CWBC 10-Q Quarterly Report June 30, 2011

COMMUNITY WEST BANCSHARES /

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10-Q 1 form10q.htm COMMUNITY WEST BANCSHARES 10-Q 6-30-2011 form10q.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 000-23575

COMMUNITY WEST BANCSHARES

(Exact name of registrant as specified in its charter)

California		77-0446957
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California 93117

(Address of principal executive offices) (Zip Code)

(805) 692-5821

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer o	Accelerated filer o

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

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

Number of shares of common stock of the registrant outstanding as of August 12, 2011: 5,986,760 shares

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	PAGE

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)
	CONSOLIDATED BALANCE SHEETS	3
	CONSOLIDATED INCOME STATEMENTS	4
	CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7

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, 2010.

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

ITEM 3.	QUANTITATIVE AND QUALITATIVE DICLOSURES ABOUT MARKET RISK (Not applicable).	35

ITEM 4.	CONTROLS AND PROCEDURES	35

PART II.	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	35

ITEM 1A.	RISK FACTORS	35

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	35

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36

ITEM 4.	REMOVED AND RESERVED	36

ITEM 5.	OTHER INFORMATION	36

ITEM 6.	EXHIBITS	36

SIGNATURES		37

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Community West Bancshares
Consolidated Balance Sheets
	June 30,		December 31,
	2011		2010
(in thousands, except shares)	(unaudited)
Assets
Cash and due from banks	$	7,511	$	6,201
Federal funds sold		25		25
Cash and cash equivalents	$	7,536	$	6,226
Time deposits in other financial institutions		240		290
Investment securities available-for-sale, at fair value; amortized cost of $23,487 at June 30, 2011 and $23,038 at December 31, 2010		23,718		23,342
Investment securities held-to-maturity, at amortized cost; fair value of $15,867 at June 30, 2011 and $17,514 at December 31, 2010		15,185		16,893
Federal Home Loan Bank stock, at cost		4,624		5,031
Federal Reserve Bank stock, at cost		1,343		1,322
Loans:
Loans held for sale, at lower of cost or fair value		76,144		82,320
Loans held for investment, net of allowance for loan losses of $15,237 at June 30, 2011 and $13,302 at December 31, 2010		477,301		498,312
Total loans		553,445		580,632
Foreclosed real estate and repossessed assets		10,319		8,478
Premises and equipment, net		2,999		2,915
Other assets		24,422		22,475
Total assets	$	643,831	$	667,604
Liabilities
Deposits:
Non-interest-bearing demand	$	54,386	$	35,767
Interest-bearing demand		275,144		262,431
Savings		22,343		20,371
Time certificates		159,261		211,324
Total deposits		511,134		529,893
Other borrowings		60,000		64,000
Convertible debentures		7,862		8,081
Other liabilities		2,997		3,988
Total liabilities		581,993		605,962
Stockholders' equity
Preferred stock, no par value; 10,000,000 shares authorized; 15,600 shares issued and outstanding		14,941		14,807
Common stock, no par value; 20,000,000 and 10,000,000 shares authorized at June 30, 2011 and December 31, 2010, respectively; 5,983,890 and 5,916,272 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		33,387		33,133
Retained earnings		13,374		13,523
Accumulated other comprehensive income, net		136		179
Total stockholders' equity		61,838		61,642
Total liabilities and stockholders' equity	$	643,831	$	667,604

See accompanying notes

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Community West Bancshares
Consolidated Income Statements (unaudited)
	Three months ended						Six months ended
	June 30,						June 30,
(in thousands, except per share amounts)	2011			2010			2011			2010
Interest income
Loans	$	8,865		$	9,323		$	17,909		$	18,857
Investment securities and other		270			380			557			788
Total interest income		9,135			9,703			18,466			19,645
Interest expense
Deposits		1,472			1,958			3,142			4,017
Other borrowings and convertible debentures		578			514			1,169			1,102
Total interest expense		2,050			2,472			4,311			5,119
Net interest income		7,085			7,231			14,155			14,526
Provision for loan losses		3,157			2,872			4,140			5,946
Net interest income after provision for loan losses		3,928			4,359			10,015			8,580
Non-interest income
Other loan fees		411			494			641			846
Gains from loan sales, net		85			92			167			195
Document processing fees		108			125			213			250
Loan servicing, net		52			39			200			128
Service charges		114			133			244			262
Other		45			50			88			91
Total non-interest income		815			933			1,553			1,772
Non-interest expenses
Salaries and employee benefits		2,707			2,858			5,816			5,866
Occupancy and equipment expenses		494			510			999			1,009
FDIC assessment		222			323			524			648
Professional services		236			239			451			442
Advertising and marketing		141			78			211			170
Depreciation and amortization		95			108			193			221
Loss on sale and write-down of foreclosed real estate and repossessed assets		199			504			658			566
Data processing		128			133			255			260
Other operating expenses		893			644			1,817			1,186
Total non-interest expenses		5,115			5,397			10,924			10,368
Income (loss) before provision for income taxes		(372	)		(105	)		644			(16	)
Provision (benefit) for income taxes		(151	)		(43	)		269			(5	)
Net income (loss)	$	(221	)	$	(62	)	$	375		$	(11	)

