form10q.htm
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 June 30, 2010
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o YESo 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
|
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). Yes o No x
Number of shares of common stock of the registrant outstanding as of August 12, 2010: 5,915,130 shares
PART I. FINANCIAL INFORMATION
|
PAGE
|
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ITEM 1.
|
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3
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4
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5
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6
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7
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The financial statements included in this Form 10-Q should be read with reference to Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
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ITEM 2.
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16
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ITEM 4.
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27
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PART II. OTHER INFORMATION
|
|
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ITEM 1.
|
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27
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ITEM 2.
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27
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ITEM 3.
|
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28
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ITEM 4.
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28
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ITEM 5.
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28
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ITEM 6.
|
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28
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|
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Cash and due from banks
|
|
$ |
5,699 |
|
|
$ |
4,906 |
|
Federal funds sold
|
|
|
50 |
|
|
|
605 |
|
Cash and cash equivalents
|
|
|
5,749 |
|
|
|
5,511 |
|
Time deposits in other financial institutions
|
|
|
475 |
|
|
|
640 |
|
Investment securities available-for-sale, at fair value; amortized cost of $18,207 at June 30, 2010 and $17,367 at December 31, 2009
|
|
|
18,468 |
|
|
|
17,670 |
|
Investment securities held-to-maturity, at amortized cost; fair value of $19,388 at June 30, 2010 and $23,538 at December 31, 2009
|
|
|
18,441 |
|
|
|
22,678 |
|
Federal Home Loan Bank stock, at cost
|
|
|
5,450 |
|
|
|
5,660 |
|
Federal Reserve Bank stock, at cost
|
|
|
1,322 |
|
|
|
1,322 |
|
Loans:
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or fair value
|
|
|
92,798 |
|
|
|
102,574 |
|
Loans held for investment, net of allowance for loan losses of $13,837 at June 30, 2010 and $13,733 at December 31, 2009
|
|
|
497,956 |
|
|
|
500,866 |
|
Total loans
|
|
|
590,754 |
|
|
|
603,440 |
|
Servicing rights
|
|
|
861 |
|
|
|
998 |
|
Foreclosed real estate and repossessed assets
|
|
|
6,265 |
|
|
|
1,822 |
|
Premises and equipment, net
|
|
|
3,093 |
|
|
|
3,279 |
|
Other assets
|
|
|
20,606 |
|
|
|
21,196 |
|
TOTAL ASSETS
|
|
$ |
671,484 |
|
|
$ |
684,216 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand
|
|
$ |
35,728 |
|
|
$ |
37,703 |
|
Interest-bearing demand
|
|
|
237,934 |
|
|
|
191,905 |
|
Savings
|
|
|
21,555 |
|
|
|
16,396 |
|
Time certificates
|
|
|
243,805 |
|
|
|
285,388 |
|
Total deposits
|
|
|
539,022 |
|
|
|
531,392 |
|
Other borrowings
|
|
|
69,000 |
|
|
|
89,000 |
|
Other liabilities
|
|
|
3,570 |
|
|
|
3,517 |
|
Total liabilities
|
|
|
611,592 |
|
|
|
623,909 |
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000,000 shares authorized; 15,600 shares issued and outstanding
|
|
|
14,674 |
|
|
|
14,540 |
|
Common stock, no par value; 10,000,000 shares authorized; 5,915,130 shares issued and outstanding
|
|
|
33,120 |
|
|
|
33,110 |
|
Retained earnings
|
|
|
11,944 |
|
|
|
12,479 |
|
Accumulated other comprehensive income, net
|
|
|
154 |
|
|
|
178 |
|
Total stockholders' equity
|
|
|
59,892 |
|
|
|
60,307 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
671,484 |
|
|
$ |
684,216 |
|
See accompanying notes.
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
9,323 |
|
|
$ |
9,746 |
|
|
$ |
18,857 |
|
|
$ |
19,498 |
|
Investment securities
|
|
|
375 |
|
|
|
437 |
|
|
|
774 |
|
|
|
886 |
|
Other
|
|
|
5 |
|
|
|
17 |
|
|
|
14 |
|
|
|
33 |
|
Total interest income
|
|
|
9,703 |
|
|
|
10,200 |
|
|
|
19,645 |
|
|
|
20,417 |
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,958 |
|
|
|
2,940 |
|
|
|
4,017 |
|
|
|
6,298 |
|
Other borrowings
|
|
|
514 |
|
|
|
1,026 |
|
|
|
1,102 |
|
|
|
2,122 |
|
Total interest expense
|
|
|
2,472 |
|
|
|
3,966 |
|
|
|
5,119 |
|
|
|
8,420 |
|
NET INTEREST INCOME
|
|
|
7,231 |
|
|
|
6,234 |
|
|
|
14,526 |
|
|
|
11,997 |
|
Provision for loan losses
|
|
|
2,872 |
|
|
|
743 |
|
|
|
5,946 |
|
|
|
13,298 |
|
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES
|
|
|
4,359 |
|
|
|
5,491 |
|
|
|
8,580 |
|
|
|
(1,301 |
) |
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loan fees
|
|
|
494 |
|
|
|
694 |
|
|
|
846 |
|
|
|
985 |
|
Gains from loan sales, net
|
|
|
92 |
|
|
|
58 |
|
|
|
195 |
|
|
|
176 |
|
Document processing fees
|
|
|
125 |
|
|
|
235 |
|
|
|
250 |
|
|
|
469 |
|
Loan servicing, net
|
|
|
39 |
|
|
|
117 |
|
|
|
128 |
|
|
|
512 |
|
Service charges
|
|
|
133 |
|
|
|
117 |
|
|
|
262 |
|
|
|
220 |
|
Other
|
|
|
50 |
|
|
|
34 |
|
|
|
91 |
|
|
|
61 |
|
Total non-interest income
|
|
|
933 |
|
|
|
1,255 |
|
|
|
1,772 |
|
|
|
2,423 |
|
NON-INTEREST EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
2,858 |
|
|
|
2,931 |
|
|
|
5,866 |
|
|
|
6,383 |
|
Occupancy and equipment expenses
|
|
|
510 |
|
|
|
523 |
|
|
|
1,009 |
|
|
|
1,070 |
|
FDIC assessment
|
|
|
323 |
|
|
|
585 |
|
|
|
648 |
|
|
|
823 |
|
Professional services
|
|
|
239 |
|
|
|
264 |
|
|
|
442 |
|
|
|
512 |
|
Advertising and marketing
|
|
|
78 |
|
|
|
80 |
|
|
|
170 |
|
|
|
181 |
|
Depreciation and amortization
|
|
|
108 |
|
|
|
125 |
|
|
|
221 |
|
|
|
250 |
|
Loss on sale and write-down of foreclosed real estate and repossessed assets
|
|
|
504 |
|
|
|
97 |
|
|
|
566 |
|
|
|
164 |
|
Data processing
|
|
|
133 |
|
|
|
153 |
|
|
|
260 |
|
|
|
314 |
|
Other operating expenses
|
|
|
644 |
|
|
|
625 |
|
|
|
1,186 |
|
|
|
1,493 |
|
Total non-interest expenses
|
|
|
5,397 |
|
|
|
5,383 |
|
|
|
10,368 |
|
|
|
11,190 |
|
(Loss) income before provision for income taxes
|
|
|
(105 |
) |
|
|
1,363 |
|
|
|
(16 |
) |
|
|
(10,068 |
) |
(Benefit) provision for income taxes
|
|
|
(43 |
) |
|
|
563 |
|
|
|
(5 |
) |
|
|
(4,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$ |
(62 |
) |
|
$ |
800 |
|
|
$ |
(11 |
) |
|
$ |
(5,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
262 |
|
|
|
262 |
|
|
|
524 |
|
|
|
523 |
|
NET (LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS
|
|
$ |
(324 |
) |
|
$ |
538 |
|
|
$ |
(535 |
) |
|
$ |
(6,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.05 |
) |
|
$ |
.09 |
|
|
$ |
(.09 |
) |
|
$ |
(1.09 |
) |
Diluted
|
|
$ |
(.05 |
) |
|
$ |
.09 |
|
|
$ |
(.09 |
) |
|
$ |
(1.09 |
) |
Basic weighted average number of common shares outstanding
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
Diluted weighted average number of common shares outstanding
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Preferred
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Accumulated Other Comprehensive
|
|
|
Total Stockholders’
|
|
|
|
Stock
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JANUARY 1, 2010
|
|
$ |
14,540 |
|
|
|
5,915 |
|
|
$ |
33,110 |
|
|
$ |
12,479 |
|
|
$ |
178 |
|
|
$ |
60,307 |
|
Stock option expense, recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(11 |
) |
Change in unrealized gain (loss) on securities available-for-sale, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
(24 |
) |
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35 |
) |
Preferred stock dividend
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
(524 |
) |
|
|
|
|
|
|
(390 |
) |
BALANCES AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JUNE 30, 2010
|
|
$ |
14,674 |
|
|
|
5,915 |
|
|
$ |
33,120 |
|
|
$ |
11,944 |
|
|
$ |
154 |
|
|
$ |
59,892 |
|
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(11 |
) |
|
$ |
(5,929 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,946 |
|
|
|
13,298 |
|
Depreciation and amortization
|
|
|
221 |
|
|
|
250 |
|
Stock-based compensation
