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COMMUNITY WEST BANCSHARES / - Quarter Report: 2012 March (Form 10-Q)

form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
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). x YES  o NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer  o   Accelerated filer o
   
Non-accelerated filer  o (Do not check if a smaller reporting company)  Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
Number of shares of common stock of the registrant outstanding as of May 9, 2012: 5,989,510 shares
 


 
 

 
 
TABLE OF CONTENTS
 
PART I.   FINANCIAL INFORMATION PAGE
     
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
 
     
  3
     
  4
     
  5
     
  6
     
  7
     
  8
     
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2011  
   
ITEM 2.
29
     
ITEM 3.
38
     
ITEM 4.
39
     
PART II.
OTHER INFORMATION
 
     
ITEM 1.
39
     
ITEM 1A.
39
     
ITEM 3.
41
     
ITEM 6.
42
     
SIGNATURES 42
 
 
PART I -
FINANCIAL INFORMATION
ITEM 1.
 
Community West Bancshares
Consolidated Balance Sheets
   
March 31,
   
December 31,
 
   
2012
   
2011
 
(in thousands, except shares)
 
(unaudited)
       
Assets
           
Cash and due from banks
  $ 43,120     $ 22,547  
Federal funds sold
    25       25  
Cash and cash equivalents
    43,145       22,572  
Time and interest bearing deposits in other financial institutions
    5,403       347  
Investment securities available-for-sale, at fair value; amortized cost of $17,889 at March 31, 2012 and $23,350 at December 31, 2011
    17,876       23,588  
Investment securities held-to-maturity, at amortized cost; fair value of $14,973 at March 31, 2012 and $16,067 at December 31, 2011
    14,270       15,335  
Federal Home Loan Bank stock, at cost
    4,013       4,214  
Federal Reserve Bank stock, at cost
    1,343       1,343  
Loans:
               
Loans held for sale, at lower of cost or fair value
    58,460       77,303  
Loans held for investment, net of allowance for loan losses of $14,705 at  March 31, 2012 and $15,270 at December 31, 2011
    446,181       455,413  
Total loans
    504,641       532,716  
Foreclosed real estate and repossessed assets
    5,776       6,701  
Premises and equipment, net
    3,067       3,090  
Other assets
    23,691       23,442  
Total assets
  $ 623,225     $ 633,348  
Liabilities
               
Deposits:
               
Non-interest-bearing demand
  $ 54,986     $ 49,894  
Interest-bearing demand
    291,529       289,796  
Savings
    19,579       19,429  
Time deposits
    144,705       152,143  
Total deposits
    510,799       511,262  
Other borrowings
    51,000       61,000  
Convertible debentures
    7,852       7,852  
Other liabilities
    2,464       2,608  
Total liabilities
    572,115       582,722  
Stockholders' equity
               
Preferred stock, no par value; 10,000,000 shares authorized; 15,600 shares issued and outstanding
    15,141       15,074  
Common stock, no par value; 20,000,000 shares authorized; 5,989,510 shares issued and outstanding at March 31, 2012 and December 31, 2011
    33,430       33,422  
Retained earnings
    2,548       1,991  
Accumulated other comprehensive income, net
    (9 )     139  
Total stockholders' equity
    51,110       50,626  
Total liabilities and stockholders' equity
  $ 623,225     $ 633,348  
See accompanying notes
 
 
Community West Bancshares
Consolidated Income Statements (unaudited)
   
Three Months Ended March 31,
 
(in thousands, except per share amounts)
 
2012
   
2011
 
Interest income
           
Loans
  $ 8,082     $ 9,044  
Investment securities and other
    239       286  
Total interest income
    8,321       9,330  
Interest expense
               
Deposits
    1,265       1,670  
Other borrowings and convertible debentures
    528       591  
Total interest expense
    1,793       2,261  
Net interest income
    6,528       7,069  
Provision for loan losses
    1,983       983  
Net interest income after provision for loan losses
    4,545       6,086  
Non-interest income
               
Other loan fees
    250       230  
Gains from loan sales, net
    1,097       82  
Document processing fees
    92       105  
Loan servicing, net
    151       148  
Service charges
    120       130  
Other
    178       43  
Total non-interest income
    1,888       738  
Non-interest expenses
               
Salaries and employee benefits
    2,885       3,109  
Occupancy and equipment expenses
    495       505  
FDIC assessment
    426       302  
Professional services
    325       215  
Advertising and marketing
    57       70  
Depreciation and amortization
    77       98  
Loss on sale and write-down of foreclosed real estate and repossessed assets
    409       459  
Data processing
    135       127  
Other operating expenses
    805       924  
Total non-interest expenses
    5,614       5,809  
Income before provision for income taxes
    819       1,015  
Provision for income taxes
    -       420  
Net income
  $ 819     $ 595  
Preferred stock dividends
    262       262  
Net income applicable to common stockholders
  $ 557     $ 333  
Earnings per common share:
               
Basic
  $ 0.09     $ 0.06  
Diluted
  $ 0.08     $ 0.05  
Basic weighted average number of common shares outstanding
    5,990       5,960  
Diluted weighted average number of common shares outstanding
    8,233       8,245  
See accompanying notes
 
 
Community West Bancshares
Consolidated Statements of Comprehensive Income (unaudited)
   
Three Months Ended March 31,
 
(in thousands)
 
2012
   
2011
 
Net income
  $ 819     $ 595  
Other comprehensive loss, net of tax:
               
Net unrealized loss on securities available-for-sale
    (148 )     (35 )
Comprehensive income
  $ 671     $ 560  
See accompanying notes
 

Community West Bancshares
Consolidated Statement of Stockholders’ Equity
 
   
Preferred
Stock
   
Common Stock
Shares Amount
   
Retained
Earnings
   
Accumulated Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
(in thousands)
       
 
                         
Balances at
January 1, 2012
  $ 15,074       5,990     $ 33,422     $ 1,991     $ 139     $ 50,626  
Stock option expense, recognized in earnings
                    8                       8  
Comprehensive income:
                                               
Net income
                            819               819  
Change in unrealized gain (loss)
                                    (148 )     (148 )
Securities available-for-sale, net
                                               
Dividends on preferred stock
    67                       (262 )             (195 )
Balances at
March 31, 2012
  $ 15,141       5,990     $ 33,430     $ 2,548     $ (9 )   $ 51,110  
See accompanying notes
 
Community West Bancshares
Consolidated Statement of Stockholders’ Equity

   
Preferred
Stock
   
Common Stock
Shares Amount
   
Retained
 Earnings
   
Accumulated Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
(in thousands)
       
 
                         
Balances at
January 1, 2011
  $ 14,807       5,916     $ 33,133     $ 13,523     $ 179     $ 61,642  
Stock option expense, recognized in earnings
                    7                       7  
Conversion of debentures
            60       210                       210  
Exercise of stock options
            5       19                       19  
Comprehensive income:
                                               
Net income
                            595               595  
Change in unrealized gain (loss)
                                    (35 )     (35 )
Securities available-for-sale, net
                                               
Dividends on preferred stock
    67                       (262 )             (195 )
Balances at
March 31, 2011
  $ 14,874       5,981     $ 33,369     $ 13,856     $ 144     $ 62,243  
See accompanying notes
 

Community West Bancshares
Consolidated Statements of Cash Flows
   
Three Months Ended March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 819     $ 595  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    1,983       983  
Depreciation and amortization
    77       98  
Deferred income taxes
    338       -  
Stock-based compensation
    8       7  
Net amortization of discounts and premiums for investment securities
    (6 )     (22 )
Net loss (gain) on:
               
Sale and write-downs of foreclosed real estate and repossessed assets
    409       459  
Sale of  loans held for sale
    (1,097 )     (82 )
Sale of available-for-sale securities
    (121 )     -  
Loan originated for sale and principal collections, net
    2,429       3,171  
Changes in:
               
Servicing rights, net of amortization
    (248 )     29  
Other assets
    (87 )     (1,993 )
Other liabilities
    (292 )     (216 )
Net cash provided by operating activities
    4,212       3,029  
Cash flows from investing activities:
               
Purchase of available-for-sale securities
    -       (2,362 )
Principal pay downs and maturities of available-for-sale securities
    1,460       2,407  
Proceeds from sale of available-for-sale securities
    4,137       -  
Redemptions of Federal Home Loan Bank stock
    201       200  
Principal pay downs and maturities of held-to-maturity securities
    1,056       1,125  
Loan originations and principal collections, net
    22,308       6,396  
Proceeds from sale of foreclosed real estate and repossessed assets
    2,967       824  
Net increase in time and interest bearing deposits in other financial institutions
    (5,056 )     -  
Purchase of premises and equipment, net
    (54 )     (130 )
Net cash provided by investing activities
    27,019       8,460  
Cash flows from financing activities:
               
Preferred stock dividends
    (262 )     (262 )
Amortization of discount on preferred stock
    67       67  
Exercise of stock options
    -       19  
Net increase in demand deposits and savings accounts
    6,975       32,215  
Net decrease in time certificates of deposit
    (7,438 )     (34,490 )
Repayment of Federal Home Loan Bank advances
    (10,000 )     -  
Net cash used in financing activities
    (10,658 )     (2,451 )
Net increase in cash and cash equivalents
    20,573       9,038  
Cash and cash equivalents, beginning of year
    22,572       6,226  
Cash and cash equivalents, end of period
  $ 43,145     $ 15,264  
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest
  $ 1,687     $ 2,495  
Cash paid for income taxes
  $ 616     $ 815  
Supplemental Disclosure of Noncash Investing Activity:
               
Transfers to foreclosed real estate and repossessed assets
  $ 2,451     $ 2,469  
See accompanying notes
 
 
COMMUNITY WEST BANCSHARES
 
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 collectively as the “Company”.  The accompanying unaudited 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 presentation have been reflected in the financial statements. The results of operations for the three-month period ended March 31, 2012 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 the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Loans Held for Investment – Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.  Unearned income includes deferred loan origination fees reduced by loan origination costs.  Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.  The following is a description of the loan categories held for investment.
 
