COMMUNITY WEST BANCSHARES / - Annual Report: 2013 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

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)

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class		Name of each exchange on which registered
Common Stock, No Par Value		Nasdaq Global Market

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o No x

 

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 past 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.  Yes x     No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

 

The aggregate market value of common stock, held by non-affiliates of the registrant was $21,888,169 based on the June 30, 2013 closing price of $4.72 per common share, as reported on the Nasdaq Global Market.  For purposes of the foregoing computation, all executive officers, directors and five percent beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed to be an admission that such executive officers, directors or five percent beneficial owners are, in fact, affiliates of the registrant.

 

As of March 4, 2014, 8,179,591 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2014 Annual Meeting of Shareholders to be held on or about May 22, 2014 are incorporated by reference into Part III of this Report.  The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended December 31, 2013.

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INDEX

PART I			Page
	Forward-Looking Statements		3
	Item 1.	Business	3
	Item 1A.	Risk Factors	5
	Item 1B.	Unresolved Staff Comments	11
	Item 2.	Properties	11
	Item 3.	Legal Proceedings	12
	Item 4.	Mine Safety Disclosures (Not Applicable)	12
PART II
	Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
	Item 6.	Selected Financial Data	14
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	47
	Item 8.	Financial Statements and Supplementary Data	48
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	95
	Item 9A.	Controls and Procedures	95
	Item 9B.	Other Information	95
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	95
	Item 11.	Executive Compensation	95
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	96
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	96
	Item 14.	Principal Accountant Fees and Services	96
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	96
SIGNATURES			99
CERTIFICATIONS			101

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PART I

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K (“Form 10K”) are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements be covered by the safe harbor provisions for forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and State securities laws, including statements that related to or are dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

The forward-looking statements contained in this Form 10K reflect our current views about future events and financial performance and involve certain risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10K.  Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission and the following factors that could cause actual results to differ materially from those presented: 1) reserve for credit losses may not be adequate to cover actual loan losses; 2) all of our lending involves underwriting risks; 3) dependency on real estate and events that negatively impact real estate; 4) future regulatory reforms from legislation will continue to impact on our business; 5) curtailment of government guaranteed loan programs could affect a segment of our business; 6) dependence on low-cost deposits; 7) ability to borrow from Federal Home Loan Bank (“FHLB”) or Federal Reserve Bank (“FRB”); 8) risk associated with changes in internal controls and processes; 9) our ability to compete in a highly competitive market; 10) our ability to recruit and retain qualified employees, especially seasoned relationship bankers; 11) the effects of terrorist attacks or threats of war; 12) perpetration of internal fraud; 13) risk of operating in a highly regulated industry and our ability to remain in compliance; 14) the effects of interest rates and interest rate policy; 15) exposure to environmental liabilities related to the properties we acquire title; 16) cyber security risks; and 24) risks related to ownership of our common stock and ability to raise capital.

For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” beginning on page 5.  Forward-looking statements speak only as of the date they are made, the Company does not undertake any obligations to update forward-looking statements to reflect circumstances and or events that occur after the date the forward-looking statements are made.

Purpose

The following discussion is designed to provide insight on the financial condition and results of operations of Community West Bancshares and its wholly owned subsidiary Community West Bank (“CWB”).  Unless otherwise stated, “the Company” or “CWBC” refers to this consolidated entity.  This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes to the Consolidated Financial Statements for the years ended December 31, 2013 and 2012, herein referred to as the “Consolidated Financial Statements”.  These Consolidated Financial Statements are presented beginning on page 50 of this Form 10-K.

ITEM 1.  BUSINESS

GENERAL

Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”).  These entities are collectively referred to herein as the “Company”.

PRODUCTS AND SERVICES

Through its wholly owned bank, the Company provides a variety of financial products and services to customers including lending and deposit products.  The Company has primarily focused on meeting the needs of professionals, small to mid-sized businesses and individual households.

Relationship Banking

Relationship banking is conducted at the community level through five full-service branch offices in the cities of Goleta, Santa Barbara, Santa Maria, Ventura and Westlake Village, California.  The primary customers are small to mid-sized businesses in these communities and their owners and managers.

Through CWB the Company provides a variety of financial products and services to customers.  These products and services include deposit products such as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits and lending products including; commercial, commercial real estate and consumer loans.

The competition in our markets is strong.  The Company has historically been successful due to its focus on high quality customer service and our experienced relationship bankers who have strong relationships within the communities we serve.

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Small Business Administration Lending

CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990.  The Company originates SBA loans which are sometimes sold into the secondary market.  The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts.  The two primary SBA loan programs that CWB offers are the basic 7(a) Loan Guaranty (“SBA 7(a)”) and the Certified Development Company (“CDC”), a Section 504 (“504”) program.

The SBA 7(a) serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels.  Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing.  Loan maturity is generally up to 10 years for working capital and up to 25 years for fixed assets.  The 7(a) loan is approved and funded by a qualified lender, guaranteed by the SBA and subject to applicable regulations.  In general, the SBA guarantees up to 85% of the loan amount depending on loan size.  The Company is required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) loans.  The SBA 7(a) loans are typically variable interest rate loans.

The 504 program is an economic development-financing program providing long-term, low down payment loans to expanding businesses.  Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower.  Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.

CWB also offers Business & Industry ("B & I") loans.  These loans are similar to the SBA product, except they are guaranteed by the U.S. Department of Agriculture.  The guaranteed amount is generally 80%.  B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the 7(a) loans.  Similar to the SBA 7(a) product, they can be sold into the secondary market.

CWB also originates conventional and investor loans which are funded by our secondary-market partners for which the Bank receives a premium.

The SBA has designated CWB as a "Preferred Lender".  As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation authority responsibility from the SBA.

Agricultural Loans for real estate and operating lines

The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA Business and Industry loan program.  The FSA loans typically issue a 90% guarantee up to $1,355,000 (amount adjusted annually based on inflation) for up to 40 years.

CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs.  Under the Farmer Mac I Program, loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac.  CWB receives an origination fee and an ongoing field servicing fee for maintaining the relationship with the borrower and performing certain loan compliance monitoring, and other duties as directed by the Central Servicer.  The Farmer Mac II Program was authorized by Congress in 1991 to establish a uniform national secondary market for originators and investors using the USDA guaranteed loan programs.  Under this program, CWB will sell the guaranteed portions of USDA loans directly to Farmer Mac’s subsidiary, Farmer Mac II LLC, services the loans, and retains the unguaranteed portions of those loans in accordance with the terms of the existing USDA guaranteed loan programs.  Eligible loans include FSA and Business and Industrial loans.  To participate in the program, CWB was subject to the requirement of purchasing 2,000 shares of Farmer Mac Class A Stock (“AGM”).

Mortgage Lending

The Company originates residential real estate loans primarily in the Central Coast of California.   At origination, the majority of these loans are classified as loans held for sale and sold into the secondary market.

Manufactured Housing

The Company has a financing program for manufactured housing to provide affordable home ownership generally to low-to-moderate income families that are purchasing or refinancing their manufactured house.  These loans are offered in approved mobile home parks throughout California primarily on the coast.  The parks must meet specific criteria.  The manufactured housing loans are secured by the manufactured home and are generally retained in the Company’s loan portfolio.

Loans to One Borrower

State banking law generally limits the amount of funds that a bank may lend to a single borrower.  Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the bank’s unimpaired capital and unimpaired surplus; and the secured and unsecured obligations of any one borrower to a bank generally may not exceed 25% of the unimpaired capital and unimpaired surplus of a national bank.

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Foreign Operations

The Company has no foreign operations.  The bank provides loans, letters of credit and other trade-related services to commercial enterprises that conduct business outside the United States.

Customer Concentration

The Company does not have any customer relationships that individually account for 10% of consolidated or segment revenues, respectively.

COMPETITION

The financial services industry is highly competitive.  Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, and offer a broader range of financial services than we can offer and may have lower cost structures.

This increasingly competitive environment is primarily a result of long term changes in regulation that made mergers and geographic expansion easier; changes in technology and product delivery systems and web-based tools; the accelerating pace of consolidation among financial services providers; and the flight of deposit customers to perceived increased safety.  We compete for loans, deposits and customers with other banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial services providers.  This strong competition for deposit and loan products directly affects the rates of those products and the terms on which they are offered to consumers.

Technological innovation continues to contribute to greater competition in domestic and international financial services markets.

Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive.  The competitive environment is also significantly impacted by federal and state legislation that makes it easier for non-bank financial institutions to compete with the Company.

EMPLOYEES

As of December 31, 2013, the Company had 122 full-time equivalent team members.  The Company's employees are not represented by a union or covered by a collective bargaining agreement.  Management believes that its employee relations are good.

GOVERNMENT POLICIES

The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory authorities, including those of the states in which it operates and the U.S. government.  These laws, regulations and policies include, for example, statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve System which impact interest rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory agencies.  Changes in these laws, regulations and policies may greatly affect our operations.  See “Item 1A Risk Factors – Curtailment of Government Guaranteed Loan Programs Could Affect a Segment of Our Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation.”

Additional Available Information

 

The Company maintains an Internet website at http://www.communitywestbank.com.  The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended.  Other information related to the Company is available free of charge, through this website as soon as reasonably practicable after it has been electronically filed or furnished to the Securities Exchange Commission (“SEC”).  The SEC maintains an Internet site, http://www.sec.gov, in which all forms filed electronically may be accessed.  The Company’s internet website and the information contained therein are not intended to be incorporated in this Form 10-K.  In addition, copies of the Company’s annual report will be made available, free of charge, upon written request.

ITEM 1A.  RISK FACTORS

 

Investing in our common stock involves various risks which are specific to the Company.  Several of these risks and uncertainties, are discussed below and elsewhere in this report.  This listing should not be considered as all-inclusive.  These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition.  Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities.  In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business.  See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report beginning on page 14 and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section beginning on page 39.

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Reserve for credit losses may not be adequate to cover actual loan losses.

The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our financial condition and/or results of operations.  We maintain a reserve for credit losses to absorb estimated probable credit losses inherent in the loan and commitment portfolios as of the balance sheet date.  After a provision for loan losses of ($1.9) million for the year, as of December 31, 2013, our allowance for loan losses was $12.2 million, or 2.98% of loans held for investment.  In addition, as of December 31, 2013, we had $23.3 million in loans on nonaccrual, $6.4 million of which are SBA guaranteed, and $0.2 million in loans 30 to 89 days past due with interest accruing.  In determining the level of the reserve for credit losses, Management makes various assumptions and judgments about the loan portfolio.  We rely on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information known at the time of the analysis.  If Management’s assumptions are incorrect, the reserve for credit losses may not be sufficient to cover losses, which could have a material adverse effect on our financial condition and/or results of operations.  While the allowance was determined to be adequate at December 31, 2013, based on the information available to us at the time, there can be no assurance that the allowance will be adequate in the future.

All of our lending involves underwriting risks.

Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business.  To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, life insurance, and/or obtains personal guarantees.  Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced.  There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to repay loans in accordance with their original terms.

Our dependence on real estate concentrated in the State of California.

As of December 31, 2013, approximately $185.0 million, or 39%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate.  A further decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans.  The real estate securing our loan portfolio is concentrated in California.  The decline in real estate values could harm the financial condition of our borrowers and the collateral for our loans will provide less security and we would be more likely to suffer losses on defaulted loans.

We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.

We are subject to extensive regulation and supervision that govern almost all aspects of our operations.  Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that we can pay, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”).  Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs.  We are currently facing increased regulation and supervision of our industry as a result of the financial crisis in the banking and financial markets.  Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities.  Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities.  Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.

We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.

 

Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations.  If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate.  These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance.  If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.

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The enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on our operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes.  The key effects of the Dodd-Frank Act on our business are:

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changes to regulatory capital requirements;

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exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier 1 capital;

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creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

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potential limitations on federal preemption;

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changes to deposit insurance assessments;

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regulation of debit interchange fees we earn;

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changes in retail banking regulations, including potential limitations on certain fees we may charge; and

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changes in regulation of consumer mortgage loan origination and risk retention.