|
|
|
10 |
|
|
|
14 |
|
Net amortization of discounts and premiums for investment securities
|
|
|
(82 |
) |
|
|
(10 |
) |
(Gain) loss on:
|
|
|
|
|
|
|
|
|
Sale of foreclosed real estate and repossesses assets
|
|
|
566 |
|
|
|
164 |
|
Sale of loans held for sale
|
|
|
(195 |
) |
|
|
(176 |
) |
Loan originated for sale and principal collections, net
|
|
|
4,794 |
|
|
|
1,318 |
|
Changes in:
|
|
|
|
|
|
|
|
|
Servicing rights, net of amortization
|
|
|
137 |
|
|
|
66 |
|
Other assets
|
|
|
631 |
|
|
|
(4,583 |
) |
Other liabilities
|
|
|
29 |
|
|
|
152 |
|
Net cash provided by operating activities
|
|
|
12,046 |
|
|
|
4,564 |
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of held-to-maturity securities
|
|
|
- |
|
|
|
(1,233 |
) |
Purchase of available-for-sale securities
|
|
|
(5,965 |
) |
|
|
(6,231 |
) |
Redemption (purchase) of Federal Home Loan Bank and Federal Reserve stock
|
|
|
210 |
|
|
|
(227 |
) |
Principal pay downs and maturities of available-for-sale securities
|
|
|
5,215 |
|
|
|
888 |
|
Principal pay downs and maturities of held-to-maturity securities
|
|
|
4,230 |
|
|
|
8,527 |
|
Loan originations and principal collections, net
|
|
|
(3,959 |
) |
|
|
(32,494 |
) |
Proceeds from sale of other assets acquired through foreclosure
|
|
|
1,091 |
|
|
|
1,687 |
|
Net decrease in time deposits in other financial institutions
|
|
|
165 |
|
|
|
80 |
|
Purchase of premises and equipment, net
|
|
|
(35 |
) |
|
|
(21 |
) |
Net cash provided by (used in) investing activities
|
|
|
952 |
|
|
|
(29,024 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(524 |
) |
|
|
(523 |
) |
Amortization of discount on preferred stock, net of additional costs
|
|
|
134 |
|
|
|
106 |
|
Net increase in demand deposits and savings accounts
|
|
|
49,213 |
|
|
|
66,363 |
|
Net decrease in time certificates of deposit
|
|
|
(41,583 |
) |
|
|
(55,162 |
) |
Proceeds from Federal Home Loan Bank and FRB advances
|
|
|
34,000 |
|
|
|
68,000 |
|
Repayment of Federal Home Loan Bank and FRB advances
|
|
|
(54,000 |
) |
|
|
(59,000 |
) |
Net cash (used in) provided by financing activities
|
|
|
(12,760 |
) |
|
|
19,784 |
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
238 |
|
|
|
(4,676 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
5,511 |
|
|
|
12,253 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
5,749 |
|
|
$ |
7,577 |
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
5,313 |
|
|
$ |
9,216 |
|
Cash paid for income taxes
|
|
|
5 |
|
|
|
16 |
|
Supplemental Disclosure of Noncash Investing Activity:
|
|
|
|
|
|
|
|
|
Transfers to other assets acquired through foreclosure
|
|
$ |
6,100 |
|
|
$ |
2,590 |
|
See accompanying notes.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The interim consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition for the interim period. The unaudited consolidated financial statements include Community West Bancshares (“CWBC") and its wholly-owned subsidiary, Community West Bank, N.A. ("CWB" or the “Bank”). CWBC and CWB are referred to herein as “the Company”. The accompanying unaudited condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement have been reflected in the financial statements. However, the results of operations for the six-month period ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Community West Bancshares included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 adequate to provide for probable losses inherent in the loan portfolio. This process involves deriving probable loss estimates that are based on individual loan loss estimation, migration analysis/historical loss rates and management’s judgment.
The Company employs several methodologies for estimating probable losses. Methodologies are determined based on a number of factors, including type of asset, risk rating, concentrations, collateral value and the input of the Special Assets group, functioning as a workout unit.
The ALL calculation for the different major loan types is as follows:
|
·
|
SBA – A migration analysis and various portfolio specific factors are used to determine the required allowance for all non-impaired loans. In addition, the migration results are adjusted based upon qualitative factors. Qualitative factors include, but are not limited to, adjustments for existing economic conditions, past due trends and concentration exposure. Impaired loans are assigned a specific reserve based upon the individual characteristics of the loan.
|
|
·
|
Relationship Banking – Primarily includes commercial, commercial real estate and construction loans. A migration analysis and various portfolio specific factors are used to calculate the required allowance for all non-impaired loans. In addition, the migration results are adjusted based upon qualitative factors. Qualitative factors include, but are not limited to, adjustments for existing economic conditions, past due trends and concentration exposure. Impaired loans are assigned a specific reserve based upon the individual characteristics of the loan.
|
|
·
|
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 history is adjusted based upon qualitative factors similar to those used for SBA loans and relationship banking.
|
The Company determines the required ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior month are reflected in the current period required ALL determination and adjusted as deemed necessary. The review of the adequacy 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 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.
The Company's ALL is maintained at a level believed adequate by management to absorb known and inherent probable losses on existing loans. A provision for loan losses is charged to expense. The allowance is charged for losses when management believes that full recovery on the loan is unlikely. Generally, the Company charges off any loan classified as a "loss"; portions of loans which are deemed to be uncollectible; overdrafts which have been outstanding for more than 90 days; and, all other unsecured loans past due 120 or more days. Subsequent recoveries, if any, are credited to the ALL.
The Bank has a centralized appraisal management process that tracks and monitors appraisals, appraisal reviews and other valuations. The centralization focus is to ensure the use of qualified and independent appraisers capable of providing reliable real estate values in the context of ever changing market conditions. The review process is monitored to ensure application of the appropriate appraisal methodology, agreement with the interpretation of market data and the resultant real estate value. The process also provides the means of tracking the performance quality of the appraisers on the Bank’s approved appraiser list. Any loan evaluation that results in the Bank determining that elevated credit risk and/or default risk exists and also exhibits a lack of a timely valuation of the collateral or apparent collateral value deterioration is reappraised and reevaluated to determine the current extent of any change in collateral value and credit risk. A similar review process is conducted quarterly on all classified and criticized real estate credits to determine the timeliness and adequacy of the real estate collateral value. A detection of non-compliance is then addressed through a new appraisal or reappraisal and review.
Foreclosed Real Estate and Repossessed Assets – Foreclosed real estate and other repossessed assets includes real estate and other repossessed assets and the collateral property is recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value less costs to sell of the other assets is charged-off against the allowance for loan losses. 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. Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
Servicing Rights – The guaranteed portion of certain SBA loans can be sold into the secondary market. Servicing rights are recognized as separate assets when loans are sold with servicing retained and when any premium refund obligations have lapsed. Servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Management evaluates its servicing rights for impairment quarterly. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing rights and resulting gain on sale are calculated based on the difference between the best actual par and premium bids on an individual loan basis.
Income Taxes – The Company uses the asset and liability method, which recognizes a liability or asset 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.
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.
