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COMMUNITY WEST BANCSHARES / - Quarter Report: 2013 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, 2013
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission File Number:  000-23575
 
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
 
California
 
77-0446957
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California
 
93117
(Address of principal executive offices)
 
(Zip Code)

(805) 692-5821
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYES oNO
 
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). xYES 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 (Do not check if a 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 Exchange Act). oYes   No x
 
Number of shares of common stock of the registrant outstanding as of May 9, 2013: 6,033,921 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, 2012.
 
ITEM 2.  
31
       
ITEM 3.  
44
   
 
 
ITEM 4.  
44
       
PART II.
OTHER INFORMATION
 
       
ITEM 1.  
45
       
ITEM 1A.  
45
       
ITEM 3.  
47
       
ITEM 6.  
48
       
SIGNATURES  
49
 
PART I – FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

Community West Bancshares
           
 
 
   
 
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
(in thousands, except shares)
 
(unaudited)
       
Assets
           
Cash and due from banks
  $ 35,664     $ 27,866  
Federal funds sold
    25       25  
Cash and cash equivalents
    35,689       27,891  
Time and interest bearing deposits in other financial institutions
    3,537       3,653  
Investment securities available-for-sale, at fair value; amortized cost of $12,231 at March 31, 2013 and $11,944 at December 31, 2012
    12,251       12,004  
Investment securities held-to-maturity, at amortized cost; fair value of $12,347 at March 31, 2013 and $12,765 at December 31, 2012
    11,651       12,036  
Federal Home Loan Bank stock, at cost
    2,953       3,283  
Federal Reserve Bank stock, at cost
    1,373       1,373  
Loans:
               
Loans held for sale, at lower of cost or fair value
    61,753       68,694  
Loans held for investment, net of allowance for loan losses of $13,950 at March 31, 2013 and $14,464 at December 31, 2012
    380,653       380,507  
Total loans
    442,406       449,201  
Foreclosed real estate and repossessed assets
    4,389       1,889  
Premises and equipment, net
    3,083       3,068  
Other assets
    15,791       17,703  
Total assets
  $ 533,123     $ 532,101  
Liabilities
               
Deposits:
               
Non-interest-bearing demand
  $ 48,920     $ 53,605  
Interest-bearing demand
    264,044       269,466  
Savings
    16,621       16,351  
Time deposits
    104,434       94,798  
Total deposits
    434,019       434,220  
Other borrowings
    34,000       34,000  
Convertible debentures
    7,735       7,852  
Other liabilities
    3,299       2,980  
Total liabilities
    479,053       479,052  
Stockholders' equity
               
Preferred stock, no par value; 10,000,000 shares authorized; 15,600 shares issued and outstanding
    15,408       15,341  
Common stock, no par value; 20,000,000 shares authorized; 6,033,347 and 5,994,510 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively
    33,705       33,555  
Retained earnings
    4,945       4,118  
Accumulated other comprehensive income, net
    12       35  
Total stockholders' equity
    54,070       53,049  
Total liabilities and stockholders' equity
  $ 533,123     $ 532,101  
 
See accompanying notes.
 
 
Community West Bancshares
     
 
 
 
   
Three Months Ended March 31,
 
(in thousands, except per share amounts)
 
2013
   
2012
 
Interest income
           
Loans
  $ 6,794     $ 8,082  
Investment securities and other
    170       239  
Total interest income
    6,964       8,321  
Interest expense
               
Deposits
    759       1,265  
Other borrowings and convertible debentures
    407       528  
Total interest expense
    1,166       1,793  
Net interest income
    5,798       6,528  
Provision for (recovery of) loan losses
    (196 )     1,983  
Net interest income after provision for (recovery of) loan losses
    5,994       4,545  
Non-interest income
               
Other loan fees
    230       250  
Gains from loan sales, net
    161       1,097  
Document processing fees
    110       92  
Loan servicing, net
    75       151  
Service charges
    85       120  
Gains from sale of available-for-sale securities (includes $99 accumulated other comprehensive income reclassifications)
    -       121  
Other
    106       57  
Total non-interest income
    767       1,888  
Non-interest expenses
               
Salaries and employee benefits
    3,514       2,885  
Occupancy and equipment expenses
    455       495  
FDIC assessment
    265       426  
Professional services
    315       325  
Advertising and marketing
    93       57  
Depreciation and amortization
    74       77  
Loss on sale and write-down of foreclosed real estate and repossessed assets
    84       409  
Data processing
    150       135  
Other operating expenses
    722       805  
Total non-interest expenses
    5,672       5,614  
Income before provision for income taxes
    1,089       819  
Provision for income taxes
    -       -  
Net income
  $ 1,089     $ 819  
Dividends and accretion on preferred stock
    262       262  
Net income available to common stockholders
  $ 827     $ 557  
Earnings per common share:
               
Basic
  $ 0.14     $ 0.09  
Diluted
  $ 0.11     $ 0.08  
Basic weighted average number of common shares outstanding
    6,011       5,990  
Diluted weighted average number of common shares outstanding
    8,301       8,233  
 
See accompanying notes.
 
 
Community West Bancshares
           
 
 
   
 
 
   
Three Months Ended March 31,
 
(in thousands)
 
2013
   
2012
 
Net income
  $ 1,089     $ 819  
Other comprehensive loss, net of tax:
               
Net unrealized loss on securities available-for-sale
    (23 )     (148 )
Comprehensive income
  $ 1,066     $ 671  
 
See accompanying notes.
 

Community West Bancshares
Consolidated Statement of Stockholders’ Equity (unaudited)

   
Preferred Stock
   
Common Stock
Shares Amount
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Total Stockholders’ Equity
 
(in thousands)
       
 
                         
Balances at January 1, 2013
  $ 15,341       5,995     $ 33,555     $ 4,118     $ 35     $ 53,049  
                                                 
Stock option expense, recognized in earnings
                    15                       15  
Conversion of debentures
            33       118                       118  
Exercise of stock options
            5       17                       17  
Comprehensive income:
                                               
Net income
                            1,089               1,089  
Other comprehensive loss
                                    (23 )     (23 )
Dividends on preferred stock
    67                       (262 )             (195 )
Balances at March 31, 2013
  $ 15,408       6,033     $ 33,705     $ 4,945     $ 12     $ 54,070  

   
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  
Other comprehensive loss
                                    (148 )     (148 )
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 Statements of Cash Flows (unaudited)

   
Three Months Ended March 31,
 
 
 
2013
   
2012
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
  $ 1,089     $ 819  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for (recovery of) loan losses
    (196 )     1,983  
Depreciation and amortization
    74       77  
Deferred income taxes
    -       338  
Stock-based compensation
    15       8  
Net amortization of discounts and premiums for investment securities
    (3 )     (6 )
Net loss (gain) on:
               
Sale and write-downs of foreclosed real estate and repossessed assets
    101       409  
Sale of  loans held for sale
    (161 )     (1,097 )
Sale of available-for-sale securities
    -       (121 )
Loans originated for sale and principal collections, net
    6,060       2,429  
Changes in:
               
Servicing rights, net of amortization
    32       (248 )
Other assets
    1,920       (87 )
Other liabilities
    101       (292 )
Net cash provided by operating activities
    9,032       4,212  
Cash flows from investing activities:
               
Purchase of available-for-sale securities
    (2,065 )     -  
Principal pay downs and maturities of available-for-sale securities
    1,785       1,460  
Proceeds from sale of available-for-sale securities
    -       4,137  
Redemptions of Federal Home Loan Bank stock
    330       201  
Principal pay downs and maturities of held-to-maturity securities
    381       1,056  
Loan originations and principal collections, net
    (3,441 )     22,308  
Proceeds from sale of foreclosed real estate and repossessed assets
    1,933       2,967  
Net decrease (increase) in time and interest bearing deposits in other financial institutions
    116       (5,056 )
Purchase of premises and equipment, net
    (89 )     (54 )
Net cash (used in) provided by investing activities
    (1,050 )     27,019  
Cash flows from financing activities:
               
Dividends and accretion on preferred stock
    -       (195 )
Exercise of stock options
    17       -  
Net (decrease) increase in demand deposits and savings accounts
    (9,837 )     6,975  
Net increase (decrease) in time certificates of deposit
    9,636       (7,438 )
Repayment of Federal Home Loan Bank advances
    -       (10,000 )
Net cash used in financing activities
    (184 )     (10,658 )
Net increase in cash and cash equivalents
    7,798       20,573  
Cash and cash equivalents, beginning of year
    27,891       22,572  
Cash and cash equivalents, end of period
  $ 35,689     $ 43,145  
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest
  $ 1,019     $ 1,687  
Cash paid for income taxes
  $ -     $ 616  
Supplemental Disclosure of Noncash Investing Activity:
               
Transfers to foreclosed real estate and repossessed assets
  $ 4,534     $ 2,451  
Supplemental Disclosure of Noncash Financing Activity:
               
Preferred stock dividends declared, not paid
  $ 195       -  

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, 2013 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, 2012.

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.
 