 

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds.  The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment.  Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies.  The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.  These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.  Failure to comply with the new requirements may negatively impact our results of operations and financial condition.  While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to investors in our Class A common stock.

The short-term and long-term impact of the new regulatory capital standards and the new capital rules is uncertain.

As discussed in detail below, the federal banking agencies recently revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to effect the implementation of the Basel III Accords.  The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets.  These minimums are outlined above.  Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve.  For CWBC, a bank holding company, common equity Tier 1 capital, a new category, includes only common stock, related surplus, retained earnings and qualified minority investments.

Additional Tier 1 capital includes non-cumulative perpetual preferred stock, certain qualifying minority interests, and for bank holding companies with less than $15 billion in consolidated assets, cumulative perpetual preferred stock and grandfathered trust preferred securities. Tier 2 capital includes subordinated debt, certain qualifying minority investments, and for bank holding companies with less than $15 billion in consolidated assets, non-qualifying capital instruments issued before May 19, 2010 that exceed 25% of Tier 1. Bank holding companies are also required to hold a capital conservation buffer of common equity Tier 1 capital of 2.5% to avoid limitations on capital distributions and executive compensation payments.  The capital rules also codify a Tier 1 leverage ratio that has long been used by the agencies as an indicator of risk.

Under the guidelines, capital is compared with the relative risk related to the balance sheet.  To derive the risk included in the balance sheet, a risk weighting is applied to each balance sheet asset and off-balance sheet item, primarily based on the relative credit risk of the asset or counterparty.  The revised capital rules also modified the risk-weights applied to particular on and off balance sheet assets.

The revised capital rules require banks and bank holding companies to maintain a common equity Tier 1 capital ratio of 6.5%, a total Tier 1 capital ratio of 8%, a total capital ratio of 10%, and a leverage ratio of 5% to be deemed “well capitalized.”  Although these new capital ratios become effective as of January 1, 2015, the banking regulators will expect bank holding companies and banks to meet these requirements well ahead of that date.

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The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it.  We cannot be certain what the impact of changes to existing capital guidelines will have on the Company.

Curtailment of government guaranteed loan programs could affect a segment of our business.

A major segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA.  From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans.  In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs.  Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable.  Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline.  Also, the profitability of these loans could decline.  As the funding of the guaranteed portion of 7(a) loans has historically been a major portion of our business, the long-term resolution to the funding for the 7(a) loan program may have an unfavorable impact on our future performance and results of operations.

Our small business customers may lack the resources to weather a downturn in the economy.

One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to medium-sized businesses and professional organizations.  Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities.  If economic conditions are generally unfavorable in our service areas, the businesses of our lending clients and their ability to repay outstanding loans may be negatively affected.  As a consequence, our results of operations and financial condition may be adversely affected.

 

As of December 31, 2013, the Company has borrowings from the FHLB of San Francisco of $30.0 million and no borrowings from the FRB.  The Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs.  The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities.  These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate its loan programs.  Any change or termination could have an adverse effect on the Company’s liquidity and profitability.

Most of the Company’s assets and liabilities are monetary in nature, which subjects us to significant risks from changes in interest rates and can impact our net income and the valuation of our assets and liabilities.  Increases or decreases in prevailing interest rates could have an adverse effect on our business, asset quality and prospects.  The Company’s operating income and net income depend to a great extent on our net interest margin.  Net interest margin is the difference between the interest yields we receive on loans, securities and other earning assets and the interest rates we pay on interest-bearing deposits, borrowings and other liabilities.  These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve.  If the rate of interest we pay on our interest-bearing deposits, borrowings and other liabilities increases more than the rate of interest we receive on loans, securities and other earning assets increases, our net interest income, and therefore our earnings, would be adversely affected.  The Company’s earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other liabilities.

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In addition, loan volumes are affected by market interest rates on loans.  Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations.  Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase.  The Company cannot guarantee that it will be able to minimize interest rate risk.  In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations.

Because of the geographic concentration of our assets, our business is highly susceptible to local economic conditions

Our business is primarily concentrated in Santa Barbara and Ventura counties in the State of California.  As a result of this geographic concentration, our financial condition and results of operations depend largely upon economic conditions in these market areas.  Deterioration in economic conditions in the markets we serve could result in one or more of the following: an increase in loan delinquencies; an increase in problem assets and foreclosures; a decrease in the demand for our products and services; and a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

 

The Company faces substantial competition in all phases of our operations from a variety of different competitors.  Our competitors, including commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds and other financial institutions, compete with lending and deposit-gathering services offered by us.  Increased competition in our markets may result in reduced loans and deposits.

 

There is very strong competition for financial services in the market areas in which we conduct our businesses from many local commercial banks as well as numerous national and commercial banks and regionally based commercial banks.  Many of these competing institutions have much greater financial and marketing resources than we have.  Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us.  If we are unable to offer competitive products and services, our business may be negatively affected.

 

Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions.  As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.  The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.

 

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations.  Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain.  If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period financial statements.  Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied.  These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.  In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period financial statements.

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Terrorist attacks and threats of war or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways

 

Terrorist attacks in the United States, as well as future events occurring in response or in connection to them including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions, may impact our operations.  Any of these events could cause consumer confidence and savings to decrease or result in increased volatility in the United States and worldwide financial markets and economy.  Any of these occurrences could have an adverse impact on the Company’s operating results, revenues and costs and may result in the volatility of the market price for our securities, including our common stock, and impair their future price.

 

The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet and telecommunications systems.  These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us and/or our customers that use our internet banking, electronic banking or some other form of our telecommunications systems.  Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place.

We may experience interruptions or breaches in our information system security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.  While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.  The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses

As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts.  Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.

In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks.  Although we take numerous protective measures to maintain the confidentiality, integrity and availability of our and our clients’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve.  As a result, our computer systems, software and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber attacks and other events that could have an adverse security impact and result in significant losses by us and/or our customers.  Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization.  Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.

We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries.  Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure.  In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.

Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future.  Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment.  As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities

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We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems.  However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.

Litigation risks may have a material impact on our assets or results of operations.

We are involved in various matters of litigation in the ordinary course of business which, historically, have not been material to our assets or results of operations.  No assurances can be given that future litigation may not have a material impact on our assets or results of operations.