Preferred stock dividends		262			262			524			524
Net income (loss) applicable to common stockholders	$	(483	)	$	(324	)	$	(149	)	$	(535	)
Earnings (loss) per common share:
Basic	$	(0.08	)	$	(0.05	)	$	(0.02	)	$	(0.09	)
Diluted	$	(0.08	)	$	(0.05	)	$	(0.02	)	$	(0.09	)
Basic weighted average number of common shares outstanding		5,982			5,915			5,971			5,915
Diluted weighted average number of common shares outstanding		5,982			5,915			5,971			5,915

See accompanying notes

Table of Contents

Community West Bancshares

Consolidated Statement of Stockholders' Equity

	Preferred Stock		Common Stock				Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
(in thousands)			Shares		Amount
Balances at January 1, 2011	$	14,807		5,916	$	33,133	$	13,523		$	179		$	61,642
Stock option expense, recognized in earnings						14								14
Conversion of debentures				63		221								221
Exercise of stock options				5		19								19
Comprehensive income:
Net income								375						375
Change in unrealized loss on securities available-for-sale, net											(43	)		(43	)
Comprehensive income														332
Dividends on preferred stock		134						(524	)					(390	)
Balances at June 30, 2011	$	14,941		5,984	$	33,387	$	13,374		$	136		$	61,838

See accompanying notes

Community West Bancshares

Consolidated Statement of Stockholders' Equity

	Preferred Stock		Common Stock				Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
(in thousands)			Shares		Amount
Balances at
January 1, 2010	$	14,540		5,915	$	33,110	$	12,479		$	178		$	60,307

Stock option expense, recognized in earnings						10								10
Comprehensive income:
Net loss								(11	)					(11	)
Change in unrealized loss on securities available-for-sale, net											(24	)		(24	)
Comprehensive income														(35	)
Dividends on preferred stock		134						(524	)					(390	)
Balances at
June 30, 2010	$	14,674		5,915	$	33,120	$	11,944		$	154		$	59,892

See accompanying notes

Table of Contents

Community West Bancshares

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
	2011			2010
	(in thousands)
Cash flows from operating activities:
Net income	$	375		$	(11	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,140			5,946
Depreciation and amortization		193			221
Stock-based compensation		14			10
Net amortization of discounts and premiums for investment securities		(33	)		(82	)
Loss (gain) on:
Sale and write-down of foreclosed real estate and repossessed assets		658			566
Sale of loans held for sale		(167	)		(195	)
Loan originated for sale and principal collections, net		3,385			4,794
Changes in:
Servicing rights, net of amortization		58			137
Other assets		(1,932	)		631
Other liabilities		(1,034	)		29
Net cash provided by operating activities		5,657			12,046
Cash flows from investing activities:
Purchase of available-for-sale securities		(4,361	)		(5,965	)
Principal pay downs and maturities of available-for-sale securities		3,950			5,215
Purchase of Federal Reserve stock		(21	)		-
Redemptions of Federal Home Loan Bank stock		407			210
Principal pay downs and maturities of held-to-maturity securities		1,704			4,230
Loan originations and principal collections, net		15,885			(3,959	)
Proceeds from sale of foreclosed real estate and repossessed assets		1,445			1,091
Net decrease in time deposits in other financial institutions		50			165
Purchase of premises and equipment, net		(276	)		(35	)
Net cash provided by investing activities		18,783			952
Cash flows from financing activities:
Preferred stock dividends		(524	)		(524	)
Amortization of discount on preferred stock		134			134
Exercise of stock options		19			-
Net increase in demand deposits and savings accounts		33,304			49,213
Net decrease in time certificates of deposit		(52,063	)		(41,583	)
Proceeds from Federal Home Loan Bank and FRB advances		-			34,000
Repayment of Federal Home Loan Bank and FRB advances		(4,000	)		(54,000	)
Net cash used in financing activities		(23,130	)		(12,760	)
Net increase in cash and cash equivalents		1,310			238
Cash and cash equivalents, beginning of year		6,226			5,511
Cash and cash equivalents, end of period	$	7,536		$	5,749
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	4,352		$	5,313
Cash paid for income taxes		1,792			5
Supplemental Disclosure of Noncash Investing Activity:
Transfers to foreclosed real estate and repossessed assets	$	3,945		$	6,100

See accompanying notes

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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 condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair statement have been reflected in the financial statements. However, the results of operations for the six-month period ended June 30, 2011 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, 2010.

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Loans Held for Investment – Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off. Unearned income includes deferred loan origination fees reduced by loan origination costs. Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method. The following is a description of the loan categories held for investment.