Provision and Allowance for Loan Losses – The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”).  The ALL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio.  This process involves deriving probable loss estimates that are based on migration analysis/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, SBA, HELOC, Single Family Residential, and Consumer portfolios. The historical loss rate method is utilized for the homogeneous loan categories, primarily the Manufactured Housing portfolio. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off.  The following is a description of the characteristics of 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.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
 
Substandard
A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
 
 
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
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 and placed on non-accrual.  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
 
International risk
 
Trends in volume, maturity, and composition
 
Off-balance sheet
 
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, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required allowance for all non-impaired loans.  In addition, the migration results are adjusted based upon 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 – 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 for impairment loans generally greater than $500,000, classified as substandard or doubtful in addition to loans either on nonaccrual, considered a troubled debt restructuring (“TDR”) or when other conditions exist which lead management to review for possible impairment.   Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.  The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods.
 
 
The expected future cash flows are estimated and then discounted at the effective interest rate.
 
The value of the underlying collateral net of selling costs.  Selling costs are estimated based on industry standards, the Company’s actual experience or actual costs incurred as appropriate.  When evaluating real estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation.  When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old at time of evaluation.  Additionally for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
 
The loan’s observable market price.
 
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
 
The Company determines the appropriate ALL on a monthly basis and updates the qualitative factors quarterly.  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 and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral.  Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience.  These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.
 
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans.  The allowance is charged for losses when management believes that full recovery on the loan is unlikely.
 
The Company has outsourced and centralized appraisal management processes that track and monitor 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.
 
Foreclosed Real Estate and Repossessed Assets – Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell.  Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses.  Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed real estate. 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.
 
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required  to establish a valuation allowance for deferred tax asset and record a charge to income if Management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax asset may not be realized.
 
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, the cumulative pretax loss position was considered significant objective evidence, in addition to other factors, 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 as of December 31, 2011 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 $3.2 million for the year ended December 31, 2012, the deferred tax valuation allowance was reduced by $1.3 million to $5.4 million at December 31, 2012. The deferred tax valuation allowance was reduced to $4.9 million at March 31, 2013 based on net income of $1.1 million for the three months ended March 31, 2013. The net deferred tax asset, net of the valuation allowance, totaled $208,000 for March 31 2013 and December 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.
 
 
Earnings Per Share - Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income (loss) available to common shareholders.  Diluted earnings per share include the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include stock options, warrants and shares that could result from the conversion of debenture bonds.
 
Recent Accounting Pronouncements In February 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02 (ASU 2013-02), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires reporting and disclosure about changes in accumulated other comprehensive income (AOCI) balances and reclassifications out of AOCI. For public companies, the ASU is effective prospectively for fiscal years and interim periods within those years beginning after 15 December 2012. For nonpublic companies, the ASU is effective prospectively for fiscal years beginning after 15 December 2013 and interim and annual periods thereafter. Early adoption is permitted. The adoption of ASU No. 2013-02 resulted in presentation changes to the Company’s consolidated income statements.  The adoption of ASU No. 2013-02 had no impact on the Company’s balance sheets.

 
2.
INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of investment securities are as follows:

March 31, 2013
     
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
Available-for-sale securities
 
Cost
   
Gains
   
Losses
   
Value
 
   
(in thousands)
 
U.S. Government agency: Notes
  $ 1,998     $ -     $ (14 )   $ 1,984  
U.S. Government agency: MBS
    161       9       -       170  
U.S. Government agency: CMO
    10,006       44       (15 )     10,035  
Equity Securities: Farmer Mac Class A Stock
    66       -       (4 )     62  
Total
  $ 12,231     $ 53     $ (33 )   $ 12,251  
                                 
Held-to-maturity securities
                               
U.S. Government agency: MBS
  $ 11,651     $ 696     $ -     $ 12,347  
Total
  $ 11,651     $ 696     $ -     $ 12,347  

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

At March 31, 2013 and December 31, 2012, $23.9 million at carrying value was pledged to the Federal Home Loan Bank San Francisco, as collateral for current and future advances.
 
In the first quarter of 2012, the Company received $4.0 million in gross proceeds from the sale of seven available-for-sale securities for a gain of $121,000.  The cost basis of the securities sold was determined by specific identification.  As a result, $99,000 (net of tax) in unrealized gain was reclassified out of accumulated other comprehensive income.
 
In January 2013, CWB became an approved Federal Agricultural Mortgage Corporation (Farmer Mac) lender under the Farmer Mac I and Farmer Mac II Programs. Under the Farmer Mac I program loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac.  CWB receives an origination fee and ongoing fee for serving the credit. The Farmer Mac II program was authorized by Congress in 1991 to establish a uniform national secondary market for originators and investors using the 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, service the loans, and retain 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) which is classified as an available-for-sale investment.
 
 
The maturity periods and weighted average yields of investment securities at March 31, 2013 are as follows:
 
   
Total Amount
   
Less than
One Year
   
One to
Five Years
   
Five to
Ten Years
   
Over Ten Years
 
   
Amount
   
Yield
   
Amount
   
Yield
   
Yield
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
 
   
(in thousands)
 
Available-for-sale securities
                                                 
U. S. Government:
                                                 
Agency: Notes
  $ 1,984       1.0 %   $ 1,984       1.0 %   $ -       -     $ -       -     $ -       -  
Agency: MBS
    170       2.5 %     -       -       -       -       170       2.5 %                
Agency: CMO
    10,035       0.8 %     1,740       1.0 %     6,316       0.7 %     -       -       1,979       1.0 %
Total
  $ 12,189       .9 %   $ 3,724       1.0 %   $ 6,316       0.7 %   $ 170       2.5 %   $ 1,979       1.0 %
                                                                                 
Held-to-maturity securities
                                                                 
U.S. Government:
                                                                 
Agency: MBS
  $ 11,651       3.4 %   $ -       -     $ 1,613       5.5 %   $ 10,038       3.1 %   $ -       -  
Total
  $ 11,651       3.4 %   $ -       -     $ 1,613       5.5 %   $ 10,038       3.1 %   $ -       -  
 
The following tables show all securities that are in an unrealized loss position and temporarily impaired as of:
 
March 31, 2013
 
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
  $ 1,984     $ 14     $ -     $ -     $ 1,984     $ 14  
U.S. Government agency: CMO
    3,680       15       -       -       3,680       15  
Equity Securities: Farmer Mac Class A Stock
    62       4       -       -       62       4  
Total
  $ 5,726     $ 33     $ -     $ -     $ 5,726     $ 33  
                                                 
Held-to-maturity securities
                                               
U.S. Government agency: MBS
  $ -     $ -     $ -     $ -     $ -     $ -  
Total
  $ -     $ -     $ -     $ -     $ -     $ -  
 
December 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
  $ 1,988     $ 10     $ -     $ -     $ 1,988     $ 10  
U.S. Government agency: CMO
    876       1       411       1       1,287       2  
Total
  $ 2,864     $ 11     $ 411     $ 1     $ 3,275     $ 12  
 
As of March 31, 2013 and December 31, 2012, there were five and two 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.   Accordingly, as of March 31, 2013 and December 31, 2012, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.
 
3.
LOAN SALES AND SERVICING
 
SBA Loan Sales - The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis.  The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts.
 
On certain SBA loan sales that occurred prior to 2003, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.
 
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  In connection with the sale of $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 – Fair Value Option to better reflect the impact of subsequent changes in interest rates.  The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed.  The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium.  The Company records servicing liabilities for the unguaranteed loans sold calculated based on the present value of the estimated future servicing costs associated with each loan. As of March 31, 2013 and December 31, 2012, the servicing liability was $37,000 and $39,000, respectively.
 
The Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.  As of March 31, 2013 and December 31, 2012, the Company had approximately $50.9 million and $55.7 million, respectively, in SBA loans included in loans held for sale.  As of March 31, 2013 and December 31, 2012, the principal balance of SBA loans serviced was $31.2 million and $32.7 million, respectively.
 
The Company has expanded its agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.  In the third quarter of 2012, the Company sold $2.5 million in USDA loans and recorded the related servicing asset at fair value of $72,000.
 
As of March 31, 2013 and December 31, 2012, the Company had $8.5 million and $4.8 million of USDA loans included in loans held for sale, respectively. As of March 31, 2013 and December 31, 2012, the principal balance of USDA loans serviced was $2.5 million.
 