The Series A Preferred Stock impacts net income available to our common shareholders and earnings per common share and the Warrant may be dilutive to holders of our common stock.

The dividends on the Series A Preferred Stock reduce the net income available to common shareholders and our earnings per common share.  The Series A Preferred Stock also receives preferential treatment in the event of liquidation, dissolution or winding up of the Company.  Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the outstanding warrant  (“Warrant”) issued  in conjunction with the Series A Preferred Stock is exercised.  The shares of common stock underlying the Warrant represent approximately 6.6% of the shares of our common stock outstanding as of December 31, 2013 (including the shares issuable upon exercise of the Warrant in total shares outstanding).  Although the Warrant holders have agreed not to vote any of the shares of common stock received upon exercise of the Warrant, a transferee of any portion of the Warrant or of any shares of common stock acquired upon exercise of the Warrant is not bound by this restriction.

We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.

We are required by federal regulatory authorities to maintain adequate capital levels to support operations.  Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook.  Pending regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required.  If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.  PROPERTIES

At December 31, 2013, the Company is headquartered at 445 Pine Avenue in Goleta, California.  This facility houses the Company's corporate offices and the mortgage loan division.  The Company operates five domestic branches one of which is owned.  All other properties are leased by the Company, including the corporate headquarters.

The Company continually evaluates the suitability and adequacy of its offices.  Management believes that the existing facilities are adequate for its present and anticipated future use.

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ITEM 3.  LEGAL PROCEEDINGS

On or about December 16, 2013, CWB was served with the Summons and Complaint in the action entitled Residential Funding Company, LLC v. Community West Bank, N.A., United States District Court for the District of Minnesota, Case No. 0:13-CV-03468-JRT-JJK.  The Summons was issued and Complaint filed on December 13, 2013.  Generally, Residential Funding Company, LLC (“RFC”) seeks damages in excess of $75,000 for breach of contract and indemnification for certain unspecified residential mortgage loans originated by CWB and sold to RFC in accordance with an agreement.  RFC alleges that some $22 million in loans were sold over the course of the agreement.  RFC further alleges that CWB made certain representations and warranties with respect to the loans and that CWB failed to comply with such representations and warranties.

RFC alleges it placed the loans from CWB into residential mortgage backed securitizations trusts (“Trusts”) and issued certificates in the Trusts to outside investors.  The loans CWB sold to RFC were eventually included along with numerous other third party lender loans in 30 different Trusts.  RFC alleges that, over time, the loans defaulted or became delinquent and, from 2008 until May 14, 2012, RFC faced numerous claims and lawsuits stemming from the loans.  RFC alleges that it had to file for bankruptcy protection to defend the claims.  RFC claims all the lawsuits against RFC filed by investors in the Trusts allege that the securitizations were defective in a variety of ways, including borrower fraud, missing or inaccurate documentation, fraudulent appraisals and misrepresentations concerning occupancy.  RFC alleges that CWB was responsible for the problems with the loans in this action and that numerous other lenders were responsible in the other actions RFC has filed.  RFC also alleges that it was forced to settle many of the claims in the bankruptcy court but continues to litigate other claims.  RFC alleges that under its agreement with CWB, CWB agreed to indemnify RFC for losses or repurchase the loans at RFC’s option.

Since the Complaint is so vague and ambiguous concerning the “agreement”, the specific loans in question and the circumstances surrounding the approval of such loans, CWB has determined to file a Motion to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure or, in the alternative, for a Motion for More Definite Statement under Rule 12(e) when CWB’s responsive pleading is due on March 17, 2014.

It is CWB’s position to vigorously defend this action and CWB knows of no evidence that would support RFC’s allegations of wrongdoing by CWB.  Due to the preliminary stage of the pleadings and without the benefit of discovery, it is not possible to predict the probable outcome.  This action is just one of many filed by RFC against various banks pending in courts in New York and Minnesota, among others.  CWB has entered into a Joint Defense Agreement with other defendants in some of the other cases.

On March 5, 2014, RFC filed a Motion to Transfer Venue to the U.S. Bankruptcy Court for the Southern District of New York (“SDNY”).  RFC argues that transfer will serve the interests of justice ensuring that (1) common issues are resolved in a common forum, (2) the SDNY Bankruptcy Court is already familiar with the claims, (3) convenience factors buttress the propriety of transfer, and (4) transfer is appropriate despite the fact that the agreement between the parties provides for Minnesota as the forum for resolutions of disputes.  RFC’s motion indicates that this is one of 83 recently commenced actions in which such a transfer motion has been filed.  CWB has not had an opportunity to fully analyze the motion, but it is CWB’s preliminary intention to oppose RFC’s transfer motion.

The Company is involved in various other litigation matters of a routine nature that are being handled and defended in the ordinary course of the Company’s business.  In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters will not have a material impact on the Company’s financial position or results of operations.

ITEM 4.  MINE SAFETY DISCLOSURES (NOT APPLICABLE)

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC.  The following table sets forth the high and low sales prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:

		2013 Quarters																2012 Quarters
		Fourth				Third				Second				First				Fourth				Third				Second				First
Range of stock prices:
High		$	6.73			$	5.97			$	5.00			$	5.10			$	3.50			$	3.07			$	2.85			$	2.72
Low			5.35				4.50				4.00				2.80				2.50				2.20				2.05				1.27

There were no common dividends declared in 2013 or 2012.

Holders

As of February 28, 2014 the closing price of our common stock on NASDAQ was $7.2499 per share.  As of that date, based on the records of our transfer agent, the company had approximately 273 stockholders of record of its common stock.

Preferred Stock Dividends

On December 26, 2013, the Company reported approval from the FRB to pay outstanding cumulative dividends on the Series A Preferred Stock.  At December 31, 2013, the Company had accrued $1.4 million of dividends on its Series A Preferred Stock.  The payment of the dividends had been previously denied by the FRB pursuant to the requirements under a written agreement with the FRB.  The deferral of the dividends on the Series A Preferred Stock is permitted under its terms and did not constitute an event of default.