Commercial Loans

In addition to traditional term commercial loans made to business customers, the Bank grants revolving business lines of credit. Under the terms of the revolving lines of credit, the Bank grants a maximum loan amount, which remains available to the business during the loan term. Generally, as part of the loan requirements, the business agrees to maintain its primary banking relationship with the Bank. The Bank does not extend material loans of this type in excess of two years.

Commercial Real Estate

Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing single-family residences, commercial or industrial properties. This loan category also includes SBA 504 loans and land loans.

A substantial portion of the Bank's real estate construction loans are first and second trust deeds on the construction of owner-occupied single family dwellings. The Bank also makes real estate construction loans on commercial properties. These consist of first and second trust deeds collateralized by the related real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 80%.

Commercial and industrial real estate loans are secured by nonresidential property. Office buildings or other commercial property primarily secure these loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 80% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 75% of appraised value of the underlying real property.

SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or acquire machinery and equipment. The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture.

Conventional and investor loans are sometimes funded by our secondary-market partners and the Bank receives a premium for these transactions.

SBA Loans

The SBA loans consist of 7(a) and Business and Industry loans (“B&I”). The 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing. In general, the SBA guarantees up to 85% of the loan amount depending on loan size. In certain instances, the Bank sells a portion of the loans, however, under the SBA 7(a) loan program, the Bank is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.

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B&I loans are guaranteed by the U.S. Department of Agriculture. The guaranteed amount is generally 80%. B&I loans are similar to the 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.

Single Family Real Estate Loans

The Bank originates loans that consist of first and second mortgage loans secured by trust deeds on one to four family homes. These loans are made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction, home improvement, or debt consolidation. Generally, these loans are underwritten to specific investor guidelines and are committed for sale to that investor. Although the majority of these loans are sold servicing released into the secondary market, a relatively small percentage is held as part of the Bank’s portfolio.

Manufactured Housing Loans

The Bank originates loans secured by manufactured homes located in mobile home parks along the California coast and in the Sacramento area. The loans are serviced internally and are originated under one of two programs: fixed rate loans written for terms of 10 to 20 years; adjustable rate loans written for a term of 30 years with the initial interest rates fixed for the first 5 or 10 years and then adjusting annually subject to caps and floors.

HELOC

The Bank provides lines of credit collateralized by residential real estate, home equity lines of credit (HELOC), for consumer related purposes. Typically, HELOCs are collateralized by a second deed of trust.

Other Installment Loans

Installment loans consist of automobile and general-purpose loans made to individuals. These loans are primarily fixed rate.

Provision and Allowance for Loan Losses – The Bank maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”). The ALL is based on estimates and is intended to be adequate to provide for probable losses inherent in the loan portfolio. This process involves deriving probable loss estimates that are based on migration analysis/historical loss rates and qualitative factors that are based on management’s judgment. The migration analysis and historical loss rate calculations are based upon the annualized loss rates utilizing a twelve quarter loss history. Migration analysis is utilized for the Commercial Real Estate, Commercial, and SBA portfolios. The historical loss rate method is utilized for the homogeneous loan categories which include Manufactured Housing, HELOC’s, Single Family Residential, and Consumer loans. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. In loan categories that historic loss rates are utilized, management increases the reserve requirement for Special Mention and Substandard loans. Loans that are considered Doubtful are typically charged off. The following is a description of the characteristics of loans graded Pass, Special Mention, Substandard, Doubtful, and Loss. Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.

Pass

Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Bank. Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers deserving of this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.

Special Mention

A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.

Substandard

A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans does not have to exist in individual loans classified Substandard.

Table of Contents

Doubtful

A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loss

Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be affected in the future. Losses are taken in the period in which they surface as uncollectible. The following is the Bank’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 Bank, 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 and outside guarantors do not provide adequate support. Loans secured by real estate on 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 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 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 Bank's possession, and its liquidation value can be verified and realized in the near term.

The second component of the ALL covers qualitative factors related to non-impaired loans. The qualitative allowance on each of the loan pools is based on the following factors:

Concentrations of credit

Trends in volume, maturity, composition

Volume and trend in delinquency

Economic conditions

Outside exams

Geographic distance

Policy and procedures

Staff experience and ability

The ALL calculation for the different loan portfolios is as follows:

Commercial Real Estate, Commercial and SBA – Migration analysis combined with risk rating is used to determine the required allowance for all non-impaired loans. In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio category. Reserves on impaired loans are assigned based upon the individual characteristics of the loan.

Manufactured Housing, Single Family Residential, HELOC and Consumer – The allowance is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency. In addition, the migration results are adjusted based upon the qualitative factors previously discussed that affect this specific portfolio.

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The Bank evaluates and individually assesses impairment on loans greater than $100,000 classified as substandard or doubtful that are either non-performing or considered a trouble debt restructure. Measured impairment is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans. The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods.

