COMMUNITY WEST BANCSHARES / - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

Commission File Number: 000-23575

 

COMMUNITY WEST BANCSHARES

(Exact name of registrant as specified in its charter)

 

 

(805) 692-5821

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒     No ☐

 

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

 

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

 

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

 

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

 

The aggregate market value of common stock, held by non-affiliates of the registrant was $35,568,010 based on the June 30, 2016 closing price of $7.36 per common share, as reported on the Nasdaq Global Market.  For purposes of the foregoing computation, all executive officers, directors and five percent beneficial owners of the registrant are deemed to be affiliates.  Such determination should not be deemed to be an admission that such executive officers, directors or five percent beneficial owners are, in fact, affiliates of the registrant.

 

As of February 24, 2017, 8,099,739 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2017 Annual Meeting of Stockholders to be held on or about May 25, 2017 are incorporated by reference into Part III of this Report.  The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended December 31, 2016.

 

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INDEX

 

PART I

Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K (“Form 10-K”) are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions.  All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and State securities laws, including statements that are related to or are dependent upon estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

The forward-looking statements contained in this Form 10-K reflect our current views about future events and financial performance and involve certain risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-K.  Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (“SEC”).

For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” beginning on page 11.  Forward-looking statements speak only as of the date they are made, the Company does not undertake any obligations to update forward-looking statements to reflect circumstances and or events that occur after the date the forward-looking statements are made.

Purpose

The following discussion is designed to provide insight on the financial condition and results of operations of Community West Bancshares (“CWBC”) and its wholly-owned subsidiary Community West Bank N.A (“CWB” or the “Bank”).  Unless otherwise stated, “the Company” refers to CWBC and CWB as a consolidated entity.  References to “CWBC or to the “holding company,” refer to Community West Bancshares, the parent company, on a stand-alone basis.  This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015, herein referred to as the “Consolidated Financial Statements”.  These Consolidated Financial Statements are presented beginning on page 49 of this Form 10-K.

ITEM 1.

BUSINESS

GENERAL

Community West Bancshares or CWBC, a California corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or “BHCA,” with corporate headquarters in Goleta, California.  Our principal business is to serve as the holding company for our wholly-owned subsidiary Community West Bank, N.A., a national banking association chartered by the Office of the Comptroller of the Currency (“OCC”).  Through CWB, the Company provides a variety of financial products and services to customers through seven full-service branch offices in the cities of Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura and Westlake, California.  The Oxnard branch was opened on January 30, 2017.

PRODUCTS AND SERVICES

CWB is focused on relationship-based business banking to small to medium-sized businesses and their owners in the communities served by its branch offices.  CWB provides a variety of financial products and services to customers.  The products and services include deposit products such as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits, cash management products, and lending products including; commercial, commercial real estate and consumer loans.

Competition in our markets remains healthy.  The Company continues to be competitive due to its focus on high quality customer service and our experienced relationship bankers who have strong relationships within the communities we serve.

Manufactured Housing

The Company has a financing program for manufactured housing to provide affordable home ownership.  These loans are offered in approved mobile home parks throughout California primarily on or near the coast.  The parks must meet specific criteria.  The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio.

Agricultural Loans for Real Estate and Operating Lines

The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock.  These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA Business and Industry loan program.  The FSA loans typically issue a 90% guarantee up to $1,399,000 (amount adjusted annually based on inflation) for up to 40 years.

 

Small Business Administration Lending

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

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

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

Loans to One Borrower

State banking law generally limits the amount of funds that a bank may lend to a single borrower.  Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the bank’s unimpaired capital and unimpaired surplus, and the secured and unsecured obligations of any one borrower.  CWB was approved to increase this lending limit under the OCC’s Special Lending Limits Program to 25%.  This program ensures that national bank lending limits such as CWB’s would remain competitive with state-chartered banks.

Foreign Operations

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

Customer Concentration

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

COMPETITION

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

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

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

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

EMPLOYEES

As of December 31, 2016, the Company had 120 full-time equivalent team members.  The Company's employees are not represented by a union or covered by a collective bargaining agreement.  Management believes that its employee relations are good.

GOVERNMENT POLICIES

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

 

Additional Available Information

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

ITEM 1A.

RISK FACTORS

Investing in our common stock involves various risks which are specific to the Company.  Several of these risks and uncertainties, are discussed below and elsewhere in this report.  This listing should not be considered as all-inclusive.  These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition.  Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities.  In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business.  See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report beginning on page 14 and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section beginning on page 37.

Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.

Substantially all of our loans are to businesses and individuals in the State of California.  A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.