Common Stock Dividends

It is the Company’s intention to review its dividend policy on a quarterly basis.  The Company’s has not paid dividends since the second quarter of 2008 and does not anticipate paying any cash dividends in the near future.  As a holding company with limited significant assets other than the capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB.  CWB’s ability to pay dividends to the Company is limited by California law and federal banking law.

Repurchases of Securities

The Company did not repurchase any of its securities during 2013 and does not currently have any publicly announced repurchase plan.  The Company's ability to repurchase shares of its common stock is subject to prior approval of the FRB.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes the securities authorized for issuance as of December 31, 2013:

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Plans approved by shareholders			375,750			$	5.25				169,075
Plans not approved by shareholders			-				-				-
Total			375,750			$	5.25				169,075

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ITEM 6.  SELECTED FINANCIAL DATA

The following summary presents selected financial data as of and for the periods indicated. You should read the selected financial data presented below in conjunction with “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.

		Year Ended December 31,
		2013				2012				2011				2010				2009
		(in thousands, except per share amounts)
Results of Operations:
Interest income		$	27,866			$	31,368			$	36,542			$	39,234			$	40,903
Interest expense			4,332				5,949				8,250				9,957				14,945
Net interest income			23,534				25,419				28,292				29,277				25,958
Provision for loan losses			(1,944	)			4,281				14,591				8,743				18,678
Net interest income after provision for loan losses			25,478				21,138				13,701				20,534				7,280
Non-interest income			2,831				4,281				3,211				4,015				4,418
Non-interest expenses			22,135				22,246				23,320				20,991				21,479
Income (loss) before income taxes			6,174				3,173				(6,408	)			3,558				(9,781	)
Provision (benefit) for income taxes			(2,812	)			-				4,077				1,467				(4,018	)
Net income (loss)		$	8,986			$	3,173			$	(10,485	)		$	2,091			$	(5,763	)
Dividends and accretion on preferred stock			1,039				1,046				1,047				1,047				1,046
Net income (loss) available to common stockholders		$	7,947			$	2,127			$	(11,532	)		$	1,044			$	(6,809	)
Per Share Data:
Income (loss) per common share - basic		$	1.13			$	0.36			$	(1.93	)		$	0.18			$	(1.15	)
Income (loss) per common share - diluted		$	0.98			$	0.31			$	(1.93	)		$	0.18			$	(1.15	)
Weighted average shares outstanding - basic			7,017				5,990				5,980				5,915				5,915
Weighted average shares outstanding - diluted			8,390				8,233				5,980				6,833				5,915
Shares outstanding at period end			7,867				5,995				5,990				5,916				5,915
Book value per common share		$	6.60			$	6.29			$	5.94			$	7.92			$	7.74
Selected Balance Sheet Data:
Net loans			462,005				449,201				532,716				580,632				603,440
Allowance for loan losses			12,208				14,464				15,270				13,302				13,733
Total assets			539,000				532,101				633,348				667,604				684,216
Total deposits			436,135				434,220				511,262				529,893				531,392
Total liabilities			471,444				479,052				582,722				605,962				623,909
Total stockholders' equity			67,556				53,049				50,626				61,642				60,307
Selected Financial and Liquidity Ratios:
Net interest margin			4.51	%			4.49	%			4.47	%			4.50	%			3.91	%
Return on average assets			1.69	%			0.55	%			-1.60	%			0.31	%			-0.85	%
Return on average stockholders' equity			15.15	%			6.22	%			-16.98	%			3.42	%			-9.24	%
Equity to assets ratio			12.53	%			9.97	%			7.99	%			9.23	%			8.81	%
Loan to deposit ratio			108.73	%			106.78	%			107.18	%			112.09	%			116.14	%
Capital Ratios:
Tier 1 leverage ratio			12.68	%			9.72	%			7.91	%			9.08	%			8.81	%
Tier 1 risk-based capital ratio			15.65	%			12.81	%			10.08	%			11.40	%			10.93	%
Total risk-based capital ratio			17.26	%			15.98	%			12.92	%			14.16	%			12.20	%
Selected Asset Quality Ratios:
Net charge-offs to average loans			0.07	%			1.02	%			2.21	%			1.52	%			2.03	%
Allowance for loan losses to total loans			2.57	%			3.12	%			2.83	%			2.24	%			2.22	%
Allowance for loan losses to nonaccrual loans			72.51	%			64.50	%			53.26	%			104.98	%			99.56	%
Nonaccrual loans to gross loans			3.55	%			4.84	%			5.23	%			2.13	%			2.62	%
Nonaccrual loans and repossessed assets to total loans			4.35	%			5.24	%			6.45	%			3.56	%			2.91	%
Loans past due 90 days or more and still accruing interest to total loans			0.01	%			0.00	%			0.11	%			0.03	%			0.01	%

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with “Item 8–Consolidated Financial Statements and Supplementary Data.”  This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions.  Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” on page 3 of this form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements.

Financial Overview and Highlights

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

Financial Result Highlights of 2013

Net income available to common stockholders for the Company of $7.9 million, or $0.98 per diluted share for 2013, compared to $2.1 million, or $0.31 per diluted share for 2012 and net loss available to common stockholders of $11.5 million or $(1.93) per diluted share for 2011.

The significant factors impacting earnings of the Company during 2013 were:

·

Net income of $9.0 million for 2013 compared to a net income of $3.2 million for 2012 and net loss of $10.5 million for 2011.

·

Net interest margin for the twelve months ended December 31, 2013 improved to 4.51% compared to 4.49% for the year ended 2012.

·

Provision for loan losses was ($1.9 million) for 2013 compared to $4.3 million in 2012 and $14.6 million in 2011, resulting from decreased net charge offs which were $0.3 million for 2013 compared to $5.1 million in 2012 and $12.6 million in 2011 along with continued improvement in credit quality.

·

Reversal of $2.8 million in deferred tax assets valuation allowance at December 31, 2013.

·

Net nonaccrual loans decreased to $16.8 million at December 31, 2013, compared to $22.4 million at December 31, 2012.

·

Allowance for loan losses was $12.2 million at December 31, 2013, or 2.98% of total loans held for investment compared to 3.66% at December 31, 2012.

·

Other assets acquired through foreclosure increased to $3.8 million at December 31, 2013 from $1.9 million at December 31, 2012 primarily due to one property located in Oregon.