Recent Accounting Pronouncements – In June 2009, amended ASC 860 “Transfers and Servicing”. ASC 860 eliminates the concept of a qualifying special purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. ASC 860 applies to transfers of government-guaranteed portions of loans, such as those guaranteed by the Small Business Administration (“SBA”). In this regard, if the Bank transfers the guaranteed portion of an SBA loan at a premium, it is obligated by the SBA to refund the premium to the purchaser if the loan is repaid within ninety days of the transfer. Under ASC 860, this premium refund obligation is a form of recourse, which means that the transferred guarantee portion of the loan does not meet the definition of a participating interest for the ninety day period that the premium refund obligation exists. As a result, the transfer must be accounted for as a secured borrowing during this period. After the ninety day period, assuming the transferred guaranteed portion and the retained unguaranteed portion of the SBA loan now meet the definition of a participating interest, the transfer of the guaranteed portion can be accounted for as a sale if all of the conditions for sale accounting in ASC 860 are met. Essentially, ASC 860 delays recognition of the gain on the sale of an SBA loan at a premium for ninety days and precludes recognition of gain on loans sold at par. This amendment is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. Adoption of ASC 860 did not have a material impact on the Company’s financial condition, results of operations or cash flows.
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is as follows:
June 30, 2010
|
|
(in thousands)
|
|
Available-for-sale securities
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. Government agency: MBS
|
|
$ |
13,250 |
|
|
$ |
279 |
|
|
$ |
(47 |
) |
|
$ |
13,482 |
|
U.S. Government agency: CMO
|
|
|
4,957 |
|
|
|
38 |
|
|
|
(9 |
) |
|
|
4,986 |
|
Total
|
|
$ |
18,207 |
|
|
$ |
317 |
|
|
$ |
(56 |
) |
|
$ |
18,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency: MBS
|
|
$ |
18,441 |
|
|
$ |
947 |
|
|
$ |
- |
|
|
$ |
19,388 |
|
U.S. Government agency: CMO
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
18,441 |
|
|
$ |
947 |
|
|
$ |
- |
|
|
$ |
19,388 |
|
December 31, 2009
|
|
(in thousands)
|
|
Available-for-sale securities
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. Government agency: MBS
|
|
$ |
10,175 |
|
|
$ |
286 |
|
|
$ |
- |
|
|
$ |
10,461 |
|
U.S. Government agency: CMO
|
|
|
7,192 |
|
|
|
37 |
|
|
|
(20 |
) |
|
|
7,209 |
|
Total
|
|
$ |
17,367 |
|
|
$ |
323 |
|
|
$ |
(20 |
) |
|
$ |
17,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency: MBS
|
|
$ |
22,678 |
|
|
$ |
891 |
|
|
$ |
(31 |
) |
|
$ |
23,538 |
|
U.S. Government agency: CMO
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
22,678 |
|
|
$ |
891 |
|
|
$ |
(31 |
) |
|
$ |
23,538 |
|
At June 30, 2010, $36.9 million of securities, at carrying value, was pledged to the Federal Home Loan Bank, San Francisco, as collateral for current and future advances.
The maturity periods and weighted average yields of investment securities at June 30, 2010 are as follows:
|
|
Total Amount
|
|
|
Less than One Year
|
|
|
One to Five Years
|
|
|
Five to Ten Years
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
(dollars in thousands)
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency: MBS
|
|
$ |
13,482 |
|
|
|
2.0 |
% |
|
$ |
4,631 |
|
|
|
0.8 |
% |
|
$ |
8,646 |
|
|
|
2.6 |
% |
|
$ |
205 |
|
|
|
2.9 |
% |
Agency: CMO
|
|
|
4,986 |
|
|
|
0.8 |
% |
|
|
48 |
|
|
|
4.6 |
% |
|
|
4,938 |
|
|
|
0.7 |
% |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
18,468 |
|
|
|
1.7 |
% |
|
$ |
4,679 |
|
|
|
0.9 |
% |
|
$ |
13,584 |
|
|
|
1.9 |
% |
|
$ |
205 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency: MBS
|
|
$ |
18,441 |
|
|
|
4.8 |
% |
|
$ |
93 |
|
|
|
5.0 |
% |
|
$ |
17,101 |
|
|
|
4.8 |
% |
|
$ |
1,247 |
|
|
|
4.6 |
% |
Agency: CMO
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
18,441 |
|
|
|
4.8 |
% |
|
$ |
93 |
|
|
|
5.0 |
% |
|
$ |
17,101 |
|
|
|
4.8 |
% |
|
$ |
1,247 |
|
|
|
4.6 |
% |
The following tables show all securities that are in an unrealized loss position and temporarily impaired as of:
June 30, 2010
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Vale
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency: MBS
|
|
$ |
4,631 |
|
|
$ |
47 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,631 |
|
|
$ |
47 |
|
U.S. Government agency: CMO
|
|
|
1,370 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
1,370 |
|
|
|
9 |
|
Total
|
|
$ |
6,001 |
|
|
$ |
56 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,001 |
|
|
$ |
56 |
|
December 31, 2009
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Vale
|
|
|
Losses
|
|
|
|
(in thousands)
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency: MBS
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
U.S. Government agency: CMO
|
|
|
1,816 |
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
1,816 |
|
|
|
20 |
|
Total
|
|
$ |
1,816 |
|
|
$ |
20 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,816 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency: MBS
|
|
$ |
2,854 |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,854 |
|
|
$ |
31 |
|
U.S. Government agency: CMO
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
2,854 |
|
|
$ |
31 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,854 |
|
|
$ |
31 |
|
As of June 30, 2010 and December 31, 2009, four and three securities, respectively, were 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 or 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, as all are direct or indirect agencies of the U. S. Government. Accordingly, as of June 30, 2010 and December 31, 2009, 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. 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 unguaranteed loans sold calculated based on the present value of the estimated future servicing costs associated with each loan. The balance of all servicing rights and obligations is subsequently amortized over the estimated life of the loans using an estimated prepayment rate of 5-25%. Quarterly, the servicing asset is analyzed for impairment.
The Company also periodically sells certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.
As of June 30, 2010 and December 31, 2009, the Company had approximately $90.6 million and $95.7 million, respectively, in SBA loans included in loans held for sale.
Mortgage Loan Sales – 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. At inception, the value of these derivatives is generally equal to the fee charged to the borrower 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 June 30, 2010 and December 31, 2009, the Company had $10.0 million and $13.6 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments, the value of related derivative instruments were not material to the Company’s financial position or results of operations.
4. LOANS HELD FOR INVESTMENT
The composition of the Company’s loans held for investment loan portfolio follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$ |
56,381 |
|
|
$ |
61,810 |
|
Real estate
|
|
|
192,016 |
|
|
|
195,480 |
|
SBA
|
|
|
44,482 |
|
|
|
43,863 |
|
Manufactured housing
|
|
|
198,194 |
|
|
|
195,656 |
|
Other installment
|
|
|
21,047 |
|
|
|
18,189 |
|
|
|
|
512,120 |
|
|
|
514,998 |
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
13,837 |
|
|
|
13,733 |
|
Deferred costs
|
|
|
(185 |
) |
|
|
(204 |
) |
Purchased premiums
|
|
|
(18 |
) |
|
|
(24 |
) |
Discount on SBA loans
|
|
|
530 |
|
|
|
627 |
|
Loans held for investment, net
|
|
$ |
497,596 |
|
|
$ |
500,866 |
|
An analysis of the allowance for credit losses for loans held for investment follows for the three and six months ended:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$ |
14,409 |
|
|
$ |
13,414 |
|
|
$ |
13,733 |
|
|
$ |
7,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
(3,642 |
) |
|
|
(804 |
) |
|
|
(6,084 |
) |
|
|
(7,299 |
) |
Recoveries on loans previously charged off
|
|
|
198 |
|
|
|
66 |
|
|
|
242 |
|
|
|
79 |
|
Net charge-offs
|
|
|
(3,444 |
) |
|
|
(738 |
) |
|
|
(5,842 |
) |
|
|
(7,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,872 |
|
|
|
743 |
|
|
|
5,946 |
|
|
|
13,298 |
|
Balance, end of period
|
|
$ |
13,837 |
|
|
$ |
13,419 |
|
|
$ |
13,837 |
|
|
$ |
13,419 |
|
As of June 30, 2010 and December 31, 2009, the Company also had reserves for credit losses on undisbursed loans of $226,000 and $501,000 respectively.