While real estate values and unemployment rates have recently improved, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

·

loan delinquencies, problem assets and foreclosures may increase;

·

the sale of foreclosed assets may slow;

·

demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;

·

collateral for loans made may decline further in value, exposing us to increased risk loans, reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans;

·

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and

·

the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely affected.

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse.  If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Economic conditions have improved since the end of the economic recession; however, economic growth has been slow and uneven.  A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability.  Declines in real estate value and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services.  These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.

Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, has among other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities.  The Federal Reserve Board increased the federal funds rate by 25 basis points in December 2016 and indicated the potential for further increases in the federal funds rate in the near future.  As the federal funds rate increases, market interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.  In addition, deflationary pressures, while possibly lowering our operating costs, could have a negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

 

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

The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our financial condition and/or results of operations.  The Company maintains a reserve for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date.  Provisions are taken from earnings and applied to the loan loss reserves as the risk of loss in the loan and commitment portfolios increases.  Conversely, credits to earnings from the loan loss reserves are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and commitment portfolios.  As of December 31, 2016, the Company’s allowance for loan losses was $7.5 million, or 1.31% of loans held for investment.  In addition, as of December 31, 2016, we had $3.1 million in loans on nonaccrual, $0.7 million of which are government guaranteed.  In determining the level of the reserve for loan losses, Management makes various assumptions and judgments about the loan portfolio.  Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information known to Management at the time of the analysis.  If Management’s assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could have a material adverse effect on the Company’s financial condition and/or results of operations.  While the allowance for loan losses was determined to be adequate at December 31, 2016, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.

All of our lending involves underwriting risks.

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

The Company is dependent on real estate concentrated in the State of California.

As of December 31, 2016, approximately $386.2 million, or 61%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate.  A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans.  The real estate securing our loan portfolio is concentrated in California.  A decline in the real estate market could materially and adversely affect the business of CWB because a significant portion of its loans are secured by real estate.  The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and CWB would be more likely to suffer losses on loans.  Substantially all of the real property collateral is located in California.  If there is an additional decline in real estate values, especially in California, the collateral for their loans would provide less security.  Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to California.

California’s current drought may impact the economy.

At December 31, 2016, California was experiencing a severe drought in all areas of the state.  At December 31, 2016, CWB had $28.5 million of agricultural loans which would be most impacted by the drought.  The overall economy of California may be negatively impacted by this drought as the cost of water and availability of water may increase the operating costs for businesses which could negatively affect their operating results, loan quality and collateral.

 

 

Additional requirements imposed by the Dodd-Frank Act and related regulation could have an adverse effect on the Company.

Government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory requirements. The Dodd-Frank Act provided for sweeping regulatory changes, including the following:

·

the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment;

·

the requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;

·

enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks;

·

additional corporate governance and executive compensation requirements; enhanced financial institution safety and soundness regulations,

·

revisions in FDIC insurance assessment fees and a permanent increase in FDIC deposit insurance coverage to $250,000;

·

authorization for financial institutions to pay interest on business checking accounts; and

·

the establishment of new regulatory bodies, such as the Consumer Financial Protection Bureau and the Financial Services Oversight Counsel, to identify emerging systemic risks and improve interagency cooperation.

Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under Dodd-Frank, may adversely impact profitability of CWBC and CWB and may have a material and adverse effect on their respective businesses, financial condition, and results of operations.  They may also be required to invest significant management attention and resources to evaluate and make changes required by the legislation and related regulations and may make it more difficult for them to attract and retain qualified executive officers and employees.

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

The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to effect the implementation of the Basel III Accords.  The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets.  Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve.  For a further discussion of the capital rules, see “SUPERVISION AND REGULATION” herein.

Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.

A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA.  From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans.  In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs.  Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable.  Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline.  Also, the profitability of these loans could decline.

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

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

The Company’s profitability depends in part on successfully attracting and retaining a stable base of low-cost deposits.  While the Company generally does not believe these core deposits are sensitive to interest rate fluctuations, the competition for these deposits in the Company’s markets is strong and customers are increasingly seeking investments that are safe, including the purchase of U.S. Treasury securities and other government-guaranteed obligations, as well as the establishment of accounts at the largest, most-well capitalized banks.  If the Company were to lose a significant portion of its low-cost deposits, it would negatively impact its liquidity and profitability.

 

From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance these programs will be available as needed.

The Company’s future success will depend on our ability to compete effectively in a highly competitive market

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

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

 

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

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

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

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

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

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

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

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

The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level.  In particular, our relative success to date has been partly the result of our management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their communities.  These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share.  From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer.  If the Company is unable to hire or retain qualified employees it may not be able to successfully execute its business strategy.  If the Company or its employee is found to have violated any nonsolicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.

 

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

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.