Commercial Loans
In addition to traditional term commercial loans made to business customers, the Company grants revolving business lines of credit.  Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term.  Generally, as part of the loan requirements, the business agrees to maintain its primary banking relationship with the Company.  The Company does not extend material loans of this type in excess of two years.
 
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing single-family residences, commercial or industrial properties.  This loan category also includes SBA 504 loans and land loans.
 
A substantial portion of the Company's real estate construction loans are first and second trust deeds on the construction of owner-occupied single family dwellings.  The Company also makes real estate construction loans on commercial properties.  These consist of first and second trust deeds collateralized by the related real property.  Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 80%.
 
Commercial and industrial real estate loans are secured by nonresidential property.  Office buildings or other commercial property primarily secure these loans.  Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 80% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 75% of appraised value of the underlying real property.
 
SBA 504 loans are made in conjunction with Certified Development Companies.  These loans are granted to purchase or construct real estate or acquire machinery and equipment.  The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures.  The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture.
 
Conventional and investor loans are sometimes funded by our secondary-market partners and the Company receives a premium for these transactions.
 
 
SBA Loans
The SBA loans consist of 7(a) and Business and Industry loans (“B&I”).  The 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing.  In general, the SBA guarantees up to 85% of the loan amount depending on loan size.  In certain instances, the Company sells a portion of the loans, however, under the SBA 7(a) loan program, the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
 
B&I loans are guaranteed by the U.S. Department of Agriculture.  The guaranteed amount is generally 80%.  B&I loans are similar to the 7(a) loans but are made to businesses in designated rural areas.  These loans can also be sold into the secondary market.
 
Single Family Real Estate Loans
The Company originates loans that consist of first and second mortgage loans secured by trust deeds on one to four family homes.  These loans are made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction, home improvement, or debt consolidation.  Generally, these loans are underwritten to specific investor guidelines and are committed for sale to that investor.  Although the majority of these loans are sold servicing released into the secondary market, a relatively small percentage is held as part of the Company’s portfolio.
 
Manufactured Housing Loans
The Company originates loans secured by manufactured homes located in approved mobile home parks in our primary lending area of Santa Barbara and Ventura Counties as well as along the California coast.  The loans are serviced internally and are originated under one of two programs: fixed rate loans written for terms of 10 to 20 years; adjustable rate loans written for a term of 30 years with the initial interest rates fixed for the first 5 or 10 years and then adjusting annually subject to caps and floors.
 
HELOC
The Company provides lines of credit collateralized by residential real estate, home equity lines of credit (HELOC), for consumer related purposes.  Typically, HELOCs are collateralized by a second deed of trust.
 
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.  These loans are primarily fixed rate.
 
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 migration analysis/historical loss rates and qualitative factors that are based on management’s judgment. The migration analysis and historical loss rate calculations are based upon the annualized loss rates utilizing a twelve quarter loss history. Migration analysis is utilized for the Commercial Real Estate, Commercial, and SBA portfolios. The historical loss rate method is utilized for the homogeneous loan categories which include Manufactured Housing, HELOC’s, Single Family Residential, and Consumer loans. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. In loan categories that historic loss rates are utilized, management increases the reserve requirement for Special Mention and Substandard loans.  Loans that are considered Doubtful are typically charged off.  The following is a description of the characteristics of loans graded Pass, Special Mention, Substandard, Doubtful, and Loss.  Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.
 
Pass
Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company.  Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.  In the case of individuals, borrowers deserving of this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.
 
Special Mention
A Special Mention loan has potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.
 
 
Substandard
A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard loans does not have to exist in individual loans classified Substandard.
 
Doubtful
A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined.  Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
 
Loss
Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be affected in the future.  Losses are taken in the period in which they surface as uncollectible. The following is the Company’s policy regarding charging off loans by loan categories.
 
Commercial, Commercial Real Estate and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.  A loan is considered uncollectible when the debtor is delinquent in principal or interest repayment 90 days or more and, in the opinion of the Company, improvement in the debtor's ability to repay the debt in a timely manner is doubtful.  Also, collateral value is insufficient to cover the outstanding indebtedness.  Loans secured by real estate on which principal or interest is due and unpaid for 90 days are evaluated for possible charge-down.  Generally, loan balances are charged-down to the fair value of the property, if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is charged-off in full like any other unsecured loan, which is not secured and over 90 days.
 
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for possible charge-down.  Loan balances are charged-down to the fair value of the property if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is generally charged-off in full like any other consumer loan, which is not secured and unpaid over 90-120 days.
 
Consumer Loans
All consumer loans (excluding real estate mortgages, home equity loans and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or 5 payments delinquent.  Consumer losses are identified well before the 120 day limit whenever possible.  Net recoverable value can only be determined if the collateral is in the Company's possession, and its liquidation value can be verified and realized in the near term.
 
The second component of the ALL covers qualitative factors related to non-impaired loans. The qualitative allowance on each of the loan pools is based on the following factors:
 
 
·
Concentrations of credit
 
·
Trends in volume, maturity, composition
 
·
Volume and trend in delinquency
 
·
Economic conditions
 
·
Outside exams
 
·
Geographic distance
 
 
 
·
Policy and procedures
 
·
Staff experience and ability
 
The ALL calculation for the different loan portfolios is as follows:
 
 
·
Commercial Real Estate, Commercial and SBA – Migration analysis combined with risk rating is used to determine the required allowance for all non-impaired loans.  In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio category.   Reserves on impaired loans are determined based upon the individual characteristics of the loan.
 
 
·
Manufactured Housing, Single Family Residential, HELOC and Consumer – The allowance is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.  In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio.
 
The Company evaluates and individually assesses impairment on loans greater than $100,000 classified as substandard or doubtful that are either non-performing or considered a trouble debt restructure.   Measured impairment is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.  The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods.
 
 
·
The expected future cash flows are estimated and then discounted at the effective interest rate.
 
·
The loan’s observable market price, if it is of a kind for which there is a secondary market.
 
·
The value of the underlying collateral net of selling costs.  Selling costs are estimated based on industry standards, the Company’s actual experience, or actual costs incurred as appropriate.  When evaluating real estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation.  When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old.  Additionally for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
 
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract.
 
The Company determines the appropriate ALL on a monthly basis.  Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.  The review of the 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.
 
The Company 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 Company’s approved appraiser list.  Any loan evaluation that results in the Company 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 are recorded at fair value at the time of foreclosure less estimated costs to sell.  Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses.  Subsequent to the legal ownership date, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell.  Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
 
Income Taxes – The Company uses the asset and liability method, which recognizes 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.
 
As of December 31, 2011, the deferred tax assets, net of valuation allowance, totaled $306,000.  Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required  to establish a valuation allowance for deferred tax assets and record a charge to income if Management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
 
For the three-year period ended December 31, 2011, the Company was in a cumulative pretax loss position.  For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position was considered significant, objective evidence that the Company may not be able to realize some portion of the deferred tax asset in the future.  As a result, the Company established a valuation allowance for the deferred tax asset of $6.7 million as of December 31, 2011.  The net deferred tax asset of $306,000 represented the estimated amount of tax that Management has determined may be recoverable through carryback of tax losses to prior years.
 
Net income represents positive evidence for the reduction of the deferred tax valuation allowance.  Based on net income of $819,000 for the first quarter of 2012, the deferred tax valuation allowance was reduced by 338,000 from $6.7 million at December 31, 2011 to $6.3 million at March 31, 2012.  The net deferred tax asset increased from $306,000 at December 31, 2011 to $644,000 at March 31, 2012.
 
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 April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures related to troubled debt restructurings as required by ASU No. 2010-20.  The provisions of ASU No. 2011-02 were effective for the Company's reporting period beginning on or after June 15, 2011.  In the third quarter of 2011, the Company adopted the provisions of ASU No. 2010-20 retrospectively to all modifications and restructuring activities that have occurred from January 1, 2011.
 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets.  ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks.  This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the balance sheet but whose fair value must be disclosed.  The provisions of ASU No. 2011-04 are effective for the Company’s interim reporting period beginning on or after December 15, 2011.  The adoption of ASU No. 2011-04 did not have a material impact on the Company’s statements of income and condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of OCI along with a total for OCI, and a total amount for comprehensive income.  The statement(s) are required to be presented with equal prominence as the other primary financial statements.  ASU No. 2011-05 eliminates the option to present the components of OCI as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in OCI or when an item of OCI must be reclassified to net income.  The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required.  The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income.  The adoption of ASU No. 2011-05 had no impact on the Company’s balance sheets.

In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”.   The amendments are being made to allow the FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and OCI for all periods presented.  Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  The adoption of ASU 2011-12 will have no impact on the Company’s balance sheets.
 