The following is a summary of activity for the Company’s I/O strips:
 
   
For the Three Months Ended March 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Beginning balance
  $ 426     $ 419  
Adjustment to fair value (included in Loan servicing, net)
    (11 )     7  
Ending balance
  $ 415     $ 426  
 
The key data and assumptions used in estimating the fair value of the Company’s I/O strips as of March 31, 2013 were as follows:
 
   
March 31, 2013
 
Weighted-Average Constant Prepayment Rate
    5.37 %
Weighted-Average Life (in years)
    6  
Weighted-Average Discount Rate
    12.08 %

A sensitivity analysis of the Company’s fair value of I/O strips to change in certain key assumptions as of March 31, 2013 is presented in the following table:
 
   
March 31, 2013
 
   
(in thousands)
 
Discount Rate
     
Increase in fair value from 100 basis points (“bps”) decrease
  $ 12  
Decrease in fair value from 100 bps increase
    (12 )
Constant Prepayment Rate
       
Increase in fair value from 10% decrease
  $ 6  
Decrease in fair value from 10% increase
    (6 )
 
The following is a summary of activity for servicing rights accounted for under the amortization method:

   
For the Three Months Ended March 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Beginning balance
  $ 383     $ 625  
Amortization (included in Loan servicing, net)
    (28 )     (28 )
Ending balance
  $ 355     $ 597  

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

   
For the Three Months Ended March 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Beginning balance
  $ 348     $ -  
Additions through loan sales
    -       276  
Adjustment to fair value (included in Loan servicing, net)
    (4 )     -  
Ending balance
  $ 344     $ 276  
 

The key data and assumptions used in estimating the fair value of the Company’s servicing rights as of March 31, 2013 were as follows:
 
   
March 31, 2013
 
Weighted-Average Constant Prepayment Rate
    4.89 %
Weighted-Average Life (in years)
    9  
Weighted-Average Discount Rate
    13.17 %
 
A sensitivity analysis of the Company’s fair value of servicing rights to change in certain key assumptions as of March 31, 2013 is presented in the following table:
 

   
March 31, 2013
 
   
(in thousands)
 
Discount Rate
     
Increase in fair value from 100 bps decrease
  $ 14  
Decrease in fair value from 100 bps increase
    (13 )
Constant Prepayment Rate
       
Increase in fair value from 100 bps decrease
  $ 7  
Decrease in fair value from 100 bps increase
    (7 )
 
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 – From time to time, the Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers.  In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor.  This forward sale agreement requires delivery of the loan on a “best efforts” basis but does not obligate the Company to deliver if the mortgage loan does not fund.
 
The mortgage rate lock agreement and the forward sale agreement qualify as derivatives.  The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates.  These derivative financial instruments are recorded at fair value if material.  Although the Company does not attempt to qualify these transactions for the special hedge accounting, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge.  At March 31, 2013 and December 31, 2012, the Company had $4.3 million and $15.8 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments. The value of related derivative instruments was not material to the Company’s financial position or results of operations.
 
 
4.
LOANS HELD FOR INVESTMENT
 
The composition of the Company’s loans held for investment loan portfolio follows:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Manufactured housing
  $ 174,923     $ 177,391  
Commercial real estate
    132,008       126,677  
Commercial
    31,769       32,496  
SBA
    29,644       30,688  
HELOC
    17,318       17,852  
Single family real estate
    9,092       9,939  
Consumer
    194       232  
      394,948       395,275  
Less:
               
Allowance for loan losses
    13,950       14,464  
Deferred costs, net
    (74 )     (128 )
Discount on SBA loans
    419       432  
Loans held for investment, net
  $ 380,653     $ 380,507  

At March 31, 2013, 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
  $ 390     $ 140     $ 257     $ 787     $ 174,136     $ 174,923     $ -  
Commercial real
estate:
                                                       
Commercial
real estate
    -       -       359       359       85,964       86,323       -  
504 1st TD
    -       489       -       489       34,082       34,571       -  
Land
    -       -       -       -       4,406       4,406       -  
Construction
    -       -       -       -       6,708       6,708       -  
Commercial
    -       -       -       -       31,769       31,769       -  
SBA
    363       -       2,710       3,073       26,571       29,644       -  
HELOC
    -       -       -       -       17,318       17,318       -  
Single family real
estate
    40       -       64       104       8,988       9,092       64  
Consumer
    -       -       -       -       194       194       -  
Total
  $ 793     $ 629     $ 3,390     $ 4,812     $ 390,136     $ 394,948     $ 64  
 
Of the $3.1 million SBA loans past due, $2.9 million is guaranteed.
 

At December 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
  $ 467     $ 258     $ 417     $ 1,142     $ 176,249     $ 177,391     $ -  
Commercial real
estate:
                                                       
Commercial
real estate
    -       -       830       830       81,682       82,512       -  
504 1st TD
    -       -       -       -       34,502       34,502       -  
Land
    -       -       -       -       4,556       4,556       -  
Construction
    -       -       -       -       5,107       5,107       -  
Commercial
    40       -       132       172       32,324       32,496       -  
SBA
    713       -       6,069       6,782       23,906       30,688       -  
HELOC
    -       -       -       -       17,852       17,852       -  
Single family real
estate
    32       -       12       44       9,895       9,939       12  
Consumer
    -       -       -       -       232       232       -  
Total
  $ 1,252     $ 258     $ 7,460     $ 8,970     $ 386,305     $ 395,275     $ 12  
 
Of the $6.8 million SBA loans past due, $5.6 million is guaranteed.
 
An analysis of the allowance for loan losses for loans held for investment follows:
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
   
(in thousands)
 
Balance, beginning of period
  $ 14,464     $ 15,270  
                 
Loans charged off
    (687 )     (2,958 )
Recoveries on loans previously charged off
    369       410  
Net charge-offs
    (318 )     (2,548 )
                 
Provision for (recovery of) loan losses
    (196 )     1,983  
Balance, end of period
  $ 13,950     $ 14,705  
 
As of March 31, 2013 and December 31, 2012, the Company also had established reserves for credit losses on undisbursed loans of $90,000 and $102,000 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, 2013:
 
   
Allowance
12/31/12
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs (Recoveries)
   
Allowance
3/31/13
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 5,945     $ 238     $ (427 )   $ 115     $ (312 )   $ 5,871  
Commercial real estate
    2,627       65       (4 )     14       10       2,702  
Commercial
    2,325       (401 )     (16 )     61       45       1,969  
SBA
    2,733       39       (115 )     177       62       2,834  
HELOC
    634       (213 )     (39 )     -       (39 )     382  
Single family real estate
    198       48       (57 )     2       (55 )     191  
Consumer
    2       28       (29 )     -       (29 )     1  
Total
  $ 14,464     $ (196 )   $ (687 )   $ 369     $ (318 )   $ 13,950  

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 (Recoveries)
   
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 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, 2013:
 
   
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
  $ 165,199     $ 4,775     $ 9,724     $ 1,096     $ 174,923     $ 5,871  
Commercial real estate
    120,687       2,698       11,321       4       132,008       2,702  
Commercial
    26,853       1,555       4,916       414       31,769       1,969  
SBA
    29,047       2,791       597       43       29,644       2,834  
HELOC
    17,090       353       228       29       17,318       382  
Single family real estate
    8,896       180       196       11       9,092       191  
Consumer
    194       1       -       -       194       1  
Total
  $ 367,966     $ 12,353     $ 26,982     $ 1,597     $ 394,948     $ 13,950  
 
 
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, 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
  $ 166,956     $ 4,842     $ 10,435     $ 1,103     $ 177,391     $ 5,945  
Commercial real estate
    114,769       2,623       11,908       4       126,677       2,627  
Commercial
    27,403       1,756       5,093       569       32,496       2,325  
SBA
    28,947       2,675       1,741       58       30,688       2,733  
HELOC
    17,583       585       269       49       17,852       634  
Single family real estate
    9,738       187       201       11       9,939       198  
Consumer
    232       2       -       -       232       2  
Total
  $ 365,628     $ 12,670     $ 29,647     $ 1,794     $ 395,275     $ 14,464  

The following schedule summarizes impaired loans by loan class as of March 31, 2013:

   
Without Specific Valuation Allowance
   
With Specific Valuation Allowance
   
Valuation Allowance
   
Impaired Loans, net
 
   
(in thousands)
 
Manufactured housing
  $ 4,190     $ 5,534     $ 1,096     $ 8,628  
Commercial real estate:
                               
Commercial real estate
    10,033       -       4       10,029  
SBA 504 1st
    772       516       -       1,288  
Commercial
    49       4,867       414       4,502  
SBA
    159       438       43       554  
HELOC
    -       228       29       199  
Single family real estate
    117       79       11       185  
Total
  $ 15,320     $ 11,662     $ 1,597     $ 25,385  

The following schedule summarizes impaired loans by loan class as of December 31, 2012:

   
Without Specific Valuation Allowance
   
With Specific Valuation Allowance
   
Valuation Allowance
   
Impaired Loans, net
 
   
(in thousands)
 
Manufactured housing
  $ 4,687     $ 5,748     $ 1,103     $ 9,332  
Commercial real estate:
                               
Commercial real estate
    10,615       -       -       10,615  
SBA 504 1st
    774       519       4       1,289  
Commercial
    49       5,044       569       4,524  
SBA
    1,238       503       58       1,683  
Consumer
    121       349       60       410  
Total
  $ 17,484     $ 12,163     $ 1,794     $ 27,853  

The following schedule summarizes the average investment in impaired loans by loan class and the interest income recognized:
 
 
   
Three Months Ended March 31, 2013
   
Three Months Ended March 31, 2012
 
   
Average Investment in Impaired Loans
   
Interest Income Recognized
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
   
(in thousands)
 
Manufactured housing
  $ 10,007     $ 33     $ 4,559     $ 46  
Commercial real estate:
                               
Commercial real estate
    10,250       6       20,971       193  
SBA 504 1st
    1,281       12       6,615       95  
Construction
    -       -       8,286       108  
Commercial
    4,969       54       5,567       87  
SBA
    1,161       10       1,835       34  
HELOC
    247       -               -  
Single family real estate
    197       1       431       1  
Consumer
    -       -       11       -  
Total
  $ 28,112     $ 116     $ 48,275     $ 564  
 
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(dollars in thousands)
 
Nonaccrual loans
  $ 24,129     $ 29,643  
SBA guaranteed portion of loans included above
    (4,422 )     (7,218 )
Nonaccrual loans, net
  $ 19,707     $ 22,425  
                 