The expected future cash flows are estimated and then discounted at the effective interest rate.

The loan’s observable market price, if it is of a kind for which there is a secondary market.

The value of the underlying collateral net of selling costs. Selling costs are estimated based on industry standards, the Bank’s actual experience, or based on actual costs incurred as appropriate. When evaluating real estate collateral, the Bank 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 Bank will use audited financial statements or appraisals no more than twelve months old. Additionally for both real estate and non-real estate collateral, the Bank may use other sources to determine value as deemed appropriate.

Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract.

The Bank determines the appropriate ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary. The review of the adequacy of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral. Additional factors considered include: geographic location of borrowers, changes in the Bank’s product-specific credit policy and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

The Bank’s ALL is maintained at a level believed adequate by management to absorb known and inherent probable losses on existing loans. A provision for loan losses is charged to expense. The allowance is charged for losses when management believes that full recovery on the loan is unlikely.

The Bank has a centralized appraisal management process that tracks and monitors appraisals, appraisal reviews and other valuations. The centralization focus is to ensure the use of qualified and independent appraisers capable of providing reliable real estate values in the context of ever changing market conditions. The review process is monitored to ensure application of the appropriate appraisal methodology, agreement with the interpretation of market data and the resultant real estate value. The process also provides the means of tracking the performance quality of the appraisers on the Bank’s approved appraiser list. Any loan evaluation that results in the Bank determining that elevated credit risk and/or default risk exists and also exhibits a lack of a timely valuation of the collateral or apparent collateral value deterioration is reappraised and reevaluated to determine the current extent of any change in collateral value and credit risk. A similar review process is conducted quarterly on all classified and criticized real estate credits to determine the timeliness and adequacy of the real estate collateral value. A detection of non-compliance is then addressed through a new appraisal or reappraisal and review .

Foreclosed Real Estate and Repossessed Assets – Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses. Subsequent to the legal ownership date, management periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value. 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.

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The Company is subject to the provisions of ASC 740, “Income Taxes” (ASC 740). ASC 740 prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.

Recent Accounting Pronouncements – In July 2010, FASB issued a final Accounting Standards Update, ASU 2010-20, that requires entities to provide extensive new disclosures in their financial statements about their financial receivables, including credit risk exposures and allowance for credit losses. The ASU requires new qualitative and quantitative disclosures on the allowance for credit losses, credit quality, impaired loans, modifications and nonaccrual and past due financing receivables. Generally, the update was effective for interim or annual reporting periods ended subsequent to December 15, 2010. Certain elements of the ASU regarding disclosures for troubled debt restructuring have been deferred and will be effective for periods beginning on or after June 15, 2011. Adoption of ASU 2010-20 did not have a material impact on the Company’s financial condition, results of operations or cash flows.

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2.	INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are as follows:


June 30, 2011	(in thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Available-for-sale securities	Cost		Gains		Losses			Value
U.S. Government agency: Notes	$	1,999	$	7	$	-		$	2,006
U.S. Government agency: MBS		4,914		186		-			5,100
U.S. Government agency: CMO		16,574		57		(19	)		16,612
Total	$	23,487	$	250	$	(19	)	$	23,718

Held-to-maturity securities
U.S. Government agency: MBS	$	15,185	$	715	$	(33	)	$	15,867
Total	$	15,185	$	715	$	(33	)	$	15,867

December 31, 2010	(in thousands)
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Available-for-sale securities	Cost		Gains		Losses			Value
U.S. Government agency: MBS	$	5,472	$	206	$	-		$	5,678
U.S. Government agency: CMO		17,566		102		(4	)		17,664
Total	$	23,038	$	308	$	(4	)	$	23,342

Held-to-maturity securities
U.S. Government agency: MBS	$	16,893	$	698	$	(77	)	$	17,514
Total	$	16,893	$	698	$	(77	)	$	17,514

At June 30, 2011, $38.9 million of securities, at carrying value, was pledged to the Federal Home Loan Bank, San Francisco, as collateral for current and future advances.

The maturity periods and weighted average yields of investment securities at June 30, 2011 are as follows:

	Total Amount					Less than One Year					One to Five Years					Five to Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
						(dollars in thousands)
Available-for-sale securities
U. S. Government:
Agency: Notes	$	2,006		2.0	%	$	2,006		2.0	%	$	-		-		$	-		-
Agency: MBS		5,100		2.3	%		-		-			-		-			5,100		2.3	%
Agency: CMO		16,612		0.8	%		3,771		0.8	%		12,841		0.8	%		-		-
Total	$	23,718		1.2	%	$	5,777		1.2	%	$	12,841		0.8	%	$	5,100		2.3	%

Held-to-maturity securities
U.S. Government:
Agency: MBS	$	15,185		4.3	%	$	38		5.0	%	$	3,657		5.3	%	$	11,490		3.9	%
Total	$	15,185		4.3	%	$	38		5.0	%	$	3,657		5.3	%	$	11,490		3.9	%