 
2. 
INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of investment securities are as follows:
 
March 31, 2012
 
(in thousands)
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Available-for-sale securities
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Government agency: Notes
  $ 2,497     $ -     $ (43 )   $ 2,454  
U.S. Government agency: MBS
    166       10       -       176  
U.S. Government agency: CMO
    15,226       34       (14 )     15,246  
Total
  $ 17,889     $ 44     $ (57 )   $ 17,876  
                                 
Held-to-maturity securities
                               
U.S. Government agency: MBS
  $ 14,270     $ 714     $ (11 )   $ 14,973  
Total
  $ 14,270     $ 714     $ (11 )   $ 14,973  
 
December 31, 2011
 
(in thousands)
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Available-for-sale securities
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. Government agency: Notes
  $ 2,496     $ -     $ (10 )   $ 2,486  
U.S. Government agency: MBS
    4,486       186       -       4,672  
U.S. Government agency: CMO
    16,368       66       (4 )     16,430  
Total
  $ 23,350     $ 252     $ (14 )   $ 23,588  
                                 
Held-to-maturity securities
                               
U.S. Government agency: MBS
  $ 15,335     $ 732     $ -     $ 16,067  
Total
  $ 15,335     $ 732     $ -     $ 16,067  

At March 31, 2012 and December 31, 2011, $32.1 million and $38.9 million of securities, respectively, at carrying value, was pledged to the Federal Home Loan Bank (FHLB), San Francisco, as collateral for current and future advances.
 
In the first quarter of 2012, the Company sold seven available-for-sale securities for a gain of $121,000.  The cost basis of the securities sold was determined by specific identification.
 
The maturity periods and weighted average yields of investment securities at March 31, 2012 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: Notes
  $ 2,454       2.0 %   $ 2,454       2.0 %   $ -       -     $ -       -  
Agency: MBS
    176       2.5 %     -       -       -       -       176       2.5 %
Agency: CMO
    15,246       0.9 %     2,647       0.7 %     12,599       0.9 %     -       -  
Total
  $ 17,876       1.0 %   $ 5,101       1.4 %   $ 12,599       0.9 %   $ 176       2.5 %
                                                                 
Held-to-maturity securities
                                                 
U.S. Government:
                                                 
Agency: MBS
  $ 14,270       3.7 %   $ 11       5.0 %   $ 2,245       5.4 %   $ 12,014       3.4 %
Total
  $ 14,270       3.7 %   $ 11       5.0 %   $ 2,245       5.4 %   $ 12,014       3.4 %
 
 
The following tables show all securities that are in an unrealized loss position and temporarily impaired as of:
 
March 31, 2012
 
Less than 12 months
   
More than 12 months
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(in thousands)
 
Available-for-sale securities
                                   
U.S. Government agency: Notes
  $ 2,454     $ 43     $ -     $ -     $ 2,454     $ 43  
U.S. Government agency: CMO
    6,390       11       1,541       3       7,931       14  
Total
  $ 8,844     $ 54     $ 1,541     $ 3     $ 10,385     $ 57  
                                                 
Held-to-maturity securities
                                               
U.S. Government agency: MBS
  $ 1,370     $ 11     $ -     $ -     $ 1,370     $ 11  
Total
  $ 1,370     $ 11     $ -     $ -     $ 1,370     $ 11  
 
December 31, 2011
 
Less than 12 months
   
More than 12 months
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
   
(in thousands)
 
Available-for-sale securities
                                   
U.S. Government agency: Notes
  $ 2,486     $ 10     $ -     $ -     $ 2,486     $ 10  
U.S. Government agency: CMO
    4,275       4       -       -       4,275       4  
Total
  $ 6,761     $ 14     $ -     $ -     $ 6,761     $ 14  
 
As of March 31, 2012 and December 31, 2011, there were nine and five securities, respectively, in an unrealized loss position.
 
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.
 
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date 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 March 31, 2012 and December 31, 2011, 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.  Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  As a result of the sale of $10.1 million in SBA loans during the first quarter of 2012, the Company recorded a servicing asset of $276,000 and has elected to measure this asset at fair value in accordance with ASC 825-10.  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 Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.
 
As of March 31, 2012 and December 31, 2011, the Company had approximately $57.6 million and $74.1 million, respectively, in SBA loans included in loans held for sale.  As of March 31, 2012 and December 31, 2011, the principal balance of loans serviced was $36.4 million and $27.6 million, respectively.

The following is a summary of activity for servicing rights accounted for under the amortization method:
 
   
For the Three Months Ended March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Beginning balance
  $ 625     $ 782  
Additions through loan sales
    -       -  
Amortization
    (28 )     (29 )
Ending balance
  $ 597     $ 753  

The following is a summary of activity for servicing rights accounted for under the fair value method:
 
   
For the Three Months Ended March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Beginning balance
  $ -     $ -  
Additions through loan sales
    276       -  
Adjustment to fair value
    -       -  
Ending balance
  $ 276     $ -  
 
The key data and assumptions used in estimating the fair value of the Company’s servicing rights as of March 31, 2012 were as follows:
 
   
March 31, 2012
 
Weighted-Average Constant Prepayment Rate
 
1.5% to 16.9%*
 
Weighted-Average Life (in years)
    23  
Weighted-Average Discount Rate
    8.0 %
 
* Prepayment rates varied between 1.5% to 16.9% for the pool of loans with an average weighted maturity greater than 21 years.
 
A sensitivity analysis of the Company’s fair value of servicing rights to change in certain key assumptions as of March 31, 2012 is presented in the following table:
 
   
March 31, 2012
 
   
(in thousands)
 
Discount Rate
     
Increase in fair value from 100 bps decrease
  $ 11  
Decrease in fair value from 100 bps increase
    (10 )
 
Due to the range of prepayments speeds used in the valuation, a sensitivity analysis for changes in constant prepayment rate was not done at the time of this reporting.
 
This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s servicing rights usually is not linear. Also, the effect of changing one key assumption without changing other assumptions is not realistic.
 

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.  The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates.  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 March 31, 2012 and December 31, 2011, the Company had $2.9 million and $8.0 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments.  The values 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:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Manufactured housing
  $ 185,539     $ 189,331  
Commercial real estate
    164,437       168,812  
Commercial
    39,906       42,058  
SBA
    38,961       37,888  
HELOC
    20,527       20,719  
Single family real estate
    11,510       11,779  
Consumer
    362       312  
      461,242       470,899  
Less:
               
Allowance for loan losses
    14,705       15,270  
Deferred costs
    (100 )     (101 )
Purchased premiums
    (7 )     (8 )
Discount on SBA loans
    463       325  
Loans held for investment, net
  $ 446,181     $ 455,413  

 
At March 31, 2012, the aging of the Company’s loans held for investment is as follows:
 
   
30-59
Days Past
Due
   
60-89
Days
Past
Due
   
Greater
Than 90
Days Past
Due
   
Total
Past Due
   
Current
   
Total
Financing
Receivables
   
Recorded
Investment
> 90 Days
and
Accruing
 
(in thousands)
 
Manufactured housing
  $ 732     $ 387     $ 685     $ 1,804     $ 183,735     $ 185,539     $ -  
Commercial real estate:
                                                       
Commercial real estate
    -       2,812       4,569       7,381       98,675       106,056       247  
504 1st TD
    -       -       1,214       1,214       33,675       34,889       -  
Land
    -       -       -       -       5,136       5,136       -  
Construction
    -       -       1,519       1,519       16,837       18,356       -  
Commercial
    43       -       312       355       39,551       39,906       -  
SBA
    279       365       7,180       7,824       31,137       38,961       -  
HELOC
    -       -       74       74       20,453       20,527       74  
Single family real estate
    37       26       873       936       10,574       11,510       -  
Consumer
    -       -       -       -       362       362       -  
Total
  $ 1,091     $ 3,590     $ 16,426     $ 21,107     $ 440,135     $ 461,242     $ 321  
 
Of the $7.8 million SBA loans past due, $7.7 million is guaranteed.
 
At December 31, 2011, the aging of the Company’s loans held for investment is as follows:
 
   
30-59
Days
Past Due
   
60-89
Days
Past Due
   
Greater
Than 90
Days Past
Due
   
Total
Past Due
   
Current
   
Total
Financing
Receivables
   
Recorded
Investment
> 90 Days
and
Accruing
 
(in thousands)
 
Manufactured housing
  $ 2,279     $ 519     $ 902     $ 3,700     $ 185,631     $ 189,331     $ -  
Commercial real estate:
                                                       
Commercial real estate
    247       -       3,718       3,965       104,260       108,225       -  
504 1st TD
    300       -       2,068       2,368       34,958       37,326       -  
Land
    -       -       -       -       5,230       5,230       -  
Construction
    -       -       1,519       1,519       16,512       18,031       -  
Commercial
    115       18       1,881       2,014       40,044       42,058       510  
SBA
    629       53       9,332       10,014       27,874       37,888       -  
HELOC
    258       -       75       333       20,386       20,719       74  
Single family real estate
    41       7       944       992       10,787       11,779       -  
Consumer
    -       -       -       -       312       312       -  
Total
  $ 3,869     $ 597     $ 20,439     $ 24,905     $ 445,994     $ 470,899     $ 584  
 
Of the $10.0 million SBA loans past due, $9.6 million is guaranteed.
 