Troubled debt restructured loans, gross
  $ 18,371     $ 19,931  
Loans 30 through 89 days past due with interest accruing
  $ 464     $ 521  
Allowance for loan losses to gross loans held for investment
    3.54 %     3.66 %
 
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, 2013
   
December 31, 2012
 
   
(in thousands)
 
Manufactured housing
  $ 6,643     $ 7,542  
Commercial real estate:
               
Commercial real estate
    10,034       10,615  
504 1st
    490       490  
Construction
    -       -  
Commercial
    1,847       1,945  
SBA
    348       1,442  
HELOC
    228       269  
Single family real estate
    117       121  
Consumer
    -       1  
Nonaccrual loans, net
  $ 19,707     $ 22,425  
 
 
The accrual of interest is discontinued when substantial doubt exists as to collectibility of the loan; generally at the time the loan is 90 days delinquent.  Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
At March 31, 2013, the recorded investment in loans by rating is as follows:
 
   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
   
(in thousands)
 
Manufactured housing
  $ 162,358     $ -     $ 12,565     $ -     $ 174,923  
Commercial real estate:
                                    -  
Commercial real estate
    63,793       8,794       13,736       -       86,323  
SBA 504 1st
    31,161       1,443       1,967       -       34,571  
Land
    3,583       823       -       -       4,406  
Construction
    6,708       -       -       -       6,708  
Commercial
    26,869       1,417       3,434       49       31,769  
SBA
    16,259       168       2,478       33       18,938  
HELOC
    9,205       245       7,868       -       17,318  
Single family real estate
    8,780       -       312       -       9,092  
Consumer
    194       -       -       -       194  
Total
  $ 328,910     $ 12,890     $ 42,360     $ 82     $ 384,242  
SBA guarantee
    -               8,177       2,529       10,706  
Total
  $ 328,910     $ 12,890     $ 50,537     $ 2,611     $ 394,948  

At December 31, 2012, the recorded investment in loans by rating is as follows:

   
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total
   
(in thousands)
 
Manufactured housing
  $ 164,269     $ -     $ 13,122     $ -     $ 177,391  
Commercial real estate:
                                       
Commercial real estate
    63,793       6,478       12,241       -       82,512  
SBA 504 1st
    31,385       1,461       1,656       -       34,502  
Land
    3,333       300       923       -       4,556  
Construction
    5,107       -       -       -       5,107  
Commercial
    27,015       997       4,413       71       32,496  
SBA
    16,302       1,514       2,504       54       20,374  
HELOC
    9,432       245       8,175       -       17,852  
Single family real estate
    9,622       -       317       -       9,939  
Consumer
    231       -       1       -       232  
Total
  $ 330,489     $ 10,995     $ 43,352     $ 125     $ 384,961  
SBA guarantee
    -       -       7,551       2,763       10,314  
Total
  $ 330,489     $ 10,995     $ 50,903     $ 2,888     $ 395,275  
 
 
The following table reflects troubled debt restructurings (TDR) that occurred in the three months ended March 31, 2013:
 
   
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
  $ 453     $ 24     $ 117       100     $ 453       133  
RE Commercial
    286       20       -       -       286       8  
Commercial
    216       4       -       -       216       60  
Total
  $ 955     $ 48     $ 117       100     $ 955       111  

The following table reflects TDR’s that occurred in the past twelve months and experienced a payment default during the three months ended March 31, 2013:

   
 
Book Balance (thousands)
   
Effect on Allowance for Loan Loss (thousands)
   
Number of Loans
 
Manufactured Housing
  $ 375     $ 9       5  
Total
  $ 375     $ 9       5  

The five Manufactured Housing troubled debt restructures received extensions of 16 months, 19 months, 33 months, 120 months and 352 months all during the nine months ended December 31, 2012. All of the five loans were transferred to repossessed assets during the first quarter of 2013.

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.  The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell.  All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.
 
 
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, 2013 and December 31, 2012 and the relative levels of inputs from which such amounts were derived:
 
   
Fair value measurements at March 31, 2013 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
  $ 12,251     $ 62     $ 12,189     $ -  
Interest only strips (included in other assets)
    415                       415  
Servicing asset (included in other assets)
    344       -       -       344  
Total
  $ 13,010     $ 62     $ 12,189     $ 759  
 
   
Fair value measurements at December 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
  $ 12,004     $ -     $ 12,004     $ -  
Interest only strips (included in other assets)
    426       -       -       426  
Servicing asset (included in other assets)
    348       -       -       348  
Total
  $ 12,778     $ -     $ 12,004     $ 774  

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 $426,000 as of December 31, 2012 and a valuation adjustment of $11,000 was recorded in expense during the first three months of 2013.  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.  In connection with the sale of $10.1 million in SBA loans during the first quarter of 2012 and the sale of $2.5 million in USDA loans during the third quarter, the Company recorded servicing assets of $276,000 and $72,000, respectively, and has elected to measure those assets at fair value in accordance with ASC 825-10.  Significant assumptions in the valuation of servicing rights include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
 
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.  These assets include loans held for sale, foreclosed real estate and repossessed assets and loans that are considered impaired per generally accepted accounting principles.
 

The following summarizes the fair value measurements of assets measured on a non-recurring basis as of March 31, 2013 and December 31, 2012 and the relative levels of inputs from which such amounts were derived:
 
   
Fair value measurements at March 31, 2013 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
  $ 25,385     $ -     $ 15,320     $ 10,065  
Loans held for sale
    65,589       -       65,589       -  
Foreclosed real estate and repossessed assets
    4,389       -       4,389       -  
Total
  $ 95,363     $ -     $ 85,298     $ 10,065  

   
Fair value measurements at December 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
  $ 27,853     $ -     $ 17,430     $ 10,423  
Loans held for sale
    72,514       -       72,514       -  
Foreclosed real estate and repossessed assets
    1,889       -       1,889       -  
Total
  $ 102,256     $ -     $ 91,833     $ 10,423  
 

Loans held for sale are carried at the lower of cost or fair value.  The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed-upon sale price.  As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy.  At March 31, 2013 and December 31, 2012, the Company had loans held for sale with an aggregate carrying value of $61.8 million and $68.7 million respectively.
 
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated costs to sell.  Fair value is based upon independent market prices obtained from certified appraisers or the current listing price, if lower.  When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2.  When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
 
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.
 
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 $34.0 million at March 31, 2013 and December 31, 2012, 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, 2013, CWB had pledged to the FHLB, securities $23.9 million at carrying value and loans of $24.5 million, and had $64.8 million available for additional borrowing.  At December 31, 2012, CWB had pledged to the FHLB, securities $24.0 million at carrying value and loans of $25.5 million, and had $65.8 million available for additional borrowing. Total FHLB interest expense for the three months ended March 31, 2013 and 2012 was $245,000 and $352,000, respectively.
 
Federal Reserve BankCWB has established a credit line with the Federal Reserve Bank (“FRB”).  Advances are collateralized in the aggregate by eligible loans for up to 28 days.  There were no outstanding FRB advances as of March 31, 2013 and December 31, 2012.  CWB had $111.1 million in borrowing capacity as of March 31, 2013.
 
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, 2013 and December 31, 2012, the balance of the convertible debentures was $7,735,000 and $7,852,000, respectively.
 
 
7.
STOCKHOLDERS’ EQUITY
 
The following summarizes the changes in the unrealized gains and losses on the available-for-sale securities component of accumulated other comprehensive income:

(in thousands)
 
Three Months Ended March 31,
 
   
2013
   
2012
 
Beginning balance
  $ 35     $ 139  
Other comprehensive income before reclassifications
    (23 )     (49 )
Amounts reclassified from accumulated other comprehensive income
    -       (99 )
Net current-period other comprehensive income
    (23 )     (148 )
Ending balance
  $ 12     $ (9 )
 
In the first quarter of 2012, the Company received $4.0 million in gross proceeds from the sale of seven available-for-sale securities for a gain of $121,000.  The cost basis of the securities sold was determined by specific identification.  As a result, $99,000 (net of tax) in unrealized gain was reclassified out of accumulated other comprehensive income.
 
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.
 
On December 11, 2012, Treasury sold all 15,600 shares of Series A Preferred Stock. The Treasury continues to hold the Warrant to purchase up to 521,158 shares of common stock at an exercise price of $4.49 per share. Treasury sold the shares in a non-public offering as part of a modified “Dutch Auction” process. The Company did not bid on any of the shares, which were all sold to third party purchasers unaffiliated with the Company. The Company did not receive any proceeds from this auction, nor were any of the terms modified in connection with the sales.
 
In the year ended December 31, 2012, the Company recorded $779,000 of dividends and $267,000 in accretion of the discount on preferred stock, for a total of $1,046,000 in Series A Preferred Stock dividends and accretion on preferred stock. In the three months ended March 31, 2013, the Company recorded $195,000 of dividends and $67,000 in accretion of the discount on preferred stock, for a total of $262,000 in Series A Preferred Stock dividends and accretion on preferred stock.
 