PROPERTIES

The Company is headquartered at 445 Pine Avenue in Goleta, California.  This facility houses the Company's corporate offices and the manufactured housing loan division.  The Company operates seven domestic branch locations one of which is owned.  Subsequent to year end, the Company opened the seventh full-service domestic branch in Oxnard, California.  All other properties are leased by the Company, including the corporate headquarters.

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

ITEM 3.

LEGAL PROCEEDINGS

From time to time, the Company may be involved in various litigation matters of a routine nature in the ordinary course of the Company’s business.  In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters are not expected to have a material impact on the Company’s financial position or results of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

ITEM 5.

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

Market Information

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

Holders

As of February 24, 2017 the closing price of our common stock on NASDAQ was $10.35 per share.  As of that date the Company had approximately 223 holders of record of its common stock.  The Company has a greater number of beneficial owners of our common stock who own their shares through brokerage firms and institutional accounts.

Common Stock Dividends

It is the Company’s intention to review its dividend policy on a quarterly basis.  As a holding company with limited significant assets other than the capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB.  CWB’s ability to pay dividends to the Company is limited by California law and federal banking law.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation – CWBC – Limitations on Dividend Payments.”

Repurchases of Securities

Common

The Company authorized a $3.0 million common stock repurchase program.  The repurchase program is expected to be executed over no more than a two-year period.  Under this program the Company has repurchased 187,569 common stock shares for $1.4 million at an average price of $7.25 per share.  There were no repurchases of common stock under this program during the three months ended December 31, 2016.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes the securities authorized for issuance as of December 31, 2016:

For material features of the plans, see “Item 8. Financial Statements and Supplementary Data - Note 11. Stockholder’s Equity-Stock Option Plans.”

 

ITEM 6.

SELECTED FINANCIAL DATA

The following summary presents selected financial data as of and for the periods indicated. You should read the selected financial data presented below in conjunction with “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.

(1)

Effective 2015, CWB was subject to Basel III regulatory capital guidelines. CWBC as a small bank holding company is not subject to the Basel III capital reporting requirements.  The 2016 and 2015 ratios were the estimated consolidated capital ratios under Basel III.

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

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

Financial Overview and Highlights

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

Financial Result Highlights of 2016

Net income available to common stockholders of $5.2 million, or $0.62 per diluted share for 2016, compared to $2.6 million, or $0.30 per diluted share for 2015 and $6.3 million or $0.75 per diluted share for 2014.

The significant factors impacting the Company during 2016 were:

·

Net income of $5.2 million for 2016 compared to a net income of $2.9 million for 2015.

·

Total loans increased 16.1% to $630.8 million at December 31, 2016 compared to $543.5 million at December 31, 2015.

·

Total deposits increased 12.5% to $612.2 million at December 31, 2016, compared to $544.3 million a year ago.

·

Non-interest-bearing deposits increased 31.2% to $100.4 million at December 31, 2016, compared to $76.5 million a year ago.

·

The provision (credit) for loan losses was ($48,000) for 2016 compared to ($2.3 million) in 2015.  Net loan loss recoveries were ($0.6 million) for 2016 compared to ($1.3 million) in 2015.

·

Net nonaccrual loans decreased to $2.4 million at December 31, 2016, compared to $5.0 million at December 31, 2015.

·

Allowance for loan losses was $7.5 million at December 31, 2016, or 1.31% of total loans held for investment compared to 1.44% at December 31, 2015.

·

Net interest margin for the year ended December 31, 2016 decreased to 4.60% compared to 4.80% for the year ended 2015.

·

Full service branch office locations opened in San Luis Obispo, California and Oxnard, California (January 2017).

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the year ended December 31, 2016 throughout the analysis sections of this report.

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

Asset Quality

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

 

Asset and Deposit Growth

The Company’s assets and liabilities are comprised primarily of loans and deposits. The ability to originate new loans and attract new deposits is fundamental to the Company’s asset growth. Total assets increased to $710.6 million at December 31, 2016 from $621.2 million at December 31, 2015.  Total loans including net deferred fees and unearned income increased by $87.3 million, or 16.1%, to $630.8 million as of December 31, 2016 compared to December 31, 2015.  Total deposits increased by 12.5% to $612.2 million as of December 31, 2016 from $544.3 million as of December 31, 2015.

RESULTS OF OPERATIONS

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

 

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:

(1)	Includes nonaccrual loans.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

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

 

(1)	Includes nonaccrual loans.

(2)	Net interest margin is computed by dividing net interest income by total average earning assets.