 
An analysis of the allowance for loan losses for loans held for investment follows:
 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Balance, beginning of period
  $ 15,270     $ 13,302  
                 
Loans charged off
    (2,958 )     (1,194 )
Recoveries on loans previously charged off
    410       81  
Net charge-offs
    (2,548 )     (1,113 )
                 
Provision for loan losses
    1,983       983  
Balance, end of period
  $ 14,705     $ 13,172  
 
As of March 31, 2012 and December 31, 2011, the Company also had established reserves for credit losses on undisbursed loans of $206,000 and $356,000 respectively, which are included in other liabilities in the consolidated balance sheets.
 
The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2012:
 
   
Allowance
12/31/11
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
3/31/12
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 4,629     $ 1,205     $ (998 )   $ 1     $ (997 )   $ 4,837  
Commercial real estate
    3,528       162       (822 )     -       (822 )     2,868  
Commercial
    2,734       433       (629 )     17       (612 )     2,555  
SBA
    3,877       (261 )     (379 )     340       (39 )     3,577  
HELOC
    349       312       (2 )     50       48       709  
Single family real estate
    150       133       (128 )     2       (126 )     157  
Consumer
    3       (1 )     -       -       -       2  
Total
  $ 15,270     $ 1,983     $ (2,958 )   $ 410     $ (2,548 )   $ 14,705  

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2011:
 
   
Allowance
12/31/10
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
3/31/11
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 4,168     $ 368     $ (281 )   $ 25     $ (256 )   $ 4,280  
Commercial real estate
    2,532       315       (18 )     2       (16 )     2,831  
Commercial
    2,094       98       (322 )     10       (312 )     1,880  
SBA
    3,753       (48 )     (423 )     42       (381 )     3,324  
HELOC
    547       36       -       1       1       584  
Single family real estate
    135       192       (150 )     1       (149 )     178  
Consumer
    73       22       -       -       -       95  
Total
  $ 13,302     $ 983     $ (1,194 )   $ 81     $ (1,113 )   $ 13,172  
 
 
The following schedule summarizes by loan category the recorded investment in loans held for investment collectively and individually evaluated for impairment and the related allowance for loan losses as of March 31, 2012:
 
   
Loans
Collectively
Evaluated
   
Allowance
For Loan
Losses
   
Loans
Individually
Evaluated
   
Allowance
For loan
Losses
   
Total Loans Held
for
Investment
   
Total
Allowance
for Loan
Losses
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 176,086     $ 4,807     $ 9,453     $ 30     $ 185,539     $ 4,837  
Commercial real estate
    118,560       2,868       45,877       -       164,437       2,868  
Commercial
    33,916       2,555       5,990       -       39,906       2,555  
SBA
    36,906       3,577       2,055       -       38,961       3,577  
HELOC
    20,527       709       -       -       20,527       709  
Single family real estate
    10,580       156       930       1       11,510       157  
Consumer
    350       2       12       -       362       2  
Total
  $ 396,925     $ 14,674     $ 64,317     $ 31     $ 461,242     $ 14,705  

The following schedule summarizes by loan category the recorded investment in loans held for investment collectively and individually evaluated for impairment and the related allowance for loan losses as of December 31, 2011:
 
   
Loans
Collectively
Evaluated
   
Allowance
For Loan
Losses
   
Loans
Individually
Evaluated
   
Allowance
For loan
Losses
   
Total Loans
Held for
Investment
   
Total
Allowance
for Loan
Losses
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 188,942     $ 4,629     $ 389     $ -     $ 189,331     $ 4,629  
Commercial real estate
    137,243       3,322       31,569       206       168,812       3,528  
Commercial
    36,029       2,734       6,029       -       42,058       2,734  
SBA
    35,981       3,835       1,907       42       37,888       3,877  
HELOC
    20,719       349       -       -       20,719       349  
Single family real estate
    11,779       150       -       -       11,779       150  
Consumer
    301       3       11       -       312       3  
Total
  $ 430,994     $ 15,022     $ 39,905     $ 248     $ 470,899     $ 15,270  

The following schedule summarizes impaired loans by loan class as of March 31, 2012:
 
   
Without Specific
Valuation
Allowance
   
With Specific
Valuation
Allowance
   
Valuation
Allowance
   
Impaired Loan, net
 
   
(in thousands)
 
Manufactured housing
  $ 6,266     $ 3,187     $ 30     $ 9,423  
Commercial real estate:
                               
Commercial real estate
    25,616       -       -       25,616  
SBA 504 1st
    7,119       -       -       7,119  
Construction
    13,142       -       -       13,142  
Commercial
    5,855       135       -       5,990  
SBA
    1,907       148       -       2,055  
Single family real estate
    850       80       1       929  
Consumer
    12       -       -       12  
Total
  $ 60,767     $ 3,550     $ 31     $ 64,286  

 
The following schedule summarizes impaired loans by loan class as of December 31, 2011:
 
   
Without Specific
Valuation
Allowance
   
With Specific
Valuation
Allowance
   
Valuation
Allowance
   
Impaired Loan, net
 
   
(in thousands)
 
Manufactured housing
  $ 390     $ -     $ -     $ 390  
Commercial real estate:
                               
Commercial real estate
    11,523       8,135       206       19,452  
SBA 504 1st
    7,164       -       -       7,164  
Construction
    4,746       -       -       4,746  
Commercial
    6,029       -       -       6,029  
SBA
    1,815       91       42       1,864  
Consumer
    11       -       -       11  
Total
  $ 31,678     $ 8,226     $ 248     $ 39,656  

The following schedule summarizes the average investment in impaired loans by loan class and the interest income recognized:
 
   
Three Months Ended March 31,
2012
   
Three Months Ended March 31,
2011
 
   
Average
Investment in
Impaired Loans
   
Interest Income
Recognized
   
Average
Investment in
Impaired
Loans
   
Interest Income
Recognized
 
   
(in thousands)
 
Manufactured housing
  $ 4,559     $ 46     $ -     $ -  
Commercial real estate:
                               
Commercial real estate
    20,971       193       11,107       92  
SBA 504 1st
    6,615       95       1,806          
Land
    -       -       1,196       7  
Construction
    8,286       108       4,704          
Commercial
    5,567       87       3,496       81  
SBA
    1,835       34       3,809          
Single family real estate
    431       1       -          
Consumer
    11       -       21          
Total
  $ 48,275     $ 564     $ 26,139     $ 180  
 
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(dollars in thousands)
 
Nonaccrual loans
  $ 50,529     $ 42,343  
SBA guaranteed portion of loans included above
    (12,239 )     (13,673 )
Nonaccrual loans, net
  $ 38,290     $ 28,670  
                 
Troubled debt restructured loans, gross
  $ 22,847     $ 17,885  
Loans 30 through 89 days past due with interest accruing
  $ 140     $ 3,114  
Allowance for loan losses to gross loans held for investment
    3.19 %     3.24 %
 
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.  Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore a repurchase reserve has not been established related to these loans.
 
 
The composition of the Company’s net nonaccrual loans is as follows:
 
   
March 31, 2012
   
December 31, 2011
 
   
(in thousands)
 
Manufactured housing
  $ 11,211     $ 3,397  
Commercial real estate:
               
Commercial real estate
    16,818       12,716  
504 1st
    2,005       3,148  
Construction
    4,727       4,746  
Commercial
    1,180       2,031  
SBA
    1,388       1,659  
HELOC
    28       29  
Single family real estate
    930       944  
Consumer
    3       -  
Nonaccrual loans, net
  $ 38,290     $ 28,670  
 
At March 31, 2012, the recorded investment in loans by rating is as follows:
 
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
(in thousands)
 
Manufactured housing
  $ 172,336     $ -     $ 13,203     $ -     $ 185,539  
Commercial real estate:
                                    -  
Commercial real estate
    67,024       8,661       30,372       -       106,057  
SBA 504 1st
    27,424       345       7,119       -       34,888  
Land
    3,913       300       923       -       5,136  
Construction
    5,214       -       13,142       -       18,356  
Commercial
    29,160       3,271       7,146       329       39,906  
SBA
    17,172       400       1,326       19       18,917  
HELOC
    9,580       6,572       4,375       -       20,527  
Single family real estate
    10,462       -       1,048       -       11,510  
Consumer
    350       -       9       3       362  
Total non-guaranteed
  $ 342,635     $ 19,549     $ 78,663     $ 351     $ 441,198  
SBA guarantee
    -               13,097       6,947       20,044  
Total
  $ 342,635     $ 19,549     $ 91,760     $ 7,298     $ 461,242  

At December 31, 2011, the recorded investment in loans by rating is as follows:
 
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
(in thousands)
 
Manufactured housing
  $ 183,893     $ -     $ 5,438     $ -     $ 189,331  
Commercial real estate:
                                       
Commercial real estate
    74,083       11,273       22,869       -       108,225  
SBA 504 1st
    28,699       349       8,278       -       37,326  
Land
    3,932       1,298       -       -       5,230  
Construction
    4,868       -       9,935       3,228       18,031  
Commercial
    29,360       3,578       7,756       1,364       42,058  
SBA
    19,510       397       2,470       34       22,411  
HELOC
    15,068       4,614       1,037       -       20,719  
Single family real estate
    10,718       -       1,061       -       11,779  
Consumer
    298       -       11       3       312  
Total non-guaranteed
  $ 370,429     $ 21,509     $ 58,855     $ 4,629     $ 455,422  
SBA guarantee
    -       -       8,541       6,936       15,477  
Total
  $ 370,429     $ 21,509     $ 67,396     $ 11,565     $ 470,899  
 

The following table reflects troubled debt restructurings (TDR) that occurred in the three months ended March 31, 2012:
 
   
Book
Balance
(thousands)
   
Effect on
Allowance for
Loan Loss
(thousands)
   
Book
Balance of
Loans with
Rate
Reduction
(thousands)
   
Average
Rate
Reduction
(bps)
   
Book
Balance of
Loans with
Term
Extension
(thousands)
   
Average
Extension
(months)
 
Manufactured Housing
  $ 519     $ -     $ 442       420     $ 519       248  
RE Commercial
    2,709       -       2,709       350       2,709       120  
Construction
    3,208       -       3,208       300       3,208       15  
Commercial
    819       8       561       350       259       21  
SBA
    410       14       -       -       410       65  
Consumer
    9       -       -       -       9       6  
Total
  $ 7,674     $ 22     $ 6,920       383     $ 7,114       136  

A loan is considered a TDR when concessions have been made to the borrower and the borrower is in financial difficulty.  These concessions include but are not limited to term extensions, rate reductions and principal reductions.  Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans are also considered impaired. A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  All other loans are measured for impairment based on the present value of future cash flows.  Impairment is measured on a loan-by-loan basis for all loans in the portfolio.
 