 
The Company has paid all the quarterly dividends on such Series A Preferred Stock through February 15, 2012. While the Company declared and accrued for its May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 dividends, the Company’s request to the FRB, pursuant to the requirements under a written agreement with the FRB, to pay the dividends was denied by the FRB and, as such, the Company has not paid the dividends.  The aggregate amount of the dividends that would have been paid on May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 on the Series A Preferred Stock was $779,000.   The deferral of the dividends on the Series A Preferred Stock is permitted under its terms and does not constitute an event of default.
 
Common Stock Warrant
 
The Warrant issued as part of the TARP  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,
 
   
2013
   
2012
 
   
(dollars in thousands, except per share data)
 
Net income
  $ 1,089     $ 819  
Less: Preferred stock dividends
    262       262  
Net income available to common stockholders
  $ 827     $ 557  
                 
Add: Debenture interest expense and costs, net of income taxes
    105       107  
Net income for diluted calculation of earnings per common share
  $ 932     $ 664  
Basic weighted average number of common shares outstanding
    6,011       5,990  
Dilutive weighted average number of common shares outstanding
    8,301       8,233  
Earnings per common share:
               
Basic
  $ 0.14     $ 0.09  
Diluted
  $ 0.11     $ 0.08  
 
 
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, 2013
   
December 31, 2012
 
   
Carrying Amount
   
Estimated Fair Value
   
Carrying Amount
   
Estimated Fair Value
 
   
(in thousands)
 
Assets:
                       
Cash and cash equivalents
  $ 35,689     $ 35,689     $ 27,891     $ 27,891  
Time and interest bearing deposits in other financial institutions
    3,537       3,537       3,653       3,653  
Federal Reserve and Federal Home Loan Bank stock
    4,326       4,326       4,656       4,656  
Investment securities
    23,902       24,598       24,040       24,769  
Loans
    442,406       459,807       449,201       467,622  
Liabilities:
                               
Deposits (other than time deposits)
    329,585       329,585       339,422       339,422  
Time deposits
    104,434       105,775       94,798       96,404  
Other borrowings
    41,735       42,905       41,852       43,238  
 
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below:
 
Cash and cash equivalents - The carrying amounts approximate fair value because of the short-term nature of these instruments.
 
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.
 
Deposits – The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date.
 
Other borrowings – The fair value 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.
 
 
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, 2013 and December 31, 2012.  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 included herein and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and the other financial information appearing elsewhere in this report.
 
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
 
Net income available to common shareholders of the Company was $827,000 million, or $0.14 per basic common share and $0.11 per diluted common share for 1Q13 compared to $557,000 or $.09 per basic common share and $0.08 per diluted common share for 1Q12.    The Company’s 1Q13 earnings performance was impacted by:
 
 
The provision for loan losses decreased from $2.0 million for 1Q12 to $(196,000) for 1Q13, resulting from net charge-offs decreasing from $2.5 million for 1Q12 to $318,000 for 1Q13 and improvement in the loss factors of the allowance for loan losses (ALLL) in 1Q13 compared to 1Q12. The ratio of the ALLL to loans held for investment increased from 3.19% at March 31, 2012 to 3.54% at March 31, 2013.
 
 
A decrease in net interest income of $730,000, or 11.2%, from $6.5 million for 1Q12 to $5.7 million for 1Q13, primarily due to a decrease in both average interest-earning assets.
 
 
Interest income declined by $1.4 million, or 16.3%, from $8.3 million for 1Q12 to $7.0 million for 1Q13, primarily due to lower average interest-earning assets of $492.3 million for 1Q13 compared to $586.4 million for 1Q12. The average yield on loans decreased by 0.03% from 6.01% in 1Q12 to 5.98% in 1Q13.
 
 
Interest expense declined $627,000, or 35.0%, from $1.8 million for 1Q12 to $1.2 million for 1Q13, resulting from a combination of lower average interest-bearing liabilities of $416.0 million for 1Q13 compared to $527.5 million for 1Q12, and lower yields on interest-bearing liabilities of 1.14% for 1Q13 compared to 1.37% for 1Q12. The average yield on deposits decreased by 0.28% from 1.10% in 1Q12 to 0.82% in 1Q13.
 
 
The combination of the decline in rates paid on deposits partially offset by a slight decline in yields on loans resulted in a margin improvement of 0.30% from 4.48% for 1Q12 to 4.78% for 1Q13.
 
 
Total non-interest income decreased by $1.1 million, or 59.4%, from $1.9 million for 1Q12 to $767,000 for 1Q13, primarily 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, both of which occurred in 1Q12.
 
Recent Regulatory Actions
 
Office of the Comptroller of the Currency
 
On January 26, 2012, the Bank entered into a consent agreement (the “OCC Agreement”) with the Comptroller of the Currency (the “OCC”), the Bank’s primary banking regulator, which requires the Bank to take certain corrective actions to address certain deficiencies in the operations of the Bank, as identified by the OCC  In accordance with the terms of the OCC Agreement, the Bank took the following actions:
 
Article I of the OCC Agreement requires the formation of a compliance committee.  The Bank established a Board Regulatory Compliance Committee (“Compliance Committee”) on January 26, 2012.  The Compliance Committee meets and reports to the Bank’s Board of Directors on a monthly basis.  The Compliance Committee’s reports to the Bank’s Board of Directors include information concerning the status of actions taken or needed to be taken to achieve full compliance with the OCC Agreement, the personnel of the Bank primarily responsible for implementing such action and the expected timing of such actions.
 
 
Article II of the OCC Agreement requires an updated strategic plan covering at least a three-year period.  The Bank has adopted, submitted and received approval from the OCC for the three-year strategic plan, and updates on an annual basis, which includes, among other things, strategic goals, objectives, key financial performance indicators and risk tolerances, identification and prioritization of initiatives and opportunities including timeframes, a management employment and succession program, assignment of responsibilities and accountability for the strategic planning process, and a description of systems designed to monitor the Bank's progress in meeting the goals set forth in the strategic plan.
 
Article III of the OCC Agreement requires a capital plan and requires that the Bank achieve and maintain a Tier 1 Leverage Capital ratio of 9% and a Total Risk-Based Capital ratio of 12% on or before May 25, 2012.  The Bank’s Board of Directors has incorporated a three-year capital plan into the Bank’s strategic plan.  The Bank successfully met the minimum capital requirements as of May 25, 2012 and has continued to exceed such requirements since then.  Notwithstanding that the Bank has achieved the required minimum capital ratios required by the OCC Agreement, the existence of a requirement to maintain a specific capital level in the OCC Agreement means that the Bank may not be deemed "well capitalized" under applicable banking regulations.  As of March 31, 2013, the Bank’s Tier 1 Leverage Capital ratio was 11.34% and the Total Risk-Based Capital ratio was 15.63%.
 
The Bank’s Board of Directors prepares a written evaluation of the Bank's performance against the capital plan on a quarterly basis, including a description of actions the Bank will take to address any shortcomings, which is documented in Board meeting minutes.
 
Article IV of the OCC Agreement requires the Bank to take steps to improve the management and oversight of the Bank.  In that regard, the Bank has appointed several key officers, including the Bank’s appointment of its President and Chief Executive Officer, the appointment of a new Chief Credit Officer; and several other officers in key areas of the Bank.  The Bank believes that these management changes have facilitated clearer lines of responsibility and authority.  At its monthly meetings, the Compliance Committee reviews the Bank’s processes, personnel and control systems to ensure they are adequate.
 
Article V of the OCC Agreement requires the Bank to have a written program designed to ensure that the risks associated with the Bank’s loan portfolio are properly reflected and accounted for on the Bank’s books and records.  The Bank’s Board of Directors has adopted such a written program, including with respect to risk grading and valuation of loans, that losses are charged off, as appropriate, and that current information is gathered and maintained regarding loans and collateral.  The Bank has submitted written information regarding the foregoing to the OCC.  The Bank’s Board of Directors and Management will continue to review this program and take steps, as appropriate, to ensure the Bank complies with the requirements of the OCC Agreement.
 
Article VI of the OCC Agreement requires the Bank to have a written program to ensure compliance with applicable financial accounting standards.  The Bank’s Board of Directors has adopted such a program, which includes specific measures for monitoring of loans, and identification of, and accounting for, loan impairment, loss recognition and troubled debt restructurings.
 
Article VII of the OCC Agreement requires that the Bank employ an external firm, acceptable to the OCC, to perform a semi-annual review of the Bank’s loan portfolio.  The Bank has done so, and a review for all quarters of 2012 and 2013 has been performed, and the findings from those reviews were considered by the Bank in performing an assessment of the Bank’s loan portfolio and related allowance for loan losses.
 
Article VIII of the OCC Agreement requires the Bank to have a program to monitor assets which have been criticized by internal or external loan reviews or by the OCC.  As so required, the Bank maintains a Criticized Assets Report, which reports the status of assets that have been identified by the Bank as evidencing a higher degree of risk of loss.  The report is updated at least monthly.
 
Article IX of the OCC Agreement requires the Bank to have a program for the maintenance of an appropriate allowance for loan and lease losses.  The Bank’s Board of Directors has adopted such a written plan, which is designed to ensure that the Bank’s allowance for loan and lease losses is consistent with all regulatory and financial accounting requirements.  An external review is performed quarterly prior to the timely quarterly filing of the Bank’s Consolidated Report of Condition and Income (“Call Report”).
 