The recorded investment in loans that is considered to be impaired:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Impaired loans without specific valuation allowances
|
|
$ |
10,816 |
|
|
$ |
13,699 |
|
Impaired loans with specific valuation allowances
|
|
|
4,457 |
|
|
|
716 |
|
Specific valuation allowances allocated to impaired loans
|
|
|
(1,279 |
) |
|
|
(622 |
) |
Impaired loans, net
|
|
$ |
13,994 |
|
|
$ |
13,793 |
|
The following schedule reflects the average investment in impaired loans:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Average investment in impaired loans
|
|
$ |
17,598 |
|
|
$ |
9,014 |
|
|
$ |
16,079 |
|
|
$ |
7,401 |
|
Interest income recognized on impaired loans
|
|
$ |
213 |
|
|
$ |
165 |
|
|
$ |
215 |
|
|
$ |
167 |
|
5. FAIR VALUE MEASUREMENT
Fair value is the exchange price that would be received for an asset or the price that would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U. S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets and liabilities
Level 2 – Observable inputs other than quoted market prices in active markets for identical assets and liabilities
Level 3 – Unobservable inputs
The following summarizes the fair value measurements of assets measured on a recurring basis as of June 30, 2010 and December 31, 2009 and the relative levels of inputs from which such amounts were derived:
|
|
Fair value measurements at June 30, 2010 using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
Investment securities available-for-sale
|
|
$ |
18,468 |
|
|
$ |
- |
|
|
$ |
18,468 |
|
|
$ |
- |
|
Interest only strips (included in other assets)
|
|
|
534 |
|
|
|
- |
|
|
|
- |
|
|
|
534 |
|
Total
|
|
$ |
19,002 |
|
|
$ |
- |
|
|
$ |
18,468 |
|
|
$ |
534 |
|
|
|
Fair value measurements at December 31, 2009 using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
Investment securities available-for-sale
|
|
$ |
17,670 |
|
|
$ |
- |
|
|
$ |
17,670 |
|
|
$ |
- |
|
Interest only strips (included in other assets)
|
|
|
623 |
|
|
|
- |
|
|
|
- |
|
|
|
623 |
|
Total
|
|
$ |
18,293 |
|
|
$ |
- |
|
|
$ |
17,670 |
|
|
$ |
623 |
|
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. The I/O strips were valued at $623,000 as of December 31, 2009 and a valuation adjustment of $89,000 was recorded against income during the first six months of 2010. No other changes in the balance have occurred related to the I/O strips and such valuation adjustments are included as additions or offsets to loan servicing income.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are loans that are considered impaired. A loan is considered impaired when, based on current information or events, it is probable that not all amounts due will be collected according to the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral. The collateral value is determined based on appraisals and other market valuations for similar assets.
The following summarizes the fair value measurements of assets measured on a non-recurring basis as of June 30, 2010 and December 31, 2009 and the relative levels of inputs from which such amounts were derived:
|
|
Fair value measurements at
June 30, 2010 using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
Impaired loans
|
|
$ |
13,994 |
|
|
$ |
- |
|
|
$ |
13,058 |
|
|
$ |
936 |
|
|
|
Fair value measurements at
December 31, 2009 using
|
|
|
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(in thousands)
|
|
Impaired loans
|
|
$ |
13,793 |
|
|
$ |
- |
|
|
$ |
13,562 |
|
|
$ |
231 |
|
6. BORROWINGS
Federal Home Loan Bank Advances – The Company 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 $69.0 million and $68.0 million at June 30, 2010 and December 31, 2009, respectively, borrowed at fixed rates. At June 30, 2010, CWB had securities and loans pledged to FHLB with carrying value of $36.9 million and $102.6 million, respectively. At December 31, 2009, CWB had securities and loans pledged with carrying value of $40.3 million and $92.3 million, respectively. Total FHLB interest expense for the six months ended June 30, 2010 and 2009 was $1.1 million and $2.1 million, respectively. At June 30, 2010, CWB had $30.7 million available for additional borrowing.
Federal Reserve Bank – CWB has established a credit line with the Federal Reserve Bank. Advances are collateralized in the aggregate by eligible loans for up to 28 days. The discount rate was raised to 0.75% from 0.50% in February 2010. There were no outstanding FRB advances as of June 30, 2010 and $21.0 million outstanding as of December 31, 2009. Interest expense on these advances for the six months ended June 30, 2010 was $17,000.
Preferred Stock
On December 19, 2008, as part of the United States Department of the Treasury’s (Treasury) Troubled Asset Relief Program - Capital Purchase Program (TARP CPP), the Company entered into a Letter Agreement with the Treasury, pursuant to which the Company issued to the Treasury, in exchange for an aggregate purchase price of $15.6 million in cash: (i) 15,600 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, having a liquidation preference of $1,000 per share (Series A Preferred Stock), and (ii) a warrant (Warrant) to purchase up to 521,158 shares of the Company's common stock, no par value, at an exercise price of $4.49 per share.
Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and at a rate of 9% per year thereafter, but will be paid only if, as and when declared by the Company's Board of Directors. 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. The Series A Preferred Stock is generally non-voting, other than class voting on certain matters that could adversely affect the Series A Preferred Stock. In the event that dividends payable on the Series A Preferred Stock have not been paid for the equivalent of six or more quarters, whether or not consecutive, the Company's authorized number of Directors will be automatically increased by two and the holders of the Series A Preferred Stock, voting together with holders of any then outstanding voting parity stock, will have the right to elect those Directors at the Company's next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These Directors will be elected annually and will serve until all accrued and unpaid dividends on the Series A Preferred Stock have been paid.
The Company may redeem the Series A Preferred Stock after February 15, 2012 for $1,000 per share plus accrued and unpaid dividends. Prior to this date, the Company may redeem the Series A Preferred Stock for $1,000 per share plus accrued and unpaid dividends if: (i) the Company has raised aggregate gross proceeds in one or more "qualified equity offerings" (as defined in the Securities Purchase Agreement entered into between the Company and the Treasury) in excess of $15.6 million, and (ii) the aggregate redemption price does not exceed the aggregate net cash proceeds from such qualified equity offerings. Any redemption is subject to the prior approval of the Company's primary banking regulator.
Common Stock Warrant
The Warrant issued as part of the TARP CPP 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. Pursuant to the Securities Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any Warrant Shares.
Earnings per Common Share-Calculation of Weighted Average Shares Outstanding
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009 |
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
Dilutive effect of options
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted weighted average common shares outstanding
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
|
|
5,915 |
|
8. 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.
The following table represents the estimated fair values:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
5,749 |
|
|
$ |
5,749 |
|
|
$ |
5,511 |
|
|
$ |
5,511 |
|
Time deposits in other financial institutions
|
|
|
475 |
|
|
|
475 |
|
|
|
640 |
|
|
|
640 |
|
Federal Reserve and Federal Home Loan Bank stock
|
|
|
6,772 |
|
|
|
6,772 |
|
|
|
6,982 |
|
|
|
6,982 |
|
Investment securities
|
|
|
36,909 |
|
|
|
37,856 |
|
|
|
40,348 |
|
|
|
41,208 |
|
Loans
|
|
|
604,591 |
|
|
|
584,244 |
|
|
|
617,173 |
|
|
|
589,858 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (other than time deposits)
|
|
|
295,217 |
|
|
|
295,217 |
|
|
|
246,004 |
|
|
|
246,004 |
|
Time deposits
|
|
|
243,805 |
|
|
|
246,353 |
|
|
|
285,388 |
|
|
|
287,806 |
|
Other borrowings
|
|
|
69,000 |
|
|
|
68,524 |
|
|
|
89,000 |
|
|
|
89,751 |
|
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.
Time 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.
Federal Home Loan Bank Stock - The carrying value approximates the fair value. The FHLB is rated AAA by Moody’s and S&P as of June 30, 2010 and no impairment was recognized as of June 30, 2010.
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. Certain adjustable loans that reprice on a frequent basis are valued at book value.
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.
Other borrowings – The fair value of FHLB and FRB advances are estimated using discounted cash flow analysis based on rates for similar types of borrowing arrangements.
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.
The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
9. SUBSEQUENT EVENTS
Subsequent events have been evaluated through the date the financial statements were issued.
|
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 unaudited interim consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this report.
Forward Looking Statements
This Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion should be read in conjunction with the Company’s financial statements and the related notes provided under "Item 1—Financial Statements" above.
Overview of Earnings Performance
For 2Q10, net loss was $62,000 compared to net income of $800,000 for 2Q09.
The significant factors impacting net income for 2Q10 were:
|
·
|
The provision for loan losses was $2.9 million for 2Q10 compared to $743,000 for 2Q09, primarily driven by net charge-offs of $3.4 million for 2Q10 compared to $738,000 for 2Q09.
|
|
·
|
The decline in rates paid on funding sources contributed to a continued improvement in the margin which increased to 4.47% for 2Q10 compared to 3.78% for 2Q09.
|
|
·
|
Resulting from the improvement in margin, net interest income increased by $997,000 to $7.2 million for 2Q10 from $6.2 million for 2Q09.
|
|
·
|
Non-interest expenses remained flat for 2Q10 compared to 2Q09.
|
Debenture Offering
On May 4, 2010, the Company announced its intention to offer $8.0 million, and up to $8.8 million with oversubscription privileges, of convertible subordinated debentures. The offering closed on August 9, 2010 with subscriptions of $8.1 million. 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 $3.50 per share if converted prior to July 1, 2013, $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.