One restructured loan, a SBA 504 1st, experienced default during the first quarter of 2012.  The loan was transferred to foreclosed real estate and repossessed assets and is currently in escrow.
 
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 – Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.  A contractually binding sales price also provides reliable evidence of fair value.
 

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.

The following summarizes the fair value measurements of assets measured on a recurring basis as of March 31, 2012 and December 31, 2011 and the relative levels of inputs from which such amounts were derived:
 
   
Fair value measurements at March 31, 2012 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
  $ 17,876     $ -     $ 17,876     $ -  
Interest only strips (included in other assets)
    483                       483  
Servicing asset (included in other assets)
    276       -       -       276  
Total
  $ 18,635     $ -     $ 17,876     $ 759  
 
   
Fair value measurements at December 31, 2011 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
  $ 23,588     $ -     $ 23,588     $ -  
Interest only strips (included in other assets)
    419       -       -       419  
Total
  $ 24,007     $ -     $ 23,588     $ 419  
 
Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  I/O strips are classified as level 3 in the fair value hierarchy.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  The I/O strips were valued at $419,000 as of December 31, 2011 and a valuation adjustment of $64,000 was recorded in income during the first three months of 2012.  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.
 
 
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  As a result of the sale of $10.1 million in SBA loans during the first quarter of 2012, the Company recorded a servicing asset of $276,000 and has elected to measure this asset at fair value in accordance with ASC 825-10.  Significant assumptions in the valuation of servicing rights include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
 
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.  These assets include loans held for sale, foreclosed real estate and repossessed assets and loans that are considered impaired per generally accepted accounting principles.
 
Loans held for sale are carried at the lower of cost or market.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed upon sale price.  As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy.  At March 31, 2012 and December 31, 2011, the Company had loans held for sale with an aggregate carrying value of $58.5 million and $77.3 million respectively.
 
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated cost to sell.  Fair value is based upon independent market prices obtained from certified appraisers or the current listing price, if lower.  When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2.  When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
 
The Company records certain loans at fair value on a non-recurring basis.  When a loan is considered impaired, an allowance for a loan loss is established.  The fair value measurement and disclosure requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans.  Impaired loans are measured at an observable market price, if available or at the fair value of the loans collateral, if the loan is collateral dependent.  The fair value of the loan’s collateral is determined by appraisals or independent valuation.  When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy.  For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
 
The following summarizes the fair value measurements of assets measured on a non-recurring basis as of March 31, 2012 and December 31, 2011 and the relative levels of inputs from which such amounts were derived:
 
   
Fair value measurements at March 31, 2012 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
  $ 64,286     $ -     $ 39,650     $ 24,636  
Loans held for sale
    61,923       -       61,923       -  
Foreclosed real estate and repossessed assets
    5,776       -       5,776       -  
Total
  $ 131,985     $ -     $ 107,349     $ 24,636  

 
   
Fair value measurements at December 31, 2011 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
  $ 39,656     $ -     $ 23,490     $ 16,166  
Loans held for sale
    79,545       -       79,545       -  
Foreclosed real estate and repossessed assets
    6,701       -       6,701       -  
Total
  $ 125,902     $ -     $ 109,736     $ 16,166  
 
6. 
BORROWINGS
 
Federal Home Loan Bank AdvancesCWB 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 $51.0 million and $61.0 million at March 31, 2012 and December 31, 2011, respectively, borrowed at fixed rates.  In March and April 2012, the Bank prepaid $5.0 million and $17.0 million, respectively, of FHLB advances..  At March 31, 2012, CWB had securities and loans pledged to the FHLB with a carrying value of $32.1 million and $61.4 million, respectively.  At December 31, 2011, CWB had securities and loans pledged with a carrying value of $38.9 million and $58.2 million, respectively. Total FHLB interest expense for the three months ended March 31, 2012 and 2011 was $352,000 and $416,000, respectively.  At March 31, 2012, CWB had $67.0 million available for additional borrowing.
 
Federal Reserve BankCWB has established a credit line with the Federal Reserve Bank (“FRB”).  Advances are collateralized in the aggregate by eligible loans for up to 28 days.  There were no outstanding FRB advances as of March 31, 2012 and December 31, 2011.  CWB had $78.8 million in borrowing capacity as of March 31, 2012.
 
Convertible Debentures - On August 9, 2010, the Company completed an offering of $8,085,000 convertible subordinated debentures.  The debentures are a general unsecured obligation and are subordinated in right of payment to all present and future senior indebtedness.  The debentures pay interest at 9% until conversion, redemption or maturity and will mature on August 9, 2020.  The debentures may be redeemed by the Company after January 1, 2014.  Prior to maturity or redemption, the debentures can be converted into common stock at the election of the holder at $3.50 per share if converted on or 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.  At March 31, 2012 and December 31, 2011, the balance of the convertible debentures was $7,852,000.
 
7.
STOCKHOLDERS’ EQUITY
 
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 Program”), 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 (the “Series A Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 521,158 shares of the Company's common stock, no par value (“Common Stock”), 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.  Notwithstanding the terms of the Series A Preferred Stock, the Treasury has issued guidance that permits institutions that participated in the TARP Program, such as the Company, to redeem the Series A Preferred Stock and to repurchase the warrants issued to the Treasury subject to prior consultation with the institutions primary federal banking regulator.
 

Common Stock Warrant
 
The Warrant issued as part of the TARP  provide 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.
 
8. 
EARNINGS PER SHARE
 
The following table presents a reconciliation of basic earnings per share and diluted earnings per share:
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
   
(dollars in thousands, except per
share data)
 
Net income
  $ 819     $ 595  
Less: Preferred stock dividends
    262       262  
Net income applicable to common stockholders
  $ 557     $ 333  
                 
Add: Debenture interest expense and costs, net of income taxes
    107       111  
Net income for diluted calculation of earnings per common share
  $ 664     $ 444  
Basic weighted average number of common shares outstanding
    5,990       5,960  
Dilutive weighted average number of common shares outstanding
    8,233       8,245  
Earnings per common share:
               
Basic
  $ 0.09     $ 0.06  
Diluted
  $ 0.08     $ 0.05  
 
9. 
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:
 
   
March 31, 2012
   
December 31, 2011
 
   
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                       
Cash and cash equivalents
  $ 43,145     $ 43,145     $ 22,572     $ 22,572  
Time and interest bearing deposits in other financial institutions
    5,403       5,403       347       347  
Federal Reserve and Federal Home Loan Bank stock
    5,356       5,356       5,557       5,557  
Investment securities
    32,146       32,849       38,923       39,655  
Loans
    504,641       484,403       532,716       512,524  
Liabilities:
                               
Deposits (other than time deposits)
    366,094       366,094       359,119       359,119  
Time deposits
    144,705       147,212       152,143       154,484  
Other borrowings
    58,852       60,396       68,852       70,975  
 
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 at par.
 
Federal Home Loan Bank Stock - The carrying value approximates the fair value.
 
Investment securities – Market valuations of our investment securities are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
Loans – For most loan categories, the fair value is estimated using discounted cash flows utilizing an appropriate discount rate and historical prepayment speeds.  For certain adjustable loans that reprice on a frequent basis carrying value approximates fair value.  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.
 
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.  In accordance with the fair value hierarchy, the market valuation for time deposit include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
Other borrowings – The fair value is estimated using a discounted cash flow analysis based on rates for similar types of borrowing arrangements.   The carrying value of FRB advances approximates the fair value due to the short term nature of these borrowings.  In accordance with the fair value hierarchy, the market valuation for other borrowings include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
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 March 31, 2012 and December 31, 2011.  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.
 
 
ITEM 2.
 
This discussion is designed to provide insight into management’s assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity.  It should be read in conjunction with the Company’s unaudited interim consolidated financial statements and notes thereto the audited consolidated financial statement and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and the other financial information appearing elsewhere in this report.
 
The following discussion should be read in conjunction with the Company’s financial statements and the related notes provided under "Item 1—Financial Statements" above.
 