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The following tables show all securities that are in an unrealized loss position and temporarily impaired as of:

June 30, 2011	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
Available-for-sale securities
U.S. Government agency: CMO	$	7,012	$	19	$	-	$	-	$	7,012	$	19
Total	$	7,012	$	19	$	-	$	-	$	7,012	$	19

Held-to-maturity securities
U.S. Government agency: MBS	$	1,473	$	33	$	-	$	-	$	1,473	$	33
Total	$	1,473	$	33	$	-	$	-	$	1,473	$	33

December 31, 2010	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: CMO	$	3,118	$	4	$	-	$	-	$	3,118	$	4
Total	$	3,118	$	4	$	-	$	-	$	3,118	$	4

Held-to-maturity securities
U.S. Government agency: MBS	$	1,444	$	77	$	-	$	-	$	1,444	$	77
Total	$	1,444	$	77	$	-	$	-	$	1,444	$	77

As of June 30, 2011 and December 31, 2010, there were seven and three securities, respectively, in an unrealized loss position.

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.

The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality, as all are direct or indirect agencies of the U. S. Government. Accordingly, as of June 30, 2011 and December 31, 2010, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.

3.	LOAN SALES AND SERVICING

SBA Loan Sales - The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis. The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts. The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed. The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium. The Company records servicing liabilities for the unguaranteed loans sold calculated based on the present value of the estimated future servicing costs associated with each loan. The balance of all servicing rights and obligations is subsequently amortized over the estimated life of the loans using an estimated prepayment rate of 5-25%. Quarterly, the servicing asset is analyzed for impairment.

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The Company also periodically sells certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.

As of June 30, 2011 and December 31, 2010, the Company had approximately $74.5 million and $77.5 million, respectively, in SBA loans included in loans held for sale.

Mortgage Loan Sales – The Company enters into mortgage loan rate lock commitments (normally for 30 days) with potential borrowers. In conjunction therewith, the Company enters into a forward sale commitment to sell the locked loan to a third party investor. This forward sale agreement requires delivery of the loan on a “best efforts” basis but does not obligate the Company to deliver if the mortgage loan does not fund.

The mortgage rate lock agreement and the forward sale agreement qualify as derivatives. The value of these derivatives is generally equal to the fee, if any, charged to the borrower at inception but may fluctuate in the event of changes in interest rates. Although the Company does not attempt to qualify these transactions for the special hedge accounting, management believes that changes in the fair value of the two commitments generally offset and create an economic hedge. At June 30, 2011 and December 31, 2010, the Company had $9.5 million and $10.9 million, respectively, in outstanding mortgage loan interest rate lock and forward sale commitments. The values of related derivative instruments were not material to the Company’s financial position or results of operations.

4.	LOANS HELD FOR INVESTMENT

The composition of the Company’s loans held for investment loan portfolio follows:

	June 30,			December 31,
	2011			2010
	(in thousands)
Commercial	$	47,194		$	57,369
Commercial real estate		173,434			173,906
SBA		46,085			51,549
Manufactured housing		193,059			194,682
Single family real estate		11,732			13,722
HELOC		20,983			20,273
Consumer		329			379
		492,816			511,880
Less:
Allowance for loan losses		15,237			13,302
Deferred costs		(119	)		(181	)
Purchased premiums		(13	)		(14	)
Discount on SBA loans		410			461
Loans held for investment, net	$	477,301		$	498,312

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At June 30, 2011, the aging of the Company’s loans held for investment is as follows:

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
(in thousands)
Single family real estate	$	1,468	$	30	$	13	$	1,511	$	10,221	$	11,732	$	-
Commercial real estate:
Commercial real estate		-		3,327		6,157		9,484		101,352		110,836		-
504 1st TD		1,442		-		954		2,396		34,363		36,759		-
Land		-		-		567		567		5,420		5,987		-
Construction		-		-		8,442		8,442		11,410		19,852		-
Commercial		278		538		50		866		46,328		47,194		-
SBA		611		1,058		14,675		16,344		29,741		46,085		-
Mfg. housing		829		1,232		687		2,748		190,311		193,059		-
HELOC		499		-		-		499		20,484		20,983		-
Consumer		-		-		-		-		329		329		-
Total	$	5,127	$	6,185	$	31,545	$	42,857	$	449,959	$	492,816	$	-

Of the $16.3 million SBA loans past due, $14.2 million is guaranteed.

At December 31, 2010, 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		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
(in thousands)
Single family real estate	$	40	$	504	$	143	$	687	$	13,035	$	13,722	$	143
Commercial real estate:
Commercial real estate		331		-		981		1,312		103,118		104,430		-
504 1st TD		-		-		1,100		1,100		38,267		39,367		-
Land		195		-		571		766		5,970		6,736		-
Construction		-		-		49		49		23,324		23,373		-
Commercial		739		-		174		913		56,456		57,369		34
SBA		2,098		910		17,129		20,137		31,412		51,549		-
Mfg. housing		914		318		894		2,126		192,556		194,682		-
HELOC		-		-		2		2		20,271		20,273		-
Consumer		-		-		21		21		358		379		-
Total	$	4,317	$	1,732	$	21,064	$	27,113	$	484,767	$	511,880	$	177

Of the $20.1 million SBA loans past due, $17.3 million is guaranteed.