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: the provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company’s 2009 Form 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
Results of Operations – Second Quarter Comparison
The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:
|
|
Three Months Ended
June 30,
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Interest income
|
|
$ |
9,703 |
|
|
$ |
10,200 |
|
|
$ |
(497 |
) |
Interest expense
|
|
|
2,472 |
|
|
|
3,966 |
|
|
|
(1,494 |
) |
Net interest income
|
|
|
7,231 |
|
|
|
6,234 |
|
|
|
997 |
|
Provision for loan losses
|
|
|
2,872 |
|
|
|
743 |
|
|
|
2,129 |
|
Net interest income after provision for loan losses
|
|
|
4,359 |
|
|
|
5,491 |
|
|
|
(1,132 |
) |
Non-interest income
|
|
|
933 |
|
|
|
1,255 |
|
|
|
(322 |
) |
Non-interest expenses
|
|
|
5,397 |
|
|
|
5,383 |
|
|
|
14 |
|
(Loss) income before provision for income taxes
|
|
|
(105 |
) |
|
|
1,363 |
|
|
|
(1,468 |
) |
(Benefit) provision for income taxes
|
|
|
(43 |
) |
|
|
563 |
|
|
|
(606 |
) |
Net (loss) income
|
|
$ |
(62 |
) |
|
$ |
800 |
|
|
$ |
(862 |
) |
Preferred stock dividends
|
|
|
262 |
|
|
|
262 |
|
|
|
- |
|
Net (loss) income applicable to common shareholders
|
|
$ |
(324 |
) |
|
$ |
538 |
|
|
$ |
(862 |
) |
(Loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.05 |
) |
|
$ |
.09 |
|
|
$ |
(.14 |
) |
Diluted
|
|
$ |
(.05 |
) |
|
$ |
.09 |
|
|
$ |
(.14 |
) |
Dividends per common share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Comprehensive (loss) income
|
|
$ |
(100 |
) |
|
$ |
858 |
|
|
$ |
(958 |
) |
The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
|
|
Three Months Ended
June 30,
|
|
|
|
2010 versus 2009
|
|
|
|
Total
|
|
|
Change due to
|
|
|
|
change
|
|
|
Rate
|
|
|
Volume
|
|
|
|
(in thousands)
|
|
Loans, net
|
|
$ |
(423 |
) |
|
$ |
(384 |
) |
|
$ |
(39 |
) |
Investment securities
|
|
|
(62 |
) |
|
|
(62 |
) |
|
|
- |
|
Other
|
|
|
(12 |
) |
|
|
- |
|
|
|
(12 |
) |
Total interest-earning assets
|
|
|
(497 |
) |
|
|
(446 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(982 |
) |
|
|
(1,127 |
) |
|
|
145 |
|
Other borrowings
|
|
|
(512 |
) |
|
|
(125 |
) |
|
|
(387 |
) |
Total interest-bearing liabilities
|
|
|
(1,494 |
) |
|
|
(1,252 |
) |
|
|
(242 |
) |
Net interest income
|
|
$ |
997 |
|
|
$ |
806 |
|
|
$ |
191 |
|
Net Interest Income
Net interest income increased by $997,000 for 2Q10 compared to 2Q09. Total interest income declined by $497,000. Average interest earning assets experienced a moderate decline of $13.0 million for 2Q10 compared to 2Q09 along with a lower yield of 6.0% compared to 6.18% for 2Q09. The decline in interest income was offset by a reduction in interest expense of $1.5 million from $4.0 million for 2Q09 to $2.5 million for 2Q10. Rates paid on interest bearing liabilities dropped from 2.77% for 2Q09 to 1.73% for 2Q10, a reduction of 1.04%.
The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 3.78% for 2Q09 to 4.47% for 2Q10.
Provision for Loan Losses
The provision for loan losses increased to $2.9 million 2Q10 compared to $743,000 for 2Q09. Charge-offs, particularly in the SBA loan portfolio, contributed to the higher provision.
The following schedule summarizes the provision, charge-offs and recoveries for the second quarter of 2010 by loan category:
|
|
|
|
|
Three Months Ended June 30, 2010
|
|
|
|
(in thousands)
|
|
|
|
Allowance
3/31/10
|
|
|
Provision
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net Charge-offs
|
|
|
Allowance
6/30/10
|
|
Real estate
|
|
$ |
2,707 |
|
|
$ |
491 |
|
|
$ |
(659 |
) |
|
$ |
1 |
|
|
$ |
(658 |
) |
|
$ |
2,540 |
|
Manufactured housing
|
|
|
2,706 |
|
|
|
596 |
|
|
|
(411 |
) |
|
|
3 |
|
|
|
(408 |
) |
|
|
2,894 |
|
Commercial
|
|
|
2,945 |
|
|
|
224 |
|
|
|
(707 |
) |
|
|
70 |
|
|
|
(637 |
) |
|
|
2,532 |
|
SBA
|
|
|
5,549 |
|
|
|
1,407 |
|
|
|
(1,751 |
) |
|
|
98 |
|
|
|
(1,653 |
) |
|
|
5,303 |
|
Other installment
|
|
|
502 |
|
|
|
154 |
|
|
|
(114 |
) |
|
|
26 |
|
|
|
(88 |
) |
|
|
568 |
|
Total
|
|
$ |
14,409 |
|
|
$ |
2,872 |
|
|
$ |
(3,642 |
) |
|
$ |
198 |
|
|
$ |
(3,444 |
) |
|
$ |
13,837 |
|
Overall, the allowance for loan losses has increased from $13.7 million at December 31, 2009 to $13.8 million at June 30, 2010. As a percentage of loans held-for-investment, the allowance has increased from 2.67% as of December 31, 2009 to 2.70% as of June 30, 2010.
Loans past due over 30 days net of the SBA Guaranteed Portion decreased from $11.6 million at December 31, 2009 to $3.5 million at June 30, 2010. Improvement was noted in the banks level of past dues in the SBA and Manufactured Housing Portfolios.
Included in the Company’s held-for-investment portfolio is the category “Other installment” which consists primarily of home equity lines of credit (HELOC) loans. Guidance issued by the SEC characterized these types of loans as higher-risk. The HELOC portfolio of $20.7 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties. In 2Q10, there were $88,000 net charge-offs in this portfolio. As of June 30, 2010, 0.5% of the portfolio is past due and 0.2% is on non-accrual status. The allowance for loan losses for this portfolio is $497,000, or 2.4%. The Company believes that, overall, this portfolio is adequately supported by real estate collateral.
Non-Interest Income
Non-interest income includes gains from sale of loans, loan document fees, service charges on deposit accounts, loan servicing fees and other revenues not derived from interest on earning assets. Total non-interest income declined by $322,000, or 25.7%, for 2Q10 compared to 2Q09. Non-interest income declined primarily in two areas, other loan fees and document processing fees. Other loan fees declined due to lower referral fees on SBA 504 loans and the decline in document processing fees resulted from lower mortgage loan originations for 2Q10 compared to 2Q09.
Non-Interest Expenses
Non-interest expenses remained even at $5.4 million for 2Q10 and 2Q09. Non-interest expenses declined in almost all areas, most significantly in the FDIC assessment, which was higher in 2Q09 due to a special assessment charged by the FDIC. These declines were offset by an increase of $407,000 in losses and write-downs of foreclosed real estate and repossessed assets.