Overview of Earnings Performance
 
For the 1Q12, net income was $819,000 compared to net income of $595,000 for 1Q11.
 
The significant factors impacting net income for 1Q12 were:
 
 
·
Sale of $10.1 million in SBA loans resulting in a gain of $973,000 in 1Q12.  There were no SBA loan sales in 1Q11.
 
 
·
Provision for loan losses of $2.0 million for 1Q12 compared to $1.0 million for 1Q11 as net charge-offs increased to $2.5 million for 1Q12 from $1.1 million for 1Q11.
 
 
·
A decline in interest income of $1.0 million resulting from a combination of lower average earning assets, $586.4 million for 1Q12 compared to $633.2 million for 1Q11 and lower yields on earning assets of 5.71% for 1Q12 compared to 5.98% for 1Q11.
 
 
·
Margin declined for 1Q12 to 4.48% compared to 4.53% for 1Q11.  The decline in rates paid on funding sources from 1.64% for 1Q11 to 1.37% for 1Q12 partially offset the lower yields on interest earning assets.
 
 
·
Closed remaining (CO, OR, UT and WA) out-of-state SBA lending operations in February 2012.
 
 
·
Sold $4 million of investment securities at a net gain of $121,000.
 
Recent Regulatory Actions
 
Office of the Comptroller of the Currency
 
As previously announced, the Board of Directors of the Bank signed an Agreement (OCC Agreement) with the Office of the Comptroller of the Currency (OCC), its primary regulator, on January 26, 2012.  The Agreement includes, among other things, the following requirements:
 
 
·
Achieving and maintaining a Tier 1 Leverage Capital ratio of 9.00% and Total Risk-Based Capital ratio of 12.00%;
 
 
·
Writing a 3-year strategic plan, which would incorporate the capital component;
 
 
·
Continue to improve on the Bank’s credit quality and administration thereof, including the monitoring of problem assets and the allowance for loan losses;
 
 
·
Continue to adhere to and implement the Bank’s liquidity risk management program.
 
Federal Reserve Bank of San Francisco
 
On April 23, 2012, the Company entered into a written agreement, (FRB Agreement) with the Federal Reserve Bank of San Francisco.  Without admitting or denying any of the alleged charges of unsafe or unsound banking practices and any violations of law, the Company has agreed to take the following corrective actions to address certain alleged violations of law and/or regulation:
 

 
·
Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure the Bank’s compliance with the OCC Agreement issued to it by the Comptroller of the Currency, effective as of January 26, 2012, and any other supervisory action taken by the Bank’s federal and state regulators;
 
·
Refrain from declaring or paying dividends absent prior regulatory approval;
 
·
Refrain from taking dividends or any form of payment from the Bank representing a reduction in the Bank’s capital absent prior regulatory approval;
 
·
Refrain from incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock absent prior regulatory approval;
 
·
Develop and submit for regulatory approval a written capital plan to maintain sufficient capital on a consolidated basis, which capital plan should, at a minimum, address, consider and include current and future capital requirements on a consolidated basis and compliance with federal regulations and guideline; the adequacy of the Bank’s capital, the sources and timing of funds necessary to fulfill future capital requirements; and the requirements of federal law that the Company serve as a source of strength to the Bank;
 
·
Develop and submit for regulatory approval a cash flow projection of the Company’s planned sources and uses of cash for debt service, operating expenses and other purposes;
 
·
Comply with appropriate regulatory notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDIC’s implementing regulations; and
 
·
Furnish written progress reports to the FRB detailing the form and manner of any actions taken to secure compliance with the Regulatory Agreement.

In accordance with the FRB Agreement, the Company requested the Reserve Bank’s approval to pay the dividend due on May 15, 2012, on the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value having a liquidation preference of $1,000 per share (Preferred Shares).  That request was denied.  Consequently, the Company will not pay that dividend.  As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.
 
Since the appointment of a new Chief Executive Officer and Chief Credit Officer, the Bank has maintained an intense focus on addressing the areas of concern that have been raised by the regulators.  As a result, many of the prudent actions required in the Agreements have been addressed, or will be addressed in the near future.
 
The Bank completed the following actions within the last 90 days to streamline the balance sheet and enhance its capital position:
 
 
·
Closed remaining (CO, OR, UT and WA) out-of-state SBA lending operations in February 2012.
 
 
·
Sold $10.1 million of guaranteed SBA loans in March 2012, generating a net gain of $973,000.
 
 
·
Prepaid $5 million of FHLB advances in March 2012 and another $17 million in April 2012.
 
 
·
Sold $4 million of investment securities at a net gain of $121,000.
 
 
·
As of April 30, 2012, achieved Tier 1 capital ratio of 9.06% and total risk-based capital ratio of 12.44%.
 
The Board and Management will continue to work closely with the OCC and FRB to achieve compliance with the terms of the Agreements and to improve the Company’s and Bank’s strength, security and performance.
 
Critical Accounting Policies
 
A number of critical accounting policies are used in the preparation of the Company’s consolidated financial statements.  These policies relate to areas of the financial statements that involve estimates and judgments made by management.  These include provision and allowance for loan losses and servicing rights.  These critical accounting policies are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
 
 
Results of Operations - First 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
March 31,
    Increase  
   
2012
   
2011
   
(Decrease)
 
   
(dollars in thousands, except per share amounts)
 
Interest income
  $ 8,321     $ 9,330     $ (1,009 )
Interest expense
    1,793       2,261       (468 )
Net interest income
    6,528       7,069       (541 )
Provision for loan losses
    1,983       983       1,000  
Net interest income after provision for loan losses
    4,545       6,086       (1,541 )
Non-interest income
    1,888       738       1,150  
Non-interest expenses
    5,614       5,809       (195 )
Income before provision for income taxes
    819       1,015       (196 )
Provision for income taxes
    -       420       (420 )
Net income
  $ 819     $ 595     $ 224  
Preferred stock dividends
    262       262       -  
Net income applicable to common shareholders
  $ 557     $ 333     $ 224  
Earnings per common share:
                       
Basic
  $ 0.09     $ 0.06     $ 0.03  
Diluted
  $ 0.08     $ 0.05     $ 0.03  
Dividends per common share
  $ -     $ -     $ -  
Comprehensive income (loss)
  $ 671     $ 560     $ 111  
 
The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
 
   
Three Months Ended
March 31,
 
   
2012 versus 2011
 
    Total     Changes due to  
     change     Rate     Volume  
    (in thousands)  
Loans, net
  $ (962 )   $ (223 )   $ (739 )
Investment securities and other
    (47 )     (36 )     (11 )
Total interest-earning assets
    (1,009 )     (259 )     (750 )
                         
Deposits
    (405 )     (280 )     (125 )
Other borrowings
    (63 )     (17 )     (46 )
Total interest-bearing liabilities
    (468 )     (297 )     (171 )
Net interest income
  $ (541 )   $ 38     $ (579 )

Net Interest Income
Net interest income declined by $541,000 for 1Q12 compared to 1Q11.  Total interest income declined by $1.0 million.  Of this decline, $750,000 was due to the decline in average earning assets from $633.2 million for 1Q11 to $586.4 million for 1Q12.  The yield on interest earning assets also declined from 5.98% for 1Q11 to 5.71% for 1Q12.
 
The decline in interest expense of $468,000 resulted from both lower rates paid on interest bearing liabilities, 1.37% for 1Q12 compared to 1.64% for 1Q11, and a decline in the average balance of interest-bearing liabilities from $560.4 million for 1Q11 to $527.5 million for 1Q12.  The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was a decline in the margin from 4.53% for 1Q11 to 4.48% for 1Q12.
 
 
Provision for Loan Losses
The provision for loan losses was $2.0 million for 1Q12 compared to $1.0 million for 1Q11.  Net charge-offs increased to $2.5 million for 1Q12 compared to $1.1 million for 1Q11.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2012:
 
   
Allowance
12/31/11
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
3/31/12
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 4,629     $ 1,205     $ (998 )   $ 1     $ (997 )   $ 4,837  
Commercial real estate
    3,528       162       (822 )     -       (822 )     2,868  
Commercial
    2,734       433       (629 )     17       (612 )     2,555  
SBA
    3,877       (261 )     (379 )     340       (39 )     3,577  
HELOC
    349       312       (2 )     50       48       709  
Single family real estate
    150       133       (128 )     2       (126 )     157  
Consumer
    3       (1 )     -       -       -       2  
Total
  $ 15,270     $ 1,983     $ (2,958 )   $ 410     $ (2,548 )   $ 14,705  

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2011:
 
   
Allowance
12/31/10
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs
   
Allowance
3/31/11
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 4,168     $ 368     $ (281 )   $ 25     $ (256 )   $ 4,280  
Commercial real estate
    2,532       315       (18 )     2       (16 )     2,831  
Commercial
    2,094       98       (322 )     10       (312 )     1,880  
SBA
    3,753       (48 )     (423 )     42       (381 )     3,324  
HELOC
    547       36       -       1       1       584  
Single family real estate
    135       192       (150 )     1       (149 )     178  
Consumer
    73       22       -       -       -       95  
Total
  $ 13,302     $ 983     $ (1,194 )   $ 81     $ (1,113 )   $ 13,172  
 
Included in the Company’s held-to-maturity portfolio are home equity loans, “HELOC”, which guidance issued by the SEC characterizes as higher-risk.  The HELOC portfolio of $20.5 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties.  In 1Q12, there were $48,000 in charge-offs in this portfolio.  As of March 31, 2012, $74,000 was past due in this portfolio.  The allowance for loan losses for this portfolio is $709,000, or 3.5%.  The Company monitors this portfolio to insure adequate support of the real estate collateral.
 