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An analysis of the allowance for loan losses for loans held for investment follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands)						(in thousands)
Balance, beginning of period	$	13,172		$	14,409		$	13,302		$	13,733

Loans charged off		(1,233	)		(3,642	)		(2,427	)		(6,084	)
Recoveries on loans previously charged off		141			198			222			242
Net charge-offs		(1,092	)		(3,444	)		(2,205	)		(5,842	)

Provision for loan losses		3,157			2,872			4,140			5,946
Balance, end of period	$	15,237		$	13,837		$	15,237		$	13,837

As of June 30, 2011 and December 31, 2010, the Company also had established reserves for credit losses on undisbursed loans of $260,000 and $194,000 respectively, which are included in other liabilities in the consolidated balance sheet.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended June 30, 2011:

	Allowance 3/31/11		Provision			Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/11
						(in thousands)
Commercial real estate	$	2,831	$	2,012		$	(427	)	$	-	$	(427	)	$	4,416
Manufactured housing		4,280		281			(268	)		2		(266	)		4,295
Commercial		1,880		486			(145	)		32		(113	)		2,253
SBA		3,324		286			(355	)		96		(259	)		3,351
Single family real estate		178		48			(38	)		11		(27	)		199
HELOC		584		65			-			-		-			649
Consumer		95		(21	)		-			-		-			74
Total	$	13,172	$	3,157		$	(1,233	)	$	141	$	(1,092	)	$	15,237

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the six months ended June 30, 2011:

	Allowance 12/31/10		Provision		Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/11
					(in thousands)
Commercial real estate	$	2,532	$	2,326	$	(444	)	$	2	$	(442	)	$	4,416
Manufactured housing		4,168		649		(549	)		27		(522	)		4,295
Commercial		2,094		585		(468	)		42		(426	)		2,253
SBA		3,753		238		(778	)		138		(640	)		3,351
Single family real estate		135		240		(188	)		12		(176	)		199
HELOC		547		101		-			1		1			649
Consumer		73		1		-			-		-			74
Total	$	13,302	$	4,140	$	(2,427	)	$	222	$	(2,205	)	$	15,237

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The recorded investment in loans that is considered to be impaired:

	June 30,			December 31,
	2011			2010
	(in thousands)
Impaired loans without specific valuation allowances	$	6,804		$	13,285
Impaired loans with specific valuation allowances		28,140			1,703
Specific valuation allowances allocated to impaired loans		(1,570	)		(362	)
Impaired loans, net	$	33,374		$	14,626

The following schedule reflects the average investment in impaired loans:	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(in thousands)
Average investment in impaired loans	$	32,206	$	17,598	$	28,805	$	16,079
Interest income recognized on impaired loans	$	260	$	213	$	440	$	215

The following schedule reflects recorded investment at the dates indicated in certain types of loans:

	June 30,			December 31,
	2011			2010
	(dollars in thousands)
Nonaccrual loans	$	48,054		$	34,950
SBA guaranteed portion of loans included above		(18,330	)		(22,279	)
Nonaccrual loans, net	$	29,724		$	12,671

Troubled debt restructured loans, gross	$	15,259		$	11,088
Loans 30 through 89 days past due with interest accruing	$	9,085		$	2,586
Allowance for loan losses to gross loans held for investment		3.09	%		2.60	%

CWB generally repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days. After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance. Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.

The composition of the Company’s net nonaccrual loans is as follows:

	June 30, 2011		December 31, 2010
	(in thousands)
Commercial	$	711	$	602
Commercial real estate:
Commercial real estate		11,744		3,226
504 1st		1,709		1,612
Land		567		571
Construction		8,442		49
SBA		3,781		4,181
Manufactured housing		2,741		1,917
Single family real estate		-		461
HELOC		29		31
Consumer		-		21
Nonaccrual loans, net	$	29,724	$	12,671

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At June 30, 2011, the recorded investment in loans by rating is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Single family real estate	$	10,292	$	1,440	$	-	$	-	$	11,732
Commercial real estate:
Commercial real estate		76,708		7,902		26,226		-		110,836
SBA 504 1st		29,332		-		7,427		-		36,759
Land		4,372		1,048		567		-		5,987
Construction		5,550		1,860		12,442		-		19,852
Commercial		34,946		4,475		7,688		85		47,194
SBA		20,476		314		4,521		94		25,405
Manufactured housing		190,278		-		2,782		-		193,060
HELOC		14,999		315		5,668		-		20,982
Consumer		313		-		15		-		328
Total	$	387,266	$	17,354	$	67,336	$	179	$	472,135
SBA guarantee		-		526		13,800		6,355		20,681
Grand total	$	387,266	$	17,880	$	81,136	$	6,534	$	492,816