Results of Operations –Six-Month Comparison
The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:
|
|
Six Months Ended
June 30,
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
Interest income
|
|
$ |
19,645 |
|
|
$ |
20,417 |
|
|
$ |
(772 |
) |
Interest expense
|
|
|
5,119 |
|
|
|
8,420 |
|
|
|
(3,301 |
) |
Net interest income
|
|
|
14,526 |
|
|
|
11,997 |
|
|
|
2,529 |
|
Provision for loan losses
|
|
|
5,946 |
|
|
|
13,298 |
|
|
|
(7,352 |
) |
Net interest income (loss) after provision for loan losses
|
|
|
8,580 |
|
|
|
(1,301 |
) |
|
|
9,881 |
|
Non-interest income
|
|
|
1,772 |
|
|
|
2,423 |
|
|
|
(651 |
) |
Non-interest expenses
|
|
|
10,368 |
|
|
|
11,190 |
|
|
|
(822 |
) |
Loss before provision for income taxes
|
|
|
(16 |
) |
|
|
(10,068 |
) |
|
|
10,052 |
|
Benefit for income taxes
|
|
|
(5 |
) |
|
|
(4,139 |
) |
|
|
4,134 |
|
Net loss
|
|
$ |
(11 |
) |
|
$ |
(5,929 |
) |
|
$ |
5,918 |
|
Preferred stock dividends
|
|
|
524 |
|
|
|
523 |
|
|
|
1 |
|
Net loss applicable to common shareholders
|
|
$ |
(535 |
) |
|
$ |
(6,452 |
) |
|
$ |
5,917 |
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(.09 |
) |
|
$ |
(1.09 |
) |
|
$ |
1.00 |
|
Diluted
|
|
$ |
(.09 |
) |
|
$ |
(1.09 |
) |
|
$ |
1.00 |
|
Dividends per common share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Comprehensive loss
|
|
$ |
(35 |
) |
|
$ |
(5,768 |
) |
|
$ |
5,733 |
|
The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
|
|
Six Months Ended
June 30,
|
|
|
|
2010 versus 2009
|
|
|
|
Total
|
|
|
Change due to
|
|
|
|
change
|
|
|
Rate
|
|
|
Volume
|
|
|
|
(in thousands)
|
|
Loans, net
|
|
$ |
(641 |
) |
|
$ |
(672 |
) |
|
$ |
31 |
|
Investment securities
|
|
|
(112 |
) |
|
|
(124 |
) |
|
|
12 |
|
Other
|
|
|
(19 |
) |
|
|
- |
|
|
|
(19 |
) |
Total interest-earning assets
|
|
|
(772 |
) |
|
|
(796 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(2,281 |
) |
|
|
(2,587 |
) |
|
|
306 |
|
Other borrowings
|
|
|
(1,020 |
) |
|
|
(402 |
) |
|
|
(618 |
) |
Total interest-bearing liabilities
|
|
|
(3,301 |
) |
|
|
(2,989 |
) |
|
|
(312 |
) |
Net interest income
|
|
$ |
2,529 |
|
|
$ |
2,193 |
|
|
$ |
336 |
|
Net Interest Income
Net interest income increased by $2.5 million, or 21.1%, for the first six months of 2010 compared to the same period in 2009. Total interest income declined by $772,000. Average interest earning assets experienced a moderate decline of $4.2 million for the six months ended June 30, 2010 compared to 2009 and a lower yield of 6.05% compared to 6.25%. The decline in interest income was offset by a reduction in interest expense of $3.3 million from $8.4 million for the first six months of 2009 to $5.1 million for the first half of 2010. Rates paid on interest bearing liabilities dropped from 2.97% for the first half of 2009 to 1.79% for 2010, a reduction of 1.18%.
The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 3.67% for the first six months of 2009 to 4.47% for the same period in 2010.
Provision for Loan Losses
The provision for loan losses declined to $5.9 million for the first six months of 2010 compared to $13.3 million for the same period in 2009. The provision continues to be driven by relatively high charge-offs, particularly in the SBA portfolio.
The following schedule summarizes the provision, charge-offs and recoveries for the six months ended June 30, 2010 by loan category:
|
|
|
|
|
Six Months Ended June 30, 2010
|
|
|
|
(in thousands)
|
|
|
|
Allowance
12/31/09
|
|
|
Provision
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Net Charge-offs
|
|
|
Allowance
6/30/10
|
|
Real estate
|
|
$ |
3,012 |
|
|
$ |
218 |
|
|
$ |
(693 |
) |
|
$ |
3 |
|
|
$ |
(690 |
) |
|
$ |
2,540 |
|
Manufactured housing
|
|
|
2,255 |
|
|
|
1,509 |
|
|
|
(873 |
) |
|
|
3 |
|
|
|
(870 |
) |
|
|
2,894 |
|
Commercial
|
|
|
3,448 |
|
|
|
(262 |
) |
|
|
(728 |
) |
|
|
74 |
|
|
|
(654 |
) |
|
|
2,532 |
|
SBA
|
|
|
4,801 |
|
|
|
3,798 |
|
|
|
(3,431 |
) |
|
|
135 |
|
|
|
(3,296 |
) |
|
|
5,303 |
|
Other installment
|
|
|
217 |
|
|
|
683 |
|
|
|
(359 |
) |
|
|
27 |
|
|
|
(332 |
) |
|
|
568 |
|
Total
|
|
$ |
13,733 |
|
|
$ |
5,946 |
|
|
$ |
(6,084 |
) |
|
$ |
242 |
|
|
$ |
(5,842 |
) |
|
$ |
13,837 |
|
Non-Interest Income
Total non-interest income declined by $651,000, or 26.9%, for the first six months of 2010 compared to the same period in 2009. Non-interest income declined primarily in three areas, loan servicing, other loan fees and document processing fees. Lower servicing income resulted from the declining balance of sold SBA loans and increased amortization of the IO strip and servicing asset. Other loan fees declined $139,000 due to lower referral fees on SBA 504 loans and the decline in document processing fees resulted from lower mortgage loan originations for the first six months of 2010 compared to the same period in 2009.
Non-Interest Expenses
Non-interest expenses declined $822,000, or 7.3%, to $10.4 million for the first six months of 2010 compared to $11.2 million for the same period in 2009. Non-interest expenses declined in almost all areas, most significantly in salaries and employee benefits and the FDIC assessment. Discontinuation of SBA lending east of the Rocky Mountains contributed to savings of $517,000 in salaries and employee benefits for the first six months of 2010 compared to 2009. The FDIC assessment declined for the first six months of 2010 in comparison to the same period in 2009 partly due the special assessment by the FDIC of $306,000 in the second quarter of 2009. Partly offsetting these savings was an increase of $402,000 in the loss on sale and write-down of foreclosed real estate and repossessed assets.
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated:
|
|
Three Months
Ended June 30,
|
|
|
Six Months
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest-earning assets:
|
|
(dollars in thousands)
|
|
Interest-earning deposits in other financial institutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
639 |
|
|
$ |
1,091 |
|
|
$ |
728 |
|
|
$ |
1,104 |
|
Interest income
|
|
|
4 |
|
|
|
6 |
|
|
|
10 |
|
|
|
14 |
|
Average yield
|
|
|
2.98 |
% |
|
|
2.39 |
% |
|
|
2.96 |
% |
|
|
2.61 |
% |
Federal funds sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
940 |
|
|
$ |
11,124 |
|
|
$ |
2,570 |
|
|
$ |
11,083 |
|
Interest income
|
|
|
1 |
|
|
|
11 |
|
|
|
4 |
|
|
|
19 |
|
Average yield
|
|
|
0.30 |
% |
|
|
0.35 |
% |
|
|
0.31 |
% |
|
|
0.34 |
% |
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
44,271 |
|
|
$ |
44,255 |
|
|
$ |
45,016 |
|
|
$ |
44,346 |
|
Interest income
|
|
|
375 |
|
|
|
437 |
|
|
|
774 |
|
|
|
886 |
|
Average yield
|
|
|
3.40 |
% |
|
|
3.97 |
% |
|
|
3.47 |
% |
|
|
4.03 |
% |
Gross loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
603,219 |
|
|
$ |
605,684 |
|
|
$ |
606,673 |
|
|
$ |
602,648 |
|
Interest income
|
|
|
9,323 |
|
|
|
9,746 |
|
|
|
18,857 |
|
|
|
19,498 |
|
Average yield
|
|
|
6.20 |
% |
|
|
6.45 |
% |
|
|
6.27 |
% |
|
|
6.52 |
% |
Total interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
649,069 |
|
|
$ |
662,154 |
|
|
$ |
654,987 |
|
|
$ |
659,181 |
|
Interest income
|
|
|
9,703 |
|
|
|
10,200 |
|
|
|
19,645 |
|
|
|
20,417 |
|
Average yield
|
|
|
6.00 |
% |
|
|
6.18 |
% |
|
|
6.05 |
% |
|
|
6.25 |
% |
Interest-bearing liabilities:
|
|
|
|
Interest-bearing demand deposits:
|
|
|
|
Average balance