 
Article X of the OCC Agreement requires the Bank to review and revise the Bank’s other real estate owned (“OREO”) section of the Bank’s loan policy.  The Bank’s Board of Directors has adopted an updated policy concerning OREO, which has been incorporated into the Bank’s three-year strategic plan.  The OREO policy reflects updates to ensure compliance with applicable regulatory and financial accounting requirements, including procedures to ensure that periodic, appropriate appraisals and valuations are performed.
 
Article XI of the OCC Agreement requires the Bank to adhere to and implement the Bank’s liquidity risk management program.  The Bank has adopted and implemented a liquidity risk management program, which is designed to address current and projected funding needs, ensure the Bank has sufficient liquidity to meet such needs, reduce reliance on high cost and wholesale funding sources, and comply with applicable restrictions on brokered deposits.  The Bank’s Board of Directors reviews its compliance with this policy on a monthly basis, and provides quarterly reports to the OCC, as required by the OCC Agreement.
 
Article XII of the OCC Agreement requires that the Bank take steps to correct all violations of law, rules or regulations identified by the OCC.  The Bank’s Board of Directors and Compliance Committee monitor the Bank’s progress on a monthly basis.
 
The OCC Agreement requires that the Bank furnish periodic written progress reports to the OCC detailing the form and manner of any actions taken to secure compliance with the OCC Agreement.  The Bank has submitted such progress reports on a monthly basis, as required by the OCC Agreement.
 
While the Bank believes that it is in substantial compliance with the OCC Agreement, no assurance can be given that the OCC will concur with the Bank’s assessment.  Failure to comply with the provisions of the OCC Agreement may subject the Bank to further regulatory action, including but not limited to, being deemed undercapitalized for purposes of the OCC Agreement, and the imposition by the OCC of prompt corrective action measures or civil money penalties which may have a material adverse impact on the Company’s financial condition and results of operations.
 
Actions required of the Bank in response to the OCC Agreement have prompted the Bank to reassess future financial results and financial forecasts.  In addition, financial results are subject to many external factors, including the interest rate environment, loan demand, deposit pricing and the economy as a whole, both locally and nationally.  The Bank does not currently expect future financial results to be significantly impacted by specific responses to, or actions taken pursuant to, the OCC Agreement.  However, the Bank is implementing a number of measures to mitigate any potential impact that such external factors could have on the Bank’s future financial results, which measures have been incorporated into the Bank’s ongoing risk management and strategic planning processes.  No assurances can be provided that these measures will be successful in mitigating any such potential impact. In that regard, the Bank does not currently expect credit quality trends to be significantly impacted by the actions required of the Bank pursuant to the OCC Agreement.  However, in connection with the Bank’s risk management process, the allowance for loan losses requires continuous oversight to ensure its adequacy and responsiveness to changes in risk within the Bank’s credit portfolio.  The Bank has not made changes to its methodology for calculating the allowance for loan losses in specific response to the OCC Agreement.  However, from time to time, in connection with the Bank’s periodic evaluation of the credit portfolio and related allowance for loan losses methodology, the Bank may make changes as the Bank deems appropriate.  Any significant changes to the Bank’s allowance for loan losses methodology will be appropriately disclosed, including any material impact to CWBC’s financial statements.

Federal Reserve Bank of San Francisco
 
On April 23, 2012, the Company entered into a written agreement (the “FRB Agreement”) with the Federal Reserve Board (the “FRB”).  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 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 guidelines; 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. The FRB accepted the capital plan on July 10, 2012;
 
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. The FRB accepted the cash flow projection on July 10, 2012;
 
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 FRB’s approval to pay the dividend due on May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 on the Company’s Series A Preferred Stock.  Those requests were denied.  Consequently, the Company did not pay the dividends and the dividends remain accrued as of, and subsequent to, March 31, 2013.  As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.
 
Since the appointment of a new Chief Executive Officer in November 2011 and Chief Credit Officer in July 2011, the Bank has maintained a focus on addressing the areas of concern that have been raised by the regulators.  As a result, all of the prudent actions required in the OCC Agreement and FRB Agreement have been addressed, and either have been or will be completed in the near future.  No assurances can be provided that CWBC and CWB will achieve full compliance with the regulatory agreements and the regulatory response in the event of any non-compliance.
 
The Board and Management will continue to work closely with the OCC and FRB to achieve compliance with the terms of both agreements and improve the Company’s and Bank’s strength, security and performance.
 
Critical Accounting Policies
 
A number of critical accounting policies are used in the preparation of the Company’s consolidated financial statements.  These policies relate to areas of the financial statements that involve estimates and judgments made by management.  These include provision and allowance for loan losses and servicing rights.  These critical accounting policies are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
 
 
Results of Operations - First Quarter Comparison
 
The following table sets forth for the periods indicated, certain items in the consolidated income statements of the Company and the related changes between those periods:
 
    Three Months Ended March 31,        
   
2013
   
2012
   
Increase
(Decrease)
 
   
(dollars in thousands, except per share amounts)
 
Interest income
  $ 6,964     $ 8,321     $ (1,357 )
Interest expense
    1,166       1,793       (627 )
Net interest income
    5,798       6,528       (730 )
Provision for (recovery of) loan losses
    (196 )     1,983       2,179  
Net interest income after provision for (recovery of) loan losses
    5,994       4,545       1,449  
Non-interest income
    767       1,888       (1,121 )
Non-interest expenses
    5,672       5,614       58  
Income before provision for income taxes
    1,089       819       270  
Provision for income taxes
    -       -       -  
Net income
  $ 1,089     $ 819     $ 270  
Dividends and accretion on preferred stock
    262       262       -  
Net income available to common shareholders
  $ 827     $ 557     $ 270  
Earnings per common share:
                       
Basic
  $ 0.14     $ 0.09     $ 0.05  
Diluted
  $ 0.11     $ 0.08     $ 0.03  
Dividends per common share
  $ -     $ -     $ -  
Comprehensive income
  $ 1,066     $ 671     $ 395  
 
The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
 
   
Three Months Ended
March 31,
 
   
2013 versus 2012
 
    Total    
Change due to
 
   
change
    Rate     Volume  
   
(in thousands)
 
Loans, net
  $ (1,288 )   $ (75 )   $ (1,213 )
Investment securities and other
    (69 )     20       (89 )
Total interest-earning assets
    (1,357 )     (55 )     (1,302 )
                         
Deposits
    (506 )     (239 )     (267 )
Other borrowings
    (121 )     116       (237 )
Total interest-bearing liabilities
    (627 )     (123 )     (504 )
Net interest income
  $ (730 )   $ 68     $ (798 )

Net Interest Income
Net interest income declined by $730,000 for 1Q13 compared to 1Q12.  Total interest income declined by $1.4 million for 1Q13 compared to 1Q12.  Of this decline, $1.3 million was due to the decline in average earning assets from $586.4 million for 1Q12 to $492.3 million for 1Q13.  The yield on interest earning assets increased slightly from 5.71% for 1Q12 to 5.74% for 1Q13.
 
The decline in interest expense of $627,000 resulted from both lower rates paid on interest-bearing liabilities, 1.14% for 1Q13 compared to 1.37% for 1Q12, and a decline in the average balance of interest-bearing liabilities from $527.5 million for 1Q12 to $416.0 million for 1Q13.  The net impact of the increase in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 4.48% for 1Q12 to 4.78% for 1Q13.
 
 
Provision for Loan Losses
The provision for loan losses decreased from $2.0 million for 1Q12 to a recovery of $(196,000) for 1Q13, resulting from net charge-offs decreasing from $2.5 million for 1Q12 to $318,000 for 1Q13 and improvement in ALLL loss factors in 1Q13 compared to 1Q12. The ratio of Allowance for loan losses to loans held for investment increased from 3.19% at March 31, 2012 to 3.54% at March 31, 2013 due primarily to a decline in loans held for investment.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2013:

   
Allowance
12/31/12
   
Provision
   
Charge-offs
   
Recoveries
   
Net Charge-offs (Recoveries)
   
Allowance
3/31/13
 
   
 
   
 
   
(in thousands)
   
 
         
 
 
Manufactured housing
  $ 5,945     $ 238     $ (427 )   $ 115     $ (312 )   $ 5,871  
Commercial real estate
    2,627       65       (4 )     14       10       2,702  
Commercial
    2,325       (401 )     (16 )     61       45       1,969  
SBA
    2,733       39       (115 )     177       62       2,834  
HELOC
    634       (213 )     (39 )     -       (39 )     382  
Single family real estate
    198       48       (57 )     2       (55 )     191  
Consumer
    2       28       (29 )     -       (29 )     1  
Total
  $ 14,464     $ (196 )   $ (687 )   $ 369     $ (318 )   $ 13,950  

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 (Recoveries)
   
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  
 
Credit Quality
 
The overall credit quality of the loan portfolio has improved as reflected in the decline in past due loans of $4.2 million or 46.4%, from $9.0 million at December 31, 2012 to $4.8 million at March 31, 2013.  Past due loans in the SBA portfolio decreased $3.7 million, from $6.8 million at December 31, 2012 to $3.1 million at March 31, 2013.
 
Nonaccrual loans decreased $2.7 million or 12.1%, from $22.4 million at December 31, 2012 to $19.7 million at March 31, 2013. The percentage of net non-accrual loans to the total loan portfolio has decreased to 4.32% as of March 31, 2013 from 7.37% at March 31, 2012.
 