The percentage of net nonaccrual loans to the total loan portfolio has increased to 7.4% as of March 31, 2012 from 5.2% at December 31, 2011.
 
The allowance for loan losses compared to net nonaccrual loans has declined to 38.4% as of March 31, 2012 from 53.3% as of December 31, 2011.
 
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 increased by $1.2 million, or 155.8%, for 1Q12 compared to 1Q11, due to the sale of $10.1 million in SBA loans with the resulting gain of $973,000 and the sale of $4.0 million of investment securities resulting in a gain of $121,000.
 
 
Non-Interest Expenses
The decline in non-interest expenses of $195,000, or 3.4%, for 1Q12 compared to 1Q11 resulted from reductions in several areas including salaries and employee benefits which was $2.9 million for 1Q12 compared to $3.1 million for 1Q11.  Partially offsetting the declines in expense was an increase of $124,000 in the FDIC assessment.
 
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 March 31,
 
   
2012
   
2011
 
Interest-earning assets:
 
(dollars in thousands)
 
Federal funds sold and interest-earning deposits:
           
Average balance
  $ 3,039     $ 1,252  
Interest income
    2       3  
Average yield
    0.25 %     0.88 %
Investment securities:
               
Average balance
  $ 42,597     $ 44,758  
Interest income
    237       283  
Average yield
    2.23 %     2.56 %
Gross loans:
               
Average balance (includes non-accrual loans)
  $ 540,763     $ 587,193  
Interest income
    8,082       9,044  
Average yield
    6.01 %     6.25 %
Total interest-earning assets:
               
Average balance
  $ 586,399     $ 633,203  
Interest income
    8,321       9,330  
Average yield
    5.71 %     5.98 %
Interest-bearing liabilities:
     
Interest-bearing demand deposits:
               
Average balance
  $ 290,484     $ 274,485  
Interest expense
    627       800  
Average cost of funds
    0.87 %     1.18 %
Savings deposits:
               
Average balance
  $ 19,398     $ 20,743  
Interest expense
    83       108  
Average cost of funds
    1.71 %     2.12 %
Time certificates of deposit:
               
Average balance
  $ 151,454     $ 193,229  
Interest expense
    555       762  
Average cost of funds
    1.47 %     1.60 %
Convertible debentures:
               
Average balance
  $ 7,852     $ 7,930  
Interest expense
    176       176  
Average cost of funds
    9.00 %     9.00 %
Other borrowings:
               
Average balance
  $ 58,308     $ 64,000  
Interest expense
    352       415  
Average cost of funds
    2.43 %     2.63 %
Total interest-bearing liabilities:
               
Average balance
  $ 527,496     $ 560,387  
Interest expense
    1,793       2,261  
Average cost of funds
    1.37 %     1.64 %
                 
Net interest income
  $ 6,528     $ 7,069  
Net interest spread
    4.34 %     4.34 %
Average net margin
    4.48 %     4.53 %

 
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 decreased by $41.0 million, or 6.1%, to $631.5 million at March 31, 2012 compared to $672.5 million at March 31, 2011.  Average total equity declined by 18.3% to $51.2 million at March 31, 2012 from $62.6 million at March 31, 2011.  Average total gross loans at March 31, 2012 decreased by $46.4 million, or 7.9%, to $540.8 million from $587.2 million at March 31, 2011.  Average deposits also decreased from $534.0 million at March 31, 2011 to $511.6 million as of March 31, 2012.
 
The book value per common share was $6.01 at March 31, 2012 and $5.94 at December 31, 2011.
 
Selected balance sheet accounts
(dollars in thousands)
 
March 31, 
2012
   
December 31,
2011
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
Cash and cash equivalents
  $ 43,145     $ 22,572     $ 20,573       91.1 %
Investment securities available-for-sale
    17,876       23,588       (5,712 )     (24.2 )%
Investment securities held-to-maturity
    14,270       15,335       (1,065 )     (6.9 )%
Loans - held for sale
    58,460       77,303       (18,843 )     (24.4 )%
Loans - held for investment, net
    446,181       455,413       (9,232 )     (2.0 )%
Total assets
    623,225       633,348       (10,123 )     (1.6 )%
   
Total deposits
    510,799       511,262       (463 )     (0.1 )%
Other borrowings and convertible debentures
    58,852       68,852       (10,000 )     (14.5 )%
   
Total stockholders' equity
    51,110       50,626       484       1.0 %
 

The following schedule shows the balance and percentage change in the various deposits:
 
   
March 31,
 2012
   
December 31,
2011
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
(dollars in thousands)
 
Non-interest-bearing deposits
  $ 54,986     $ 49,894     $ 5,092       10.2 %
Interest-bearing deposits
    291,529       289,796       1,733       0.6 %
Savings
    19,579       19,429       150       0.8 %
Time deposits of $100,000 or more
    121,993       128,254       (6,261 )     (4.9 )%
Other time deposits
    22,712       23,889       (1,177 )     (4.9 )%
Total deposits
  $ 510,799     $ 511,262     $ (463 )     (0.1 )%
 
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 and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  All other loans are measured for impairment based on the present value of future cash flows.  Impairment is measured on a loan-by-loan basis for all loans in the portfolio.
 
The following schedule summarizes impaired loans by loan class as of March 31, 2012:
 
   
Without Specific
Valuation
Allowance
   
With Specific
Valuation
Allowance
   
Valuation
Allowance
   
Impaired Loan, net
 
   
(in thousands)
 
Manufactured housing
  $ 6,266     $ 3,187     $ 30     $ 9,423  
Commercial real estate:
                               
Commercial real estate
    25,616       -       -       25,616  
SBA 504 1st
    7,119       -       -       7,119  
Construction
    13,142       -       -       13,142  
Commercial
    5,855       135       -       5,990  
SBA
    1,907       148       -       2,055  
Single family real estate
    850       80       1       929  
Consumer
    12       -       -       12  
Total
  $ 60,767     $ 3,550     $ 31     $ 64,286  

The following schedule summarizes impaired loans by loan class as of December 31, 2011:
 
   
Without Specific
Valuation
llowance
   
With Specific
Valuation
Allowance
   
Valuation
Allowance
   
Impaired Loan, net
 
   
(in thousands)
 
Manufactured housing
  $ 390     $ -     $ -     $ 390  
Commercial real estate:
                               
Commercial real estate
    11,523       8,135       206       19,452  
SBA 504 1st
    7,164       -       -       7,164  
Construction
    4,746       -       -       4,746  
Commercial
    6,029       -       -       6,029  
SBA
    1,815       91       42       1,864  
Consumer
    11       -       -       11  
Total
  $ 31,678     $ 8,226     $ 248     $ 39,656  
 
 
The following schedule summarizes the average investment in impaired loans by loan class and the interest income recognized:
 
   
Three Months Ended March 31,
2012
   
Three Months Ended March 31,
2011
 
   
Average
Investment in
Impaired Loans
   
Interest Income
Recognized
   
Average
Investment in
Impaired
Loans
   
Interest Income
Recognized
 
   
(in thousands)
 
Manufactured housing
  $ 4,559     $ 46     $ -     $ -  
Commercial real estate:
                               
Commercial real estate
    20,971       193       11,107       92  
SBA 504 1st
    6,615       95       1,806          
Land
    -       -       1,196       7  
Construction
    8,286       108       4,704          
Commercial
    5,567       87       3,496       81  
SBA
    1,835       34       3,809          
Single family real estate
    431       1       -          
Consumer
    11       -       21          
Total
  $ 48,275     $ 564     $ 26,139     $ 180  
 
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(dollars in thousands)
 
Nonaccrual loans
  $ 50,529     $ 42,343  
SBA guaranteed portion of loans included above
    (12,239 )     (13,673 )
Nonaccrual loans, net
  $ 38,290     $ 28,670  
                 
Troubled debt restructured loans, gross
  $ 22,847     $ 17,885  
Loans 30 through 89 days past due with interest accruing
  $ 140     $ 3,114  
Allowance for loan losses to gross loans held for investment
    3.19 %     3.24 %
 
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.

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.
 
 
CWB has a blanket lien credit line with the Federal Home Loan Bank (FHLB).  Advances are collateralized in the aggregate by CWB’s eligible loans and securities.  Total FHLB advances were $51.0 million and $61.0 million at March 31, 2012 and December 31, 2011, respectively, borrowed at fixed rates.  In March and April 2012, the Bank prepaid $5.0 million and $17.0 million, respectively, of FHLB advances. At March 31, 2012, CWB had securities and loans pledged to the FHLB with a carrying value of $32.1 million and $61.4 million, respectively.  At December 31, 2011, CWB had securities and loans pledged with a carrying value of $38.9 million and $58.2 million, respectively. Total FHLB interest expense for the three months ended March 31, 2012 and 2011 was $352,000 and $416,000, respectively.  At March 31, 2012, CWB had $67.0 million available for additional borrowing.
 
CWB has established a credit line with the Federal Reserve Bank (“FRB”).  Advances are collateralized in the aggregate by eligible loans for up to 28 days.  There were no outstanding FRB advances as of March 31, 2012 and December 31, 2011.  CWB had $78.8 million in borrowing capacity as of March 31, 2012.
 