|
|
$ |
232,922 |
|
|
$ |
96,695 |
|
|
$ |
219,021 |
|
|
$ |
81,976 |
|
Interest expense
|
|
|
827 |
|
|
|
441 |
|
|
|
1,635 |
|
|
|
724 |
|
Average cost of funds
|
|
|
1.42 |
% |
|
|
1.83 |
% |
|
|
1.51 |
% |
|
|
1.78 |
% |
Savings deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
20,979 |
|
|
$ |
19,513 |
|
|
$ |
19,495 |
|
|
$ |
17,385 |
|
Interest expense
|
|
|
115 |
|
|
|
120 |
|
|
|
223 |
|
|
|
234 |
|
Average cost of funds
|
|
|
2.20 |
% |
|
|
2.46 |
% |
|
|
2.30 |
% |
|
|
2.72 |
% |
Time certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
251,196 |
|
|
$ |
335,939 |
|
|
$ |
261,652 |
|
|
$ |
351,579 |
|
Interest expense
|
|
|
1,016 |
|
|
|
2,380 |
|
|
|
2,159 |
|
|
|
5,340 |
|
Average cost of funds
|
|
|
1.62 |
% |
|
|
2.84 |
% |
|
|
1.66 |
% |
|
|
3.06 |
% |
Other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
69,587 |
|
|
$ |
122,681 |
|
|
$ |
76,989 |
|
|
$ |
120,188 |
|
Interest expense
|
|
|
514 |
|
|
|
1,025 |
|
|
|
1,102 |
|
|
|
2,122 |
|
Average cost of funds
|
|
|
2.96 |
% |
|
|
3.35 |
% |
|
|
2.89 |
% |
|
|
3.56 |
% |
Total interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance
|
|
$ |
574,684 |
|
|
$ |
574,828 |
|
|
$ |
577,157 |
|
|
$ |
571,128 |
|
Interest expense
|
|
|
2,472 |
|
|
|
3,966 |
|
|
|
5,119 |
|
|
|
8,420 |
|
Average cost of funds
|
|
|
1.73 |
% |
|
|
2.77 |
% |
|
|
1.79 |
% |
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
7,231 |
|
|
$ |
6,234 |
|
|
$ |
14,526 |
|
|
$ |
11,997 |
|
Net interest spread
|
|
|
4.27 |
% |
|
|
3.41 |
% |
|
|
4.26 |
% |
|
|
3.27 |
% |
Net interest margin
|
|
|
4.47 |
% |
|
|
3.78 |
% |
|
|
4.47 |
% |
|
|
3.67 |
% |
In calculating interest rates and differentials:
|
·
|
Average yields and rates are derived by dividing interest income by the average balances of interest-earning assets and by dividing interest expense by the average balances of interest-bearing liabilities for the periods indicated. Amounts outstanding are averages of daily balances during the applicable periods.
|
|
·
|
Nonaccrual loans are included in the average balance of loans outstanding.
|
|
·
|
Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and other liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or 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.
|
|
·
|
Net interest margin is net interest income expressed as a percentage of 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.
|
Financial Condition
Average total assets increased by $6.0 million, or 0.9%, to $678.4 million at June 30, 2010 compared to $672.4 million at June 30, 2009. Average total equity declined by 4.2% to $60.9 million at June 30, 2010 from $63.5 million at June 30, 2009. Average total gross loans at June 30, 2010 increased by $4.0 million, or 0.7%, to $606.7 million from $602.6 million at June 30, 2009. Average deposits also increased from $486.5 million at June 30, 2009 to $539.0 million as of June 30, 2010.
The book value per common share declined to $7.64 at June 30, 2010 from $7.74 at December 31, 2009.
Selected balance sheet accounts
(dollars in thousands)
|
|
June 30,
2010
|
|
|
December 31, 2009
|
|
|
Increase (Decrease)
|
|
|
Percent of Increase (Decrease)
|
|
|
|
(dollars in thousands) |
|
Cash and cash equivalents
|
|
$ |
5,749 |
|
|
$ |
5,511 |
|
|
$ |
238 |
|
|
|
4.3 |
% |
Investment securities available-for-sale
|
|
|
18,468 |
|
|
|
17,670 |
|
|
|
798 |
|
|
|
4.5 |
% |
Investment securities held-to-maturity
|
|
|
18,441 |
|
|
|
22,678 |
|
|
|
(4,237 |
) |
|
|
(18.7 |
)% |
Loans-held for sale
|
|
|
92,798 |
|
|
|
102,574 |
|
|
|
(9,776 |
) |
|
|
(9.5 |
)% |
Loans-held for investment, net
|
|
|
497,956 |
|
|
|
500,866 |
|
|
|
(2,910 |
) |
|
|
(0.6 |
)% |
Total assets
|
|
|
671,484 |
|
|
|
684,216 |
|
|
|
(12,732 |
) |
|
|
(1.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
539,022 |
|
|
|
531,392 |
|
|
|
7,630 |
|
|
|
1.4 |
% |
Other borrowings
|
|
|
69,000 |
|
|
|
89,000 |
|
|
|
(20,000 |
) |
|
|
(22.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
59,892 |
|
|
|
60,307 |
|
|
|
(415 |
) |
|
|
(0.7 |
)% |
The following schedule shows the balance and percentage change in the various deposits:
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
Increase (Decrease)
|
|
|
Percent of Increase (Decrease)
|
|
|
|
(dollars in thousands)
|
|
Non-interest-bearing deposits
|
|
$ |
35,728 |
|
|
$ |
37,703 |
|
|
$ |
(1,975 |
) |
|
|
(5.2 |
)% |
Interest-bearing deposits
|
|
|
237,934 |
|
|
|
191,905 |
|
|
|
46,029 |
|
|
|
24.0 |
% |
Savings
|
|
|
21,555 |
|
|
|
16,396 |
|
|
|
5,159 |
|
|
|
31.5 |
% |
Time certificates of $100,000 or more
|
|
|
174,228 |
|
|
|
173,594 |
|
|
|
634 |
|
|
|
0.4 |
% |
Other time certificates
|
|
|
69,577 |
|
|
|
111,794 |
|
|
|
(42,217 |
) |
|
|
(37.8 |
)% |
Total deposits
|
|
$ |
539,022 |
|
|
$ |
531,392 |
|
|
$ |
7,630 |
|
|
|
1.4 |
% |
Nonaccrual, Past Due and Restructured 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 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 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, except for securitized 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 except for the securitized loans, which are evaluated for impairment on a collective basis.
The recorded investment in loans that is considered to be impaired:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Impaired loans without specific valuation allowances
|
|
$ |
10,816 |
|
|
$ |
13,699 |
|
Impaired loans with specific valuation allowances
|
|
|
4,457 |
|
|
|
716 |
|
Specific valuation allowances allocated to impaired loans
|
|
|
(1,279 |
) |
|
|
(622 |
) |
Impaired loans, net
|
|
$ |
13,994 |
|
|
$ |
13,793 |
|
The following schedule reflects the average investment in impaired loans:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Average investment in impaired loans
|
|
$ |
17,598 |
|
|
$ |
9,014 |
|
|
$ |
16,079 |
|
|
$ |
7,401 |
|
Interest income recognized on impaired loans
|
|
$ |
213 |
|
|
$ |
165 |
|
|
$ |
215 |
|
|
$ |
167 |
|
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Nonaccrual loans
|
|
$ |
39,477 |
|
|
$ |
40,265 |
|
SBA guaranteed portion of loans included above
|
|
|
(24,903 |
) |
|
|
(24,088 |
) |
Nonaccrual loans, net
|
|
$ |
14,574 |
|
|
$ |
16,177 |
|
|
|
|
|
|
|
|
|
|
Troubled debt restructured loans, gross
|
|
$ |
6,715 |
|
|
$ |
7,013 |
|
Loans 30 through 89 days past due with interest accruing
|
|
$ |
4,809 |
|
|
$ |
17,686 |
|
Allowance for loan losses to gross loans (including loans held for sale)
|
|
|
2.29 |
% |
|
|
2.23 |
% |
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.
The following table presents net non-accrual loans by type:
|
|
June 30, 2010
|
|
|
December 31, 2010
|
|
|
|
(dollars in thousands)
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial
|
|
$ |
1,422 |
|
|
|
9.8 |
% |
|
$ |
1,108 |
|
|
|
6.8 |
% |
Real estate
|
|
|
6,572 |
|
|
|
45.1 |
% |
|
|
6,443 |
|
|
|
39.8 |
% |
SBA
|
|
|
4,925 |
|
|
|
33.8 |
% |
|
|
6,125 |
|
|
|
37.9 |
% |
Manufactured housing
|
|
|
1,627 |
|
|
|
11.1 |
% |
|
|
2,105 |
|
|
|
13.0 |
% |
Other
|
|
|
28 |
|
|
|
0.2 |
% |
|
|
396 |
|
|
|
2.5 |
% |
|
|
$ |
14,574 |
|
|
|
100.0 |
% |
|
$ |
16,177 |
|
|
|
100.0 |
% |
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/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues. The Company maintains strategic liquidity and contingency plans.