The manufactured housing portfolio, representing 44.3% of gross loans held for investment, has experienced net charge-offs due to borrowers that filed Chapter 7 bankruptcy and received credit discharges from the bankruptcy court.  These borrowers were individually evaluated for new loans which required charge-offs based on the value of the underlying collateral. However, the net loan charge-offs in this portfolio have decreased from $997,000 in 1Q12 to $312,000 in 1Q13. As of March 31, 2013, $1.1 million was past due in this portfolio and the allowance for loan losses was $5.9 million on the $174.9 million portfolio. The balance of troubled debt restructurings for this portfolio at March 31, 2013 was $5.8 million. The Company monitors this portfolio to ensure adequate support for the collateral.
 
 
The allowance for loan losses compared to net non-accrual loans has increased to 70.8% as of March 31, 2013 from 38.4% as of March 31, 2012.
 
See “ITEM 8. FINANCIAL STATEMENTS, NOTE 4. LOANS HELD FOR INVESTMENT.”
 
Non-Interest Income
The following table summarizes the Company's non-interest income for the periods indicated:
 
   
Three Months
Ended March 31,
             
   
March 31, 2013
   
March 31, 2012
   
Increase (Decrease)
   
Percent Increase (Decrease)
 
Other loan fees
  $ 230     $ 250     $ (20 )     (8.0 )%
Gains from loan sales, net
    161       1,097       (936 )     (85.3 )%
Document processing fees
    110       92       18       19.6 %
Loan servicing, net
    75       151       (76 )     (50.3 )%
Service charges
    85       120       (35 )     (29.2 )%
Gains from sale of available-for-sale securities
    -       121       (121 )     (100.0 )%
Other
    106       57       49       86.0 %
Total non-interest income
  $ 767     $ 1,888     $ (1,121 )     (59.4 )%

Total non-interest income decreased by $1.1 million, or 59.4%, for 1Q13 compared to 1Q12, primarily 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, both of which occurred in 1Q12.
 
Non-Interest Expenses

The following table summarizes the Company's non-interest expense for the periods indicated:
 
   
Three Months
Ended March 31,
             
   
March 31, 2013
   
March 31, 2012
   
Increase (Decrease)
   
Percent Increase (Decrease)
 
Salaries and employee benefits
  $ 3,514     $ 2,885     $ 629       21.8 %
Occupancy and equipment expenses
    455       495       (40 )     (8.1 )%
FDIC assessment
    265       426       (161 )     (37.8 )%
Professional services
    315       325       (10 )     (3.1 )%
Advertising and marketing
    93       57       36       63.2 %
Depreciation and amortization
    74       77       (3 )     (3.9 )%
Loss on sale and write-down of foreclosed real estate and repossessed assets
    84       409       (325 )     (79.5 )%
Data processing
    150       135       15       11.1 %
Other operating expenses
    722       805       (83 )     (10.3 )%
Total non-interest expenses
  $ 5,672     $ 5,614     $ 58       1.0 %

Non-interest expenses increased $58,000, or 1.0%, for 1Q13 compared to 1Q12 primarily due to a $629,000 increase in salaries and employee benefits from increases in staff, primarily lenders and credit administration, and the reinstatement of the 6.2% FICA tax from 4.2% in 1Q12. Partially offsetting the increases in expense was decreases in the FDIC assessment, loss on sale and write-down of foreclosed real estate and repossessed assets and other operating expenses.
 
 
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,
 
   
2013
   
2012
 
Interest-earning assets:
 
(dollars in thousands)
 
Federal funds sold and interest-earning deposits:
           
Average balance
  $ 3,592     $ 3,039  
Interest income
    1       2  
Average yield
    0.15 %     0.25 %
Investment securities:
               
Average balance
  $ 27,971     $ 42,597  
Interest income
    169       237  
Average yield
    2.44 %     2.23 %
Gross loans:
               
Average balance (includes non-accrual loans)
  $ 460,741     $ 540,763  
Interest income
    6,794       8,082  
Average yield
    5.98 %     6.01 %
Total interest-earning assets:
               
Average balance
  $ 492,304     $ 586,399  
Interest income
    6,964       8,321  
Average yield
    5.74 %     5.71 %
Interest-bearing liabilities:
     
Interest-bearing demand deposits:
               
Average balance
  $ 262,024     $ 290,484  
Interest expense
    301       627  
Average cost of funds
    0.47 %     0.87 %
Savings deposits:
               
Average balance
  $ 16,387     $ 19,398  
Interest expense
    79       83  
Average cost of funds
    1.95 %     1.71 %
Time certificates of deposit:
               
Average balance
  $ 95,797     $ 151,454  
Interest expense
    379       555  
Average cost of funds
    1.61 %     1.47 %
Convertible debentures:
               
Average balance
  $ 7,800     $ 7,852  
Interest expense
    162       176  
Average cost of funds
    8.43 %     9.00 %
Other borrowings:
               
Average balance
  $ 34,000     $ 58,308  
Interest expense
    245       352  
Average cost of funds
    2.92 %     2.43 %
Total interest-bearing liabilities:
               
Average balance
  $ 416,008     $ 527,496  
Interest expense
    1,166       1,793  
Average cost of funds
    1.14 %     1.37 %
                 
Net interest income
  $ 5,798     $ 6,528  
Net interest spread
    4.60 %     4.34 %
Average net margin
    4.78 %     4.48 %
 
 
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 $107.0 million, or 16.9%, to $524.6 million at March 31, 2013 compared to $631.5 million at March 31, 2012.  Average total equity increased by 4.2% to $53.4 million at March 31, 2013 from $51.2 million at March 31, 2012.  Average total gross loans at March 31, 2013 decreased by $80.0 million, or 14.8%, to $460.7 million from $540.8 million at March 31, 2012.  Average deposits also decreased from $511.6 million at March 31, 2012 to $426.4 million as of March 31, 2013.
 
The book value per common share was $6.41 at March 31, 2013 and $6.29 at December 31, 2012.
 
Selected balance sheet accounts
(dollars in thousands)
 
March 31, 2013
   
December 31, 2012
   
Increase (Decrease)
   
Percent Increase (Decrease)
 
                                 
Cash and cash equivalents
  $ 35,689     $ 27,891     $ 7,798       28.0 %
Investment securities available-for-sale
    12,251       12,004       247       2.1 %
Investment securities held-to-maturity
    11,651       12,036       (385 )     (3.2 )%
Loans - held for sale
    61,753       68,694       (6,941 )     (10.1 )%
Loans - held for investment, net
    380,653       380,507       146       0.0 %
Total assets
    533,123       532,101       1,022       0.2 %
   
Total deposits
    434,019       434,220       (201 )     0.0 %
Other borrowings and convertible debentures
    41,735       41,852       (117 )     (0.3 )%
   
Total stockholders' equity
    54,070       53,049       1,021       1.9 %
 

The following schedule shows the balance and percentage change in the various deposits:
 
   
March 31,
 2013
   
December 31,
2012
   
Increase (Decrease)
   
Percent Increase (Decrease)
 
   
(dollars in thousands)
 
Non-interest-bearing deposits
  $ 48,920     $ 53,605     $ (4,685 )     (8.7 )%
Interest-bearing deposits
    264,044       269,466       (5,422 )     (2.0 )%
Savings
    16,621       16,351       270       1.7 %
Time deposits of $100,000 or more
    90,708       80,710       9,998       12.4 %
Other time deposits
    13,726       14,088       (362 )     (2.6 )%
Total deposits
  $ 434,019     $ 434,220     $ (201 )     0.0 %
 
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, 2013:

   
Without Specific Valuation Allowance
   
With Specific Valuation Allowance
   
Valuation Allowance
   
Impaired Loans, net
 
   
(in thousands)
 
Manufactured housing
  $ 4,190     $ 5,534     $ 1,096     $ 8,628  
Commercial real estate:
                               
Commercial real estate
    10,033       -       -       10,033  
SBA 504 1st
    772       516       4       1,284  
Commercial
    49       4,867       414       4,502  
SBA
    159       438       43       554  
HELOC
    -       228       29       199  
Single family real estate
    117       79       11       185  
Total
  $ 15,320     $ 11,662     $ 1,597     $ 25,385  

The following schedule summarizes impaired loans by loan class as of December 31, 2012:

   
Without Specific Valuation Allowance
   
With Specific Valuation Allowance
   
Valuation Allowance
   
Impaired Loans, net
   
(in thousands)
 
Manufactured housing
  $ 4,687     $ 5,748     $ 1,103     $ 9,332  
Commercial real estate:
                               
Commercial real estate
    10,615       -       -       10,615  
SBA 504 1st
    774       519       4       1,289  
Commercial
    49       5,044       569       4,524  
SBA
    1,238       503       58       1,683  
Consumer
    121       349       60       410  
Total
  $ 17,484     $ 12,163     $ 1,794     $ 27,853  
 
 
The following schedule summarizes the average investment in impaired loans by loan class and the interest income recognized:

   
Three Months Ended March 31, 2013
   
Three Months Ended March 31, 2012
 
   
Average Investment in Impaired Loans
   
Interest Income Recognized
   
Average Investment in Impaired Loans
   
Interest Income Recognized
 
   
(in thousands)
 
Manufactured housing
  $ 10,007     $ 33     $ 4,559     $ 46  
Commercial real estate:
                               
Commercial real estate
    10,250       6       20,971       193  
SBA 504 1st
    1,281       12       6,615       95  
Construction
    -       -       8,286       108  
Commercial
    4,969       54       5,567       87  
SBA
    1,161       10       1,835       34  
HELOC
    247                          
Single family real estate
    197       1       431       1  
Consumer
    -       -       11       -  
Total
  $ 28,112     $ 116     $ 48,275     $ 564  
 
The following schedule reflects recorded investment at the dates indicated in certain types of loans:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
   
(dollars in thousands)
 
Nonaccrual loans
  $ 24,129     $ 29,643  
SBA guaranteed portion of loans included above
    (4,422 )     (7,218 )
Nonaccrual loans, net
  $ 19,707     $ 22,425  
                 
Troubled debt restructured loans, gross
  $ 18,371     $ 19,931  
Loans 30 through 89 days past due with interest accruing
  $ 464     $ 521  
Allowance for loan losses to gross loans held for investment
    3.54 %     3.66 %

The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is usually no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
CWB generally repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days.  After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance.  Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.
 