At December 31, 2010, the recorded investment in loans by rating is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Single family real estate	$	13,261	$	-	$	461	$	-	$	13,722
Commercial real estate:
Commercial real estate		82,058		9,520		12,852		-		104,430
SBA 504 1st		35,645		891		2,831		-		39,367
Land		4,592		1,073		1,071		-		6,736
Construction		10,665		10,546		2,162		-		23,373
Commercial		46,825		6,961		3,494		89		57,369
SBA		21,724		511		4,898		82		27,215
Manufactured housing		192,490		60		2,132		-		194,682
HELOC		19,664		463		144		2		20,273
Consumer		339		-		40		-		379
Total	$	427,263	$	30,025	$	30,085	$	173	$	487,546
SBA guarantee		-		-		17,109		7,225		24,334
Grand total	$	427,263	$	30,025	$	47,194	$	7,398	$	511,880

5.	FAIR VALUE MEASUREMENT

Fair value is the exchange price that would be received for an asset or the price that would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U. S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets and liabilities

Level 2 – Observable inputs other than quoted market prices in active markets for identical assets and liabilities

Level 3 – Unobservable inputs

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The following summarizes the fair value measurements of assets measured on a recurring basis as of June 30, 2011 and December 31, 2010 and the relative levels of inputs from which such amounts were derived:

	Fair value measurements at June 30, 2011 using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Investment securities available-for-sale	$	23,718	$	-	$	23,718	$	-
Interest only strips (included in other assets)		471		-		-		471
Total	$	24,189	$	-	$	23,718	$	471

	Fair value measurements at December 31, 2010 using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Investment securities available-for-sale	$	23,342	$	-	$	23,342	$	-
Interest only strips (included in other assets)		492		-		-		492
Total	$	23,834	$	-	$	23,342	$	492

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 $492,000 as of December 31, 2010 and a valuation adjustment of $21,000 was recorded in income during the first six months of 2011. No other changes in the balance have occurred related to the I/O strips and such valuation adjustments are included as additions or offsets to loan servicing income.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans held for sale, foreclosed real estate and repossessed assets and loans that are considered impaired per generally accepted accounting principles.

Loans held for sale are carried at the lower of cost or market. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed upon sale price. As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy. At June 30, 2011 and December 31, 2010, the Company had loans held for sale with an aggregate carrying value of $76.1 and $82.3 million respectively.

Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated cost to sell. Fair value is based upon independent market prices obtained from certified appraisers or the current listing price, if lower. When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2. When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.

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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.

The following summarizes the fair value measurements of assets measured on a non-recurring basis as of June 30, 2011 and December 31, 2010 and the relative levels of inputs from which such amounts were derived:

	Fair value measurements at June 30, 2011 using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Impaired loans	$	33,374	$	-	$	28,246	$	5,128
Loans held for sale		78,390		-		78,390		-
Foreclosed real estate and repossessed assets		10,319		-		10,319		-
Total	$	122,083	$	-	$	116,955	$	5,128

	Fair value measurements at December 31, 2010 using
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Impaired loans	$	14,626	$	-	$	13,527	$	1,099
Loans held for sale		84,673		-		84,673		-
Foreclosed real estate and repossessed assets		8,478		-		8,478		-
Total	$	107,777	$	-	$	106,678	$	1,099

6.	BORROWINGS

Federal Home Loan Bank Advances – The Company has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”). Advances are collateralized in the aggregate by CWB’s eligible loans and securities. Total FHLB advances were $60.0 million June 30, 2011 and $64.0 million at December 31, 2010 borrowed at fixed rates. At June 30, 2011, CWB had securities and loans pledged to the FHLB with a carrying value of $38.9 million and $69.2 million, respectively. At December 31, 2010, CWB had securities and loans pledged with a carrying value of $40.2 million and $76.6 million, respectively. Total FHLB interest expense for the six months ended June 30, 2011 and 2010 was $817,000 and $1.1 million, respectively. At June 30, 2011, CWB had $63.7 million available for additional borrowing.

Federal Reserve Bank – The Company has established a credit line with the Federal Reserve Bank. Advances are collateralized in the aggregate by eligible loans for up to 28 days. The discount rate is 0.75% and there were no outstanding FRB advances as of June 30, 2011 and December 31, 2010. CWB had $109.3 million in borrowing capacity as of June 30, 2011.

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Convertible Debentures - On August 9, 2010, the Company announced the completion of its offering of $8,085,000 convertible subordinated debentures. 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 June 30, 2011, the balance of the convertible debentures was $7,862,000.