The Company 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 $69.0 million and $68.0 million at June 30, 2010 and December 31, 2009, respectively, borrowed at fixed rates. At June 30, 2010, CWB had securities and loans pledged to FHLB with carrying value of $36.9 million and $102.6 million, respectively. At December 31, 2009, CWB had securities and loans pledged with carrying value of $40.3 million and $92.3 million, respectively. Total FHLB interest expense for the six months ended June 30, 2010 and 2009 was $1.1 million and $2.1 million, respectively. At June 30, 2010, CWB had $30.7 million available for additional borrowing.
CWB has established a credit line with the Federal Reserve Bank. Advances are collateralized in the aggregate by eligible loans for up to 28 days. The discount rate was raised to 0.75% from 0.50% in February 2010. There were no outstanding FRB advances as of June 30, 2010 and $21.0 million outstanding as of December 31, 2009. Interest expense on these advances for the six months ended June 30, 2010 was $17,000.
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.
The Company has not experienced disintermediation and does not believe this is a potentially probable occurrence. The liquidity ratio of the Company was 18% at June 30, 2010 and December 31, 2009. The Company’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists 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, TARP preferred dividends and, beginning in the fourth quarter of 2010, interest payments on the recently completed debenture offering. Normally, CWBC obtains funding to meet its obligations from dividends collected from its subsidiary 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. CWBC anticipates that for the foreseeable future, it will fund its expenses, TARP preferred dividends and interest payments on the debenture from proceeds of the offering and will not receive dividends from its bank subsidiary.
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include: lag, repricing, basis and prepayment risk.
|
·
|
Lag Risk – lag risk results from the inherent timing difference between the repricing of the Company’s adjustable rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. However, at a community bank such as CWB, when rates are rising, funding sources tend to reprice more slowly than the loans. Therefore, for CWB, the effect of this timing difference is generally favorable during a period of rising interest rates and unfavorable during a period of declining interest rates. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.
|
|
·
|
Repricing Risk – repricing risk is caused by the mismatch in the maturities / repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This is so since loans tend to reprice more quickly than do funding sources. Typically, since CWB is somewhat asset sensitive, this would also tend to expand the net interest margin during times of interest rate increases.
|
|
·
|
Basis Risk – item pricing tied to different indices may tend to react differently, however, all CWB’s variable products are priced off the prime rate.
|
|
·
|
Prepayment Risk – prepayment risk results from borrowers paying down / off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. Since a majority of CWB’s loan originations are adjustable rate and set based on prime, and there is little lag time on the reset, CWB does not experience significant prepayments. However, CWB does have more prepayment risk on its securitized and manufactured housing loans and its mortgage-backed investment securities.
|
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as our funding sources. CWB sells mortgage products and a portion of its SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.
Loan sales - The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by CWB. A significant decline in interest rates could also decrease the size of CWB’s servicing portfolio and the related servicing income by increasing the level of prepayments.
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 reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions and new 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 capital ratio of at least 5% and a total risk-based capital ratio of at least 10%. Additionally, FDICIA imposes Tier I risk-based capital ratio of at least 6% to be considered “well capitalized”. 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 the Bank 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). The Company’s and CWB’s actual capital amounts and ratios as of June 30, 2010 and December 31, 2009 are also presented in the table below:
(dollars in thousands)
|
|
Total Capital
|
|
|
Tier 1 Capital
|
|
|
Risk-Weighted Assets
|
|
|
Adjusted Average Assets
|
|
|
Total Risk-Based Capital Ratio
|
|
|
Tier 1 Risk-Based Capital Ratio
|
|
|
Tier 1 Leverage Ratio
|
|
(dollars in thousands)
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CWBC (Consolidated)
|
|
$ |
66,504 |
|
|
$ |
59,651 |
|
|
$ |
541,042 |
|
|
$ |
674,632 |
|
|
|
12.29 |
% |
|
|
11.03 |
% |
|
|
8.84 |
% |
Capital in excess of well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,400 |
|
|
$ |
27,188 |
|
|
$ |
25,919 |
|
CWB
|
|
|
66,221 |
|
|
|
59,365 |
|
|
|
541,307 |
|
|
|
674,667 |
|
|
|
12.23 |
% |
|
|
10.97 |
% |
|
|
8.80 |
% |
Capital in excess of well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,090 |
|
|
$ |
26,887 |
|
|
$ |
25,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CWBC (Consolidated)
|
|
$ |
66,984 |
|
|
$ |
60,029 |
|
|
$ |
549,207 |
|
|
$ |
681,101 |
|
|
|
12.20 |
% |
|
|
10.93 |
% |
|
|
8.81 |
% |
Capital in excess of well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,063 |
|
|
$ |
27,077 |
|
|
$ |
25,974 |
|
CWB
|
|
|
66,175 |
|
|
|
59,219 |
|
|
|
549,240 |
|
|
|
681,129 |
|
|
|
12.05 |
% |
|
|
10.78 |
% |
|
|
8.69 |
% |
Capital in excess of well capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,251 |
|
|
$ |
26,265 |
|
|
$ |
25,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well capitalized ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.00 |
% |
|
|
6.00 |
% |
|
|
5.00 |
% |
Minimum capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
The Company and CWB each met the minimum ratios required to be classified as “well capitalized” under generally applicable regulatory guidelines.
Debenture Offering
On May 4, 2010, the Company announced its intention to offer $8.0 million, and up to $8.8 million with oversubscription privileges, of convertible subordinated debentures. The offering closed on August 9, 2010 with subscriptions of $8.1 million. The debentures, which will pay interest at 9% until conversion, redemption or maturity, 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 $3.50 per share if converted prior to July 1, 2013, $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.
TARP CPP
On December 19, 2008, as part of the United States Department of the Treasury’s ("Treasury") Troubled Asset Relief Program - Capital Purchase Program ("TARP CPP"), the Company entered into a Letter Agreement which incorporates the terms of a Securities Purchase Agreement - Standard Terms with the Treasury ("Purchase Agreement"), pursuant to which the Company issued to the Treasury, in exchange for an aggregate purchase price of $15.6 million in cash: (i) 15,600 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, having a liquidation preference of $1,000 per share ("Series A Preferred Stock"), and (ii) a warrant ("Warrant") to purchase up to 521,158 shares of Common Stock, at an exercise price of $4.49 per share ("Warrant Shares"). The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year, or approximately $780,000, for the first five years and at a rate of 9% per year thereafter, or approximately $1,404,000, if, as and when declared by the Company's Board of Directors. 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. The Series A Preferred Stock is generally non-voting, other than class voting on certain matters that could adversely affect the Series A Preferred Stock.
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. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any Warrant Shares.
Both the Series A Preferred Stock and the Warrant will be accounted for as components to Tier 1 capital.
Supervision and Regulation
|
Banking is a complex, highly regulated industry. The banking regulatory scheme serves not to protect investors, but 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 furtherance 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 Board of Governors of the Federal Reserve Bank ("FRB”), the FDIC, and the Office of the Comptroller of the Currency ("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, 2008 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are reasonably effective in ensuring that information 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 the SEC’s rules and forms and is accumulated and communicated to management to allow timely decisions regarding disclosure.
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.
There was no change in the Company’s internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report 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.
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LEGAL PROCEEDINGS
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The Company is involved in various litigation of a routine nature that is being handled and defended in the ordinary course of the Company’s business. In the opinion of management, based in part on consultation with legal counsel, the resolution of these litigation matters is not expected have a material impact on the Company’s financial position or results of operations.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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None
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DEFAULTS UPON SENIOR SECURITIES
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None
None
Exhibits.
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31.1
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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.
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31.2
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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.
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*32.1
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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.
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*
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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 Company specifically incorporates it by reference.
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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.
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COMMUNITY WEST BANCSHARES
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(Registrant)
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Date: August 12, 2010
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/s/Charles G. Baltuskonis
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Charles G. Baltuskonis
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Executive Vice President and
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Chief Financial Officer
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On Behalf of Registrant and as
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Principal Financial and Accounting Officer
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EXHIBIT INDEX
Exhibit
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Number
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Description of Document
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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.
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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.
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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.
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____________________
*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.