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 likely occurrence, although there is significant competition for core deposits.  The liquidity ratio of the Company was 20% at March 31, 2012 and December 31, 2011.  The Company’s liquidity ratio fluctuates in conjunction with loan funding demands.  The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.
 
CWBC’s routine funding requirements primarily consist of certain operating expenses, TARP preferred dividends and interest payments on the convertible debentures.  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, including TARP preferred dividends, to the extent declared and paid, and interest payments on the debenture from its own funds and will not receive dividends from the Bank. See “DEFAULTS UPON SENIOR SECURITIES” herein.
 
Capital Resources
 
The Company (on a consolidated basis) and CWB are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and CWB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and CWB must meet specific capital guidelines that involve quantitative measures of the Company’s and CWB’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and CWB’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.
 
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) contains rules as to the legal and regulatory environment for insured depository institutions, including increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions and regulations concerning internal controls, accounting and operations.  The prompt corrective action regulations of FDICIA define specific capital categories based on the institutions’ capital ratios.  The capital categories, in declining order, are “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”.  To be considered “well capitalized”, an institution must have a core or leverage capital ratio of at least 5%, a Tier I risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.  Tier I risk-based capital is, primarily, common stock and retained earnings, net of goodwill and other intangible assets.
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and CWB to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital (as defined) to adjusted average assets (as defined).
 
 
The Company’s and CWB’s actual capital amounts and ratios as of March 31, 2012 and December 31, 2011 are 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)
 
March 31, 2012
                                     
CWBC (Consolidated)
  $ 65,004     $ 51,030     $ 480,988     $ 631,460       13.51 %     10.61 %     8.08 %
Capital in excess of well capitalized
                                  $ 16,910     $ 22,173     $ 19,457  
CWB
  $ 59,745     $ 53,625     $ 480,790     $ 629,364       12.43 %     11.15 %     8.52 %
Capital in excess of well capitalized
                                  $ 11,666     $ 24,778     $ 22,157  
                                                         
December 31, 2011
                                                       
CWBC (Consolidated)
  $ 64,647     $ 50,423     $ 500,462     $ 637,752       12.92 %     10.08 %     7.91 %
Capital in excess of well capitalized
                                  $ 14,601     $ 20,395     $ 18,535  
CWB
  $ 59,018     $ 52,650     $ 500,173     $ 637,434       11.80 %     10.53 %     8.26 %
Capital in excess of well capitalized
                                  $ 9,001     $ 22,640     $ 20,778  
                                                         
Minimum capital ratios required by the OCC in the Agreement
                                    12.00 %             9.00 %
Well capitalized ratios
                                    10.00 %     6.00 %     5.00 %
Adequately capitalized ratios
                              8.00 %     4.00 %     4.00 %

The January 26, 2012 Agreement with the OCC specified that the Bank shall achieve within 120 days and thereafter maintain the following minimum capital ratios:
 
 
·
Tier 1 capital at least equal to 9.00% of adjusted total assets, and
 
 
·
Total risk-based capital at least equal to 12.00% of risk weighted assets
 
Due to the Agreement, the requirement to achieve and maintain a specific capital level means that the Bank may not be deemed to be “well capitalized”.

Supervision and Regulation
 
Banking is a complex, highly regulated industry. The banking regulatory system is designed to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy.  In addition of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry.  Consequently, the Company's growth and earnings performance, as well as that of CWB, may be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the FRB, FDIC and the OCC.  For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."
 
ITEM 3.
 
Not applicable.
 
 
ITEM 4.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation, the Company’s management, which includes the Company's Chief Executive Officer and Chief Financial Officer, has concluded that, as of the end of the period covered by this report, disclosure controls and procedures are effective in ensuring that information relating to the Company (including its consolidated subsidiary) required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 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.
 
The Company is involved in various litigation of a routine nature that is being handled and defended in the ordinary course of business.  In the opinion of management, based in part on consultation with legal counsel, the resolution of these litigation matters is not likely to have a material impact on the Company’s financial condition or results of operations.

ITEM 1A.
 
Investing in our common stock involves various risks which are particular to our Company, our industry and our market area.  Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed below.  The following should not be considered as an all-inclusive discussion of the risk factors potentially affecting the Company.  If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted.
 
Recent Regulatory Action
 
On April 23, 2012, the Company entered into a written agreement (FRB Agreement) with the Federal Reserve Bank of San Francisco (Reserve Bank).  The FRB Agreement requires the Company to take certain actions than ensure compliance with the OCC Agreement of January 26, 2012 and that the Company remains a source of financial strength for the Bank.  In addition to other provisions which are detailed in the “Management Discussion and Analysis”, the FRB Agreement prohibits the Company from paying any dividends without prior regulatory approval.  In accordance with the FRB Agreement, the Company requested the Reserve Bank’s approval to pay the dividend due on May 15, 2012, on the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value having a liquidation preference of $1,000 per share (Preferred Shares).  That request was denied.  Consequently, the Company will not pay that dividend.  As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.  As discussed in “Defaults Upon Senior Securities,” while the deferral of the dividend does not constitute an event of default under the Preferred Shares, in the event that the dividends payable on the Preferred Shares have not been paid for the equivalent of six or more quarters, whether or not consecutive, the number of Directors of the Company will automatically be increased by two and the holders of the Preferred Shares, together with any then outstanding parity stock, will have the right to elect those Directors.
 

Failure to comply with the provisions of the FRB Agreement may subject the Company to further regulatory action which could have a material adverse effect on the Company.

Forward Looking Statements
 
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains certain forward-looking statements about the financial condition, results of operations and business of the Company. These statements may include statements regarding the projected performance of the Company for the period following the completion of this form 10-Q. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “will,” “plans” or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties.
 
Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and shareholder values of the Company following this Form 10-Q may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Accordingly, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
 
Examples of forward-looking statements include, but are not limited to, estimates with respect to the Company’s financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include but are not limited to the following:
 
 
general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the real estate or securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;
 
 
changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;
 
 
legislative or regulatory changes which may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations required to be promulgated thereunder;
 
 
the Company’s success in implementing its new business initiatives, including expanding its product line, adding new branches and ATM centers and successfully building its brand image;
 
 
changes in interest rates which may reduce net interest margin and net interest income;
 
 
increases in competitive pressure among financial institutions or non-financial institutions;
 
 
technological changes which may be more difficult to implement or expensive than anticipated;
 
 
changes in deposit flows, loan demand, real estate values, borrowing facilities, capital markets and investment opportunities which may adversely affect the business;
 
 
changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;
 
 
 
litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;
 
 
 the ability to originate and purchase loans with attractive terms and acceptable credit quality;
 
 
the ability to utilize deferred tax assets;
 
 
the ability to attract and retain key members of management; and
 
 
 the ability to realize cost efficiencies.
 
All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in or incorporated by reference into this Form 10-Q. The forward-looking statements contained in this Form 10-Q are made as of the date hereof, and the Company assumes no obligation to, and expressly disclaims any obligation to, update these forward-looking statements to reflect actual results, events or circumstances after the date of this Form 10-Q, changes in assumptions or changes in other factors affecting such forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements, except as legally required. For a discussion of additional factors that could adversely affect the Company’s future performance, see “RISK FACTORS in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
ITEM 3.
 
On December 17, 2008, the Company issued 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 (Preferred Shares).   The terms of the Preferred Shares provides for the payment of quarterly cumulative dividends at the rate of 5% per year for the first five years and then at the rate of 9% thereafter.  Under the terms of the FRB Agreement by and between the Company and the Reserve Bank, the Company may not pay dividends without the prior approval of the Reserve Bank.  The Company has paid all the quarterly dividends on such Preferred Shares through February 15, 2012, therefore, the Company is not in arrears on any such prior dividends. While the Company declared the May 15, 2012 dividend and has deducted it from capital on its books, the Company’s request to the Reserve Bank to pay the dividend on the Preferred Shares due on May 15, 2012, was denied by the Reserve Bank and, as such, the Company will not pay that dividend.  The aggregate amount of the dividend that would have been due on May 15, 2012 on the Preferred Shares is $195,000.  The deferral of the dividends on the Preferred Shares is permitted under its terms and does not constitute an event of default.  In the event that dividends payable on the Preferred Shares 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 Preferred Shares, 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.
 
 
ITEM 6.
 
Exhibits.
 
31.1
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
31.2
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
32.1*
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as Amended, and 18 U.S.C. 1350.
   
101**
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Income Statements; (iii) the Consolidated Statement of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows;  and (v) the Notes to the Consolidated Financial Statements.
 
 
*
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.

 
**
Furnished, not filed.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  COMMUNITY WEST BANCSHARES
  (Registrant)
   
Date: May 14, 2012
/s/ Charles G. Baltuskonis
  Charles G. Baltuskonis
  Executive Vice President and
  Chief Financial Ofiicer
   
  On Behalf of Registrant and as
  Principal Financial and Accounting Officer
 

EXHIBIT INDEX
           
Exhibit
Number 
 
Description of Document
   
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
   
101**
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Income Statements; (iii) the Consolidated Statement of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows;  and (v) the Notes to the Consolidated Financial Statements.
 
 
*
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.

 
**
Furnished, not filed.
 
 
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