7.	STOCKHOLDERS’ EQUITY

Preferred Stock

On December 19, 2008, as part of the United States Department of the Treasury’s (the “Treasury”) Troubled Asset Relief Program - Capital Purchase Program (the “TARP Program”), the Company entered into a Letter Agreement with the Treasury, pursuant to which the Company issued to the Treasury, in exchange for the payment of 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 (the “Common Stock”), at an exercise price of $4.49 per share.

Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and at a rate of 9% per year thereafter, but will be paid only if, as and when declared by the Company's Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. The Series A Preferred Stock is generally non-voting, other than class voting on certain matters that could adversely affect the Series A Preferred Stock. In the event that dividends payable on the Series A Preferred Stock have not been paid for the equivalent of six or more quarters, whether or not consecutive, the Company's authorized number of Directors will be automatically increased by two and the holders of the Series A Preferred Stock, voting together with holders of any then outstanding voting parity stock, will have the right to elect those Directors at the Company's next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These Directors will be elected annually and will serve until all accrued and unpaid dividends on the Series A Preferred Stock have been paid.

Notwithstanding the terms of the Series A Preferred Stock, the Treasury has issued guidance that permits institutions that participated in the TARP Program, such as the Company, to redeem the Series A Preferred Stock and to repurchase the warrants issued to the Treasury subject to prior consultation with the institutions primary federal banking regulator.

Common Stock Warrant

The Warrant issued as part of the TARP provide for the purchase of up to 521,158 shares of the common stock, at an exercise price of $4.49 per share (“Warrant Shares”). The Warrant is immediately exercisable and has a 10-year term. The exercise price and the ultimate number of shares of common stock that may be issued under the Warrant are subject to certain anti-dilution adjustments, such as upon stock splits or distributions of securities or other assets to holders of the common stock, and upon certain issuances of the common stock at or below a specified price relative to the then current market price of the common stock. Pursuant to the Securities Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any Warrant Shares.

8.	EARNINGS PER SHARE

The following table presents a reconciliation of basic earnings per share and diluted earnings per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(dollars in thousands, except per share data)						(dollars in thousands, except per share data)
Net income	$	(221	)	$	(62	)	$	375		$	(11	)
Less: Preferred stock dividends		262			262			524			524
Net income (loss) applicable to common stockholders	$	(483	)	$	(324	)	$	(149	)	$	(535	)

Add: Debenture interest expense and costs, net of income taxes		-			-			-			-
Net income for diluted calculation of earnings (loss) per common share	$	-		$	-		$	-		$	-
Basic weighted average number of common shares outstanding		5,982			5,915			5,971			5,915
Dilutive weighted average number of common shares outstanding		5,982			5,915			5,971			5,915
Earnings (loss) per common share:
Basic	$	(0.08	)	$	(0.05	)	$	(0.02	)	$	(0.09	)
Diluted	$	(0.08	)	$	(0.05	)	$	(0.02	)	$	(0.09	)

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Excluded from the diluted earnings per share calculation, due to the loss applicable to common shareholders, were 2,248,610 and 2,257,509 average debenture shares for the three and six months ended June 30, 2011, respectively. Also excluded from the diluted earnings per share calculations were 15,250 and 18,545 average option shares for the three and six months ended June 30, 2011, respectively.

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:

	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Assets:
Cash and cash equivalents	$	7,536	$	7,536	$	6,226	$	6,226
Time deposits in other financial institutions		240		240		290		290
Federal Reserve and Federal Home Loan Bank stock		5,967		5,967		6,353		6,353
Investment securities		38,903		39,585		40,235		40,856
Loans		553,445		535,147		580,632		562,508
Liabilities:
Deposits (other than time deposits)		351,873		351,873		318,569		318,569
Time deposits		159,261		162,042		211,324		214,473
Other borrowings		67,862		68,973		72,081		71,676

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. The FHLB is rated AAA by Moody’s and S&P and no impairment was recognized as of June 30, 2011.

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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.

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.

Commitments to Extend Credit, Commercial and Standby Letters of Credit – Due to the proximity of the pricing of these commitments to the period end, the fair values of commitments are immaterial to the financial statements.

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2011 and December 31, 2010. 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.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is designed to provide insight into management’s assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It should be read in conjunction with the Company’s unaudited interim consolidated financial statements and notes thereto the audited consolidated financial statement and notes thereto included in the Company’s Annual Report or Form 10-K for the year ended December 31, 2010, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.

The following discussion should be read in conjunction with the Company’s financial statements and the related notes provided under "Item 1—Financial Statements" above.

Overview of Earnings Performance

For the 2Q11, net loss was $221,000 compared to net loss of $62,000 for 2Q10.

The significant factors impacting net income for 2Q11 were:

The provision for loan losses was $3.2 million for 2Q11 compared to $2.9 million for 2Q10.

The decline in rates paid on funding sources contributed to a slight improvement in the margin which increased to 4.58% for 2Q11 compared to 4.47% for 2Q10.

Loss on sale and write-down of foreclosed real