approved by the holders of Series A Preferred Stock, these holders of Series A Preferred Stock have specifically agreed that they will not exercise any voting rights to fill these vacancies without the prior approval of the FRB.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable

ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
Exhibits.

31.1
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
 
31.2
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
 
32.1*
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as Amended, and 18 U.S.C. 1350.

101INS – XBRL Instance Document
101SCH –XBRL Taxonomy Extension Schema Document
101CAL – XBRL Taxonomy Calculation Linkbase Document
101DEF – XBRL Taxonomy Extension Definition Linkbase Document
101LAB – XBRL Taxonomy Label Linkbase Document
101PRE – XBRL Taxonomy Presentation Linkbase Document

* This certification is furnished to, but shall not be deemed filed, with the Commission.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange  Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.

51

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMUNITY WEST BANCSHARES
(Registrant)
 
 
 
Date: November 12, 2013
BY:
/s/ Charles G. Baltuskonis
Charles G. Baltuskonis
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
 
 
On Behalf of Registrant and as
 
 
Principal Financial and Accounting Officer

52

EXHIBIT INDEX
 
Exhibit
Number 
Description of Document
 
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
 
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
 
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
 
 
101
101INS – XBRL Instance Document
 
101SCH –XBRL Taxonomy Extension Schema Document
 
101CAL – XBRL Taxonomy Calculation Linkbase Document
 
101DEF – XBRL Taxonomy Extension Definition Linkbase Document
 
101LAB – XBRL Taxonomy Label Linkbase Document
 
101PRE – XBRL Taxonomy Presentation Linkbase Document

* This certification is furnished to, but shall not be deemed filed, with the Commission.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange  Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.
 
 
53