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

 

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

(1)

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

Comparison of interest income, interest expense and net interest margin

The Company’s primary source of revenue is interest income.  Interest income for the year ended December 31, 2016 was $32.2 million, an increase from $30.2 million and $28.0 million, respectively, for the years ended December 31, 2015 and 2014.  The interest income was positively impacted by increased average earning assets primarily loans in 2016.  Average loans for the year increased 11.5% over 2015 and 17.1 % over 2014.  Average asset yields declined for 2016 as competition for new quality loans continued to further compress the interest rates and the margin.  In 2015 the margin benefited by 22 basis points from the payoff of two large nonaccrual loan relationships.  These loan interest recoveries on nonaccrual loans in 2015 also accounted for the increased average yield on loans for 2015 compared to 2016 and 2014.

Interest expense for the year ended December 31, 2016 increased compared to 2015 by $0.6 million and decreased compared to 2014 by $0.1 million, respectively, to $3.1 million.  The increase for 2016 compared to 2015 was mostly the result of the increased volume of deposits and increased rates.  Average interest-bearing deposits increased 10.8% in 2016 compared to 2015.  The average cost on interest-bearing deposits also increased to 59 basis points in 2016 compared to 54 basis points in 2015.

The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was to decrease the margin for 2016 compared to 2015.  The net interest margin was 4.60% for 2016 compared to 4.80% for 2015 and 4.50% in 2014.

Net interest income increased by $1.4 million for 2016 compared to 2015 and $4.4 million, compared to 2014.

Total interest income increased by $2.2 million to $30.2 million in 2015 compared to 2014.  The interest income was positively impacted by increased yields on earning assets in 2015 which increased to 5.23% compared to 5.10% for 2014.  The average yield on loans increased to 5.67% for 2015 compared to 5.55% for 2014 as the Company benefited from loan interest recoveries on nonaccrual loans during the year.  Total interest expense decreased by $0.8 million in 2015 compared to 2014.  This decline was primarily due to decreased total cost of funds which include non-interest bearing deposits from 67 basis points for 2014 to 49 basis points for 2015.  Net interest income increased by $3.0 million for 2015 compared to 2014.

Provision for loan losses

The provision for loan losses in each period is reflected as a charge against earnings in that period.  The provision for loan losses is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio.  The provision (credit) for loan losses was ($48,000) in 2016 compared to ($2.3 million) in 2015 and ($5.1 million) in 2014.  The credit to provision for loan losses for 2016 resulted from $0.6 million net recoveries, reduced historical loss factors partially offset by loan growth.  The credit to provision for 2015 resulted from $2.0 million from reduced historical loss factors, $1.3 million net recoveries, and $0.3 million reduction in impaired loan reserve and grade change improvements partially offset by provision of $1.4 million for loan growth and qualitative factor changes.  The result of the improvements in credit quality, historical loss rates and net recoveries was the ratio of the allowance for loan losses to loans held for investment decreased from 1.44% at December 31, 2015 to 1.31% at December 31, 2016.  Additional information regarding improved credit quality can be found beginning on page 26.

 

The following table summarizes the provision (credit), charge-offs (recoveries) by loan category for the year ended December 31, 2016, 2015 and 2014:

The percentage of net non-accrual loans (net of government guarantees) to the total loan portfolio has decreased to 0.38% as of December 31, 2016 from 0.92% at December 31, 2015.

The allowance for loan losses compared to net non-accrual loans has increased to 314% as of December 31, 2016 from 138% as of December 31, 2015.  Total past due loans decreased to $0.2 million as of December 31, 2016 from $1.9 million as of December 31, 2015.

Non-interest Income

The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers.

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

Total non-interest income declined slightly for 2016 compared to 2015.  The decline was mostly from the Company’s exit from the wholesale mortgage loan origination and sale business line in 2015 which contributed $0.1 million in gains from loan sales.  The Company did not sell any loans in 2016.  Also contributing to the decline was lower income from loan servicing, net of $0.1 million.  Legacy sold loans continued to pay-off in 2016 and have not been replaced with new loan sales.  These declines were partially offset by increased service charges and loan fees which are the result of loan and deposit growth in 2016.

 

Total non-interest income increased by $0.1 million, or 5.1 %, for 2015 compared to 2014.  This increase was primarily from other loan fees and document processing fees which increased by $0.2 million for 2015 compared to 2014 as a result of increased loan volumes in 2015 compared to 2014.  Service charges income increased slightly for 2015 compared to 2014 mostly from account analysis charges and ATM fees.  These increases were partially offset by declined gains from loan sales and other non-interest income in 2015 compared to 2014 of $0.1 million.  Other non-interest income was impacted by lower other loan related income in 2015 compared to 2014 and gains on loan sales was impacted negatively due to the exit of the Company from originating mortgage loans for sale towards the end of 2015.

Non-Interest Expenses

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