·

During 2013, $6.4 million debentures converted to common stock.  Outstanding debentures at December 31, 2013 were $1.4 million.  Common shares outstanding at December 31, 2013 were 7.9 million.

·

Total loans increased 2.9% to $462.0 million at December 31, 2013 compared to $449.2 million at December 31, 2012.

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the year ended December 31, 2013 throughout the analysis sections of this report.

Subsequent Event

Effective as of January 27, 2014, the regulatory agreement between Community West Bank and the Office of the Comptroller of the Currency (“OCC”), the bank’s primary banking regulator, was terminated and, therefore, the Bank is no longer subject to the requirements of that regulatory agreement. Similarly, effective March 11, 2014, the Federal Reserve Board, (“FRB”) terminated its regulatory agreement (the “FRB Agreement”) with the Company and therefore, the Company is no longer subject to the requirements of that regulatory agreement.

In accordance with the terms of the FRB Agreement, the Company applied for approval to pay the dividends on the Company’s outstanding Series A Preferred Stock due on May 15, 2012, August 15, 2012, November 15, 2012, February 15, 2013, May 15, 2013 and August 15, 2013 which application was denied.  On December 26, 2013, the FRB approved the Company’s request to pay outstanding cumulative dividends on its Series A preferred stock.  These deferred dividends were paid by the Company on February 18, 2014.

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

		Year Ended December 31,
		2013				2012				2011
		(in thousands, except per share amounts)
Net income (loss) available to common stockholders		$	7,947			$	2,127			$	(11,532	)
Basic earnings (loss) per share			1.13				0.36				(1.93	)
Diluted earnings (loss) per share			0.98				0.31				(1.93	)
Total assets			539,000				532,101				633,348
Gross loans			474,213				463,665				547,986
Total deposits			436,135				434,220				511,262
Net interest margin			4.51	%			4.49	%			4.47	%
Return on average assets			1.69	%			0.55	%			(1.60	)%
Return on average stockholders' equity			15.15	%			6.22	%			(16.98	)%

As a bank holding company, management focuses on key ratios in evaluating the Company’s financial condition and results of operations.  In the current economic environment, key ratios regarding asset credit quality and efficiency are more informative as to the financial condition of the Company than those utilized in a more normal economic period such as return on equity and return on assets.

Asset Quality

For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations.  The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans.  Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans.  The following table summarizes asset quality metrics:

		Year Ended December 31,
		2013				2012				2011
		(in thousands)
Non-accrual loans (net of guaranteed portion)		$	16,837			$	22,425			$	28,670
Non-performing assets			23,997				31,548				53,840
Non-accrual loans to gross loans			3.55	%			4.84	%			5.23	%
Net charge-offs to average loans			0.07	%			1.02	%			2.21	%

Asset and Deposit Growth

The ability to originate new loans and attract new deposits is fundamental to the Company’s asset growth.  The Company’s assets and liabilities are comprised primarily of loans and deposits.  Total assets increased to $539.0 million at December 31, 2013 from $532.1 million at December 31, 2012.  Total loans including net deferred fees and unearned income increased by $12.8 million, or 2.9%, to $462.0 million as of December 31, 2013 compared to December 31, 2012.  Total deposits increased slightly to $436.1 million as of December 31, 2013 from $434.2 million as of December 31, 2012.

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RESULTS OF OPERATONS

The following table sets forth a summary financial overview for the comparable years:

		Year Ended												Year Ended
		December 31,								Increase				December 31,								Increase
		2013				2012				(Decrease)				2012				2011				(Decrease)
		(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income		$	27,866			$	31,368			$	(3,502	)		$	31,368			$	36,542			$	(5,174	)
Interest expense			4,332				5,949				(1,617	)			5,949				8,250				(2,301	)
Net interest income			23,534				25,419				(1,885	)			25,419				28,292				(2,873	)
Provision for credit losses			(1,944	)			4,281				(6,225	)			4,281				14,591				(10,310	)
Net interest income after provision for credit losses			25,478				21,138				4,340				21,138				13,701				7,437
Non-interest income			2,831				4,281				(1,450	)			4,281				3,211				1,070
Non-interest expenses			22,135				22,246				(111	)			22,246				23,320				(1,074	)
Income before income taxes			6,174				3,173				3,001				3,173				(6,408	)			9,581
Income taxes			(2,812	)			-				(2,812	)			-				4,077				(4,077	)
Net income		$	8,986			$	3,173			$	5,813			$	3,173			$	(10,485	)		$	13,658
Dividends and accretion on preferred stock			1,039				1,046				(7	)			1,046				1,047				(1	)
Net income available to common stockholders		$	7,947			$	2,127			$	5,820			$	2,127			$	(11,532	)		$	13,659
Income per share - basic		$	1.13			$	0.36			$	0.78			$	0.36			$	(1.93	)		$	2.29
Income per share - diluted		$	0.98			$	0.31			$	0.67			$	0.31			$	(1.93	)		$	2.24

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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:

 

		Year Ended December 31,
		2013												2012
		Average Balance				Interest				Average Yield/Cost				Average Balance				Interest				Average Yield/Cost
Interest-Earning Assets		(in thousands)
Federal funds sold and interest-earning deposits (4)		$	34,810			$	81				0.23	%		$	31,237			$	71				0.23	%
Investment securities			29,213				714				2.44	%			35,093				807				2.30	%
Loans (1)			457,847				27,071				5.91	%			500,273				30,490				6.09	%
Total earnings assets			521,870				27,866				5.34	%			566,603				31,368				5.54	%
Nonearning Assets
Cash and due from banks			1,122												979
Allowance for loan losses			(13,240	)											(15,208	)
Other assets			21,586												28,590
Total assets		$	531,338											$	580,964
Interest-Bearing Liabilities
Interest-bearing demand deposits			258,345				1,185				0.46	%			280,831				1,839				0.65	%
Savings deposits			16,334				290				1.78	%			17,683				325				1.84	%
Time deposits			102,495				1,441				1.41	%			128,605				1,966				1.53	%
Total interest-bearing deposits			377,174				2,916				0.77	%			427,119				4,130				0.97	%
Convertible debentures			4,354				442				10.15	%			7,852				717				9.13	%
Other borrowings			33,474				974				2.91	%			40,090				1,102				2.75	%
Total interest-bearing liabilities			415,002				4,332				1.04	%			475,061				5,949				1.25	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits			53,278												52,196
Other liabilities			3,755												2,652
Stockholders' equity			59,303												51,055
Total Liabilities and Stockholders' Equity		$	531,338											$	580,964
Net interest income and margin (2)						$	23,534				4.51	%						$	25,419				4.49	%
Net interest spread (3)											4.30	%											4.29	%

 

(1)

Includes nonaccrual loans.