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 $34.0 million at March 31, 2013 and December 31, 2012, borrowed at fixed rates.  At March 31, 2013, CWB had pledged to the FHLB, securities of $23.8 million and loans of $24.5 million, and had $64.8 million available for additional borrowing.  At December 31, 2012, CWB had pledged to the FHLB, securities of $24.0 million and loans of $25.5 million, and had $65.8 million available for additional borrowing.
 
CWB has established a credit line with the Federal Reserve Bank (“FRB”).  There were no outstanding FRB advances as of March 31, 2013 and December 31, 2012.  CWB had $111.1 million in borrowing capacity as of March 31, 2013.
 
CWB also maintains four federal funds purchased lines for a total borrowing capacity of $23.5 million.  Of the $23.5 million in borrowing capacity, two of the lines for $10.0 million require the Company to furnish acceptable collateral. There was no amount outstanding as of March 31, 2013 and December 31, 2012.
 
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits.  The liquidity ratio of the Company was 20% at March 31, 2013 and December 31, 2012.  The Company’s liquidity ratio fluctuates in conjunction with loan funding demands.  The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.
 
CWBC’s routine funding requirements primarily consist of certain operating expenses, preferred dividends and interest payments on the convertible debentures.  Normally, CWBC obtains funding to meet its obligations from dividends collected from the Bank and has the capability to issue debt securities.  Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval.  Further, under the terms of the FRB Agreement, CWBC has agreed that, absent prior regulatory approval, CWBC will refrain from taking dividends or any form of payment from the Bank representing a reduction in the Bank’s capital. CWBC anticipates that for the foreseeable future, it will fund its expenses, including preferred dividends, to the extent declared and paid, and interest payments on the debenture from its own funds and will not receive dividends from the Bank. See “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, 2013 and December 31, 2012 are presented in the table below:
 
   
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, 2013
                                     
CWBC (Consolidated)
  $ 66,978     $ 53,988     $ 411,559     $ 524,572       16.27 %     13.12 %     10.29 %
Capital in excess of well capitalized
                                  $ 25,822     $ 29,295     $ 27,760  
CWB
  $ 64,298     $ 59,045     $ 411,386     $ 520,901       15.63 %     14.35 %     11.34 %
Capital in excess of well capitalized
                                  $ 23,159     $ 34,362     $ 33,000  
                                                         
December 31, 2012
                                                       
CWBC (Consolidated)
  $ 66,076     $ 52,941     $ 413,378     $ 544,778       15.98 %     12.81 %     9.72 %
Capital in excess of well capitalized
                                  $ 24,738     $ 28,138     $ 25,702  
CWB
  $ 63,089     $ 57,808     $ 413,199     $ 540,985       15.27 %     13.99 %     10.69 %
Capital in excess of well capitalized
                                  $ 21,769     $ 33,016     $ 30,759  
                                                         
Minimum capital ratios required for CWB by the OCC Agreement
                                    12.00 %     n/a       9.00 %
Well capitalized ratios
                                    10.00 %     6.00 %     5.00 %
Adequately capitalized ratios
                              8.00 %     4.00 %     4.00 %

The OCC Agreement specified that the Bank shall achieve within 120 days and thereafter maintain the following minimum capital ratios:
 
 
Tier 1 capital at least equal to 9.00% of adjusted total assets, and
 
 
Total risk-based capital at least equal to 12.00% of risk weighted assets
 
Despite the Bank meeting both the capital requirements to be deemed “well capitalized” and the capital requirements of the OCC Agreement at March 31, 2013, the Bank is nevertheless deemed to be “adequately capitalized” as a result of the OCC Agreement’s requirement to achieve and maintain specific capital levels.
 
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.  Therefore, pursuant to the OCC Agreement, the Bank is considered adequately capitalized.  At each successive lower capital category, an insured bank is subject to more restrictions.  The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
 
 
Supervision and Regulation
 
Banking is a complex, highly regulated industry. The banking regulatory system is designed to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy.  In addition of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry.  Consequently, the Company's growth and earnings performance, as well as that of CWB, may be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the FRB, FDIC and the OCC.  For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."
 
ITEM 3.
 
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 the Chief Financial Officer, has concluded that, as of the end of the period covered by this report, disclosure controls and procedures are effective in ensuring that information relating to the Company (including its consolidated subsidiary) required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended March 31, 2013 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
PART II – OTHER INFORMATION
 
ITEM 1.
 
The Company is involved in various litigation of a routine nature that is being handled and defended in the ordinary course of business.  In the opinion of management, based in part on consultation with legal counsel, the resolution of these litigation matters is not likely to have a material adverse impact on the Company’s financial condition or results of operations.
 
ITEM 1A.
 
Investing in our common stock involves various risks which are particular to our Company, our industry and our market area.  Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K, with the exception of an update to our risk factor relating to recent regulatory action, as described below.
 
Recent Regulatory Action
 
On January 26, 2012, the Bank, entered into the OCC Agreement.  The OCC Agreement requires the Bank to take certain corrective actions to address certain deficiencies in the operations of the Bank, as identified by the OCC.  The requirements of the OCC Agreement are detailed in “ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” and include, among other items, the following:
 
 
Achieving on or before May 25, 2012, and maintaining a Tier 1 Leverage Capital ratio of 9% and Total Risk-Based Capital ratio of 12%.
 
 
Writing a 3-year strategic plan, which incorporates the capital component.
 
 
Continuing to improve the Bank’s credit quality and administration thereof, including the monitoring of and proper accounting for problem assets and the allowance for loan losses.
 
 
Continuing to adhere to and implement the Bank’s liquidity risk management program.
 
 
Organizing a compliance committee to monitor and coordinate the Bank’s compliance with and adherence to the provisions of the Agreement.

On April 23, 2012, the Company entered into the FRB Agreement with the Reserve Bank.  The FRB Agreement requires the Company to take certain actions than ensure compliance with the OCC Agreement and that the Company remains a source of financial strength for the Bank.  In addition to other provisions which are detailed herein under “ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," the FRB Agreement prohibits the Company from paying any dividends without prior regulatory approval.  As required by the FRB Agreement, the Company requested the Reserve Bank’s approval to pay the dividends due on May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 on the Company’s Series A Preferred Stock.  These requests were denied by the FRB and, consequently, the Company did not pay those dividends.  As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.  As discussed in “ITEM 3. DEFAULTS UPON SENIOR SECURITIES,” while the deferral of the dividends does not constitute an event of default under the Series A Preferred Stock, in the event the 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 number of Directors of the Company will automatically be increased by two and the holders of the Series A Preferred Stock, together with any then outstanding parity stock, will have the right to elect those Directors.
 
 
Failure to comply with the provisions of the OCC Agreement and/or the FRB Agreement may subject the Bank to further regulatory action including but not limited to, being deemed undercapitalized for regulatory purposes.  Additional risks associated with compliance with the Agreements include, but are not limited to:
 
 
a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;
 
 
an increase in the cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

 
a limitation on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.
 
Accordingly, failure to comply with the provisions of the OCC Agreement and/or the FRB Agreement 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, 2012.
 
ITEM 3.
 
On December 17, 2008, the Company issued 15,600 shares of the Company’s Series A Preferred Stock.   The terms of the Series A Preferred Stock 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 Series A Preferred Stock through February 15, 2012; therefore, the Company is not in arrears on any such prior dividends. While the Company declared and accrued for its May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 dividends, the Company’s request to the FRB, pursuant to the requirements under a written agreement with the FRB, to pay the dividends was denied by the FRB and, as such, the Company has not paid the dividends.  The aggregate amount of the dividends that would have been paid on May 15, 2012, August 15, 2012, November 15, 2012 and February 15, 2013 on the Series A Preferred Stock was $779,000.   The deferral of the dividends on the Series A Preferred Stock is permitted under its terms and does not constitute an event of default. 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.
 
 
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, 2013, 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.  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
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.

   
 
 
    (Registrant)  
       
Date: May 13, 2013
/s/ Charles G. Baltuskonis
 
 
Charles G. Baltuskonis
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
     
 
On Behalf of Registrant and as
 
 
Principal Financial and Accounting Officer
 


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, 2013, 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.
 
 
50