(2)

Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities. Net interest margin is computed by dividing net interest income by total average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.

(3)	Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(4)	Certain amounts have been reclassified to conform to the current year presentation.

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		Year Ended December 31,
		2012												2011
		Average Balance				Interest				Average Yield/Cost				Average Balance				Interest				Average Yield/Cost
Interest-Earning Assets		(in thousands)
Federal funds sold and interest-earning deposits (4)		$	31,237			$	71				0.23	%		$	16,673			$	40				0.24	%
Investment securities			35,093				807				2.30	%			45,113				1,067				2.37	%
Loans (1)			500,273				30,490				6.09	%			570,684				35,435				6.21	%
Total earnings assets			566,603				31,368				5.54	%			632,470				36,542				5.78	%
Nonearning Assets
Cash and due from banks			979												1,012
Allowance for loan losses			(15,208	)											(13,721	)
Other assets			28,590												34,061
Total assets		$	580,964											$	653,822
Interest-Bearing Liabilities
Interest-bearing demand deposits			280,831				1,839				0.65	%			280,950				2,894				1.03	%
Savings deposits			17,683				325				1.84	%			20,701				389				1.88	%
Time deposits			128,605				1,966				1.53	%			167,977				2,668				1.59	%
Total interest-bearing deposits			427,119				4,130				0.97	%			469,628				5,951				1.27	%
Convertible debentures			7,852				717				9.13	%			7,876				709				9.00	%
Other borrowings			40,090				1,102				2.75	%			63,299				1,590				2.51	%
Total interest-bearing liabilities			475,061				5,949				1.25	%			540,803				8,250				1.53	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits			52,196												50,144
Other liabilities			2,652												1,116
Stockholders' equity			51,055												61,759
Total Liabilities and Stockholders' Equity		$	580,964											$	653,822
Net interest income and margin (2)						$	25,419				4.49	%						$	28,292				4.47	%
Net interest spread (3)											4.29	%											4.25	%

(1)	Includes nonaccrual loans.

(2)

Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities..  Net interest margin is computed by dividing net interest income by total average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.

(3)	Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(4)	Certain amounts have been reclassified to conform to the current year presentation.

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The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.  For purposes of this table, nonaccrual loans have been included in the average loan balances.

		Year Ended December 31,												Year Ended December 31,
		2013 versus 2012												2012 versus 2011
		Increase (Decrease)												Increase (Decrease)
		Due to Changes in (1)												Due to Changes in (1)
		Volume				Rate				Total				Volume				Rate				Total
		(in thousands)												(in thousands)
Interest income:
Investment securities		$	(142	)		$	49			$	(93	)		$	(230	)		$	(30	)		$	(260	)
Federal funds sold and other			10				-				10				33				(2	)			31
Loans, net			(2,519	)			(900	)			(3,419	)			(4,288	)			(657	)			(4,945	)
Total interest income			(2,651	)			(851	)			(3,502	)			(4,485	)			(689	)			(5,174	)
Interest expense:
Interest checking			(103	)			(551	)			(654	)			(1	)			(1,054	)			(1,055	)
Savings			(24	)			(11	)			(35	)			(56	)			(8	)			(64	)
Time deposits			(368	)			(157	)			(525	)			(602	)			(100	)			(702	)
Other borrowings			(193	)			65				(128	)			(638	)			150				(488	)
Convertible debentures			(355	)			80				(275	)			(2	)			10				8
Total interest expense			(1,043	)			(574	)			(1,617	)			(1,299	)			(1,002	)			(2,301	)
Net increase		$	(1,608	)		$	(277	)		$	(1,885	)		$	(3,186	)		$	313			$	(2,873	)

(1)

Changes due to both volume and rate have been allocated to volume changes.

Comparison of interest income, interest expense and net interest margin

The Company’s primary source of revenue is interest income.  Interest income for the year ended December 31, 2013 was $27.9 million a decrease from $31.4 million and $36.5 million, respectively for the years ended December 31, 2012 and 2011.  The majority of the declines in interest income resulted from lower average earning assets and decreased yields in 2013 compared to 2012 and 2011.  The decrease in average earning assets was the result of strategic planning to reduce the balance sheet and problem assets.  The yield on interest-earning assets for 2013 compared to 2012 and 2011 decreased to 5.34% mostly due to decreased yields on loans.

Interest expense for the year ended December 31, 2013 compared to 2012 and 2011 decreased by $1.6 million and $3.9 million, respectively to $4.3 million.  This decline was primarily due to decreased average cost of interest-bearing deposits, which declined 20 basis points to 77 basis points in 2013 compared to the same period in 2012 and declined 50 basis points compared to 2011.  Interest paid on the debentures and other borrowings decreased in 2013 compared to 2012 and 2011 due to debenture conversions in 2013 and decreased Federal Home Loan Bank (“FHLB”) borrowings.

The net impact of the changes in yields on interest-earning assets and interest-bearing liabilities was to improve the margin slightly to 4.51% for 2013 compared to 4.49% for 2012 and 4.47% in 2011.

Net interest income declined by $2.9 million, or 10.2%, for 2012 compared to 2011.  Total interest income declined by $5.1 million, or 14.0%, from $36.5 million in 2011 to $31.4 million in 2012.  The entire $5.1 million decline in total interest income resulted from the decline in average interest-earnings assets from $632.5 million for 2011 to $566.6 million for 2012.  Yields on interest-earning-assets decreased from 5.78% for 2011 to 5.54% for 2012.

The decline in interest income for 2012 compared to 2011 was partly offset by the $2.4 million reduction of interest expense, from $8.3 million for 2011 to $5.9 million for 2012.  Of this decline, $1.0 million resulted from lower rates paid on deposits and borrowings.  The remaining $1.3 million reduction of interest expense resulted from the decline in average interest-bearing liabilities from $540.8 million for 2011 to $475.1 million in 2012.

Provision for loan losses

The provision for loan losses in each period is reflected as a charge against earnings in that period.  The provision for loan losses is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio.  The provision for loan losses was $(1.9 million) in 2013 compared to $4.3 million in 2012 and $14.6 million in 2011.  The Company has been experiencing a downward trend in net charge-offs and increased credit quality, which resulted in a release of reserves.  The ratio of the allowance for loan losses to loans held for investment decreased from 3.66% at December 31, 2012 to 2.98% at December 31, 2013.

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The following schedule summarizes the provision, charge-offs (recoveries) by loan category for the year ended December 31, 2013, 2012 and 2011:

		For the Year Ended December 31,
		Manufactured				Commercial																Single Family
		Housing				Real Estate				Commercial				SBA				HELOC				Real Estate				Consumer				Total
2013		(in thousands)
Beginning balance		$	5,945			$	2,627			$	2,325			$	2,733			$	634			$	198			$	2			$	14,464
Charge-offs			(1,294	)			(349	)			(149	)			(547	)			(39	)			(179	)			(37	)			(2,594	)
Recoveries			257				1,243				212				559				3				8				-				2,282
Net charge-offs			(1,037	)			894				63				12				(36	)			(171	)			(37	)			(312	)
Provision			206				(969	)			(324	)			(794	)			(318	)			218				37				(1,944	)
Ending balance		$	5,114			$	2,552			$	2,064			$	1,951			$	280			$	245			$	2			$	12,208
2012
Beginning balance		$	4,629			$	3,528			$	2,734			$	3,877			$	349			$	150			$	3			$	15,270
Charge-offs			(3,652	)			(1,687	)			(656	)			(623	)			(76	)			(314	)			(8	)			(7,016	)
Recoveries			144				756				131				837				50				6				5				1,929
Net charge-offs			(3,508	)			(931	)			(525	)			214				(26	)			(308	)			(3	)			(5,087	)
Provision			4,824				30				116				(1,358	)			311				356				2				4,281
Ending balance		$	5,945			$	2,627			$	2,325			$	2,733			$	634			$	198			$	2			$	14,464
2011
Beginning balance		$	4,168			$	2,532			$	2,094			$	3,753			$	547			$	135			$	73			$	13,302
Charge-offs			(2,996	)			(4,224	)			(2,153	)			(2,930	)			(1	)			(788	)			-				(13,092	)
Recoveries			73				5				75				299				-				17				-				469
Net charge-offs			(2,923	)			(4,219	)			(2,078	)			(2,631	)			(1	)			(771	)			-				(12,623	)
Provision			3,384				5,215				2,718				2,755				(197	)			786				(70	)			14,591
Ending balance		$	4,629			$	3,528			$	2,734			$	3,877			$	349			$	150			$	3			$	15,270

The percentage of net non-accrual loans to the total loan portfolio has decreased to 3.55% as of December 31, 2013 from 4.84% at December 31, 2012.

The allowance for loan losses compared to net non-accrual loans has increased to 72.5% as of December 31, 2013 from 64.5% as of December 31, 2012.  Total past due loans declined to $2.6 million as of December 31, 2013 from $9.0 million as of December 31, 2012.  Of these past due amounts, $0.4 million and $5.6 million were guaranteed by the SBA as of December 31, 2013 and December 31, 2012, respectively.

Non-interest Income

 

The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers, gains from loan sales, investment securities gains and other.

The following tables present a summary of non-interest income for the periods presented:

		Year Ended												Year Ended
		December 31,								Increase				December 31,								Increase
		2013				2012				(Decrease)				2012				2011				(Decrease)
		(in thousands)
Other loan fees		$	1,033			$	1,124			$	(91	)		$	1,124			$	1,380			$	(256	)
Gains from loan sales, net			361				1,660				(1,299	)			1,660				370				1,290
Document processing fees			463				407				56				407				418				(11	)
Loan servicing, net			198				268				(70	)			268				300				(32	)
Service charges			318				410				(92	)			410				505				(95	)
Gains from sales of available-for-sale securities			-				121				(121	)			121				-				121
Other			458				291				167				291				238				53
Total non-interest income		$	2,831			$	4,281			$	(1,450	)		$	4,281			$	3,211			$	1,070

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Non-interest income decreased by $1.5 million to $2.8 million for 2013 compared to $4.3 million in 2012 primarily due to gains of $1.4 million in 2012 resulting from the sale of SBA and USDA loans and investment securities.  There were no such sales in 2013.

Non-interest income increased by $1.1 million to $4.3 million for 2012 compared to $3.2 million in 2011 primarily due to the sales of loans and securities mentioned above in 2012 that did not happen in 2011.  The increase in gains was partially offset by a decline in other loan fees mostly due to a decline in the volume of new loans in 2012 compared to 2011.

Non-Interest Expense

The following tables present a summary of non-interest expense for the periods presented:

		Year Ended												Year Ended
		December 31,								Increase				December 31,								Increase
		2013				2012				(Decrease)				2012				2011				(Decrease)
		(in thousands)
Salaries and employee benefits		$	12,842			$	11,552			$	1,290			$	11,552			$	11,816			$	(264	)
Occupancy expense, net			1,814				1,829				(15	)			1,829				1,969				(140	)
Loan servicing and collection			1,444				1,492				(48	)			1,492				1,538				(46	)
Professional services			1,219				1,484				(265	)			1,484				1,058				426
FDIC assessment			1,046				1,342				(296	)			1,342				957				385
Data processing			549				533				16				533				529				4
Advertising and marketing			512				367				145				367				395				(28	)
Depreciation			300				306				(6	)			306				374				(68	)
Net loss on sales/write-downs of foreclosed real estate and repossessed assets			388				1,161				(773	)			1,161				2,630				(1,469	)
Other			2,021				2,180				(159	)			2,180				2,054				126
Total non-interest expenses		$	22,135			$	22,246			$	(111	)		$	22,246			$	23,320			$	(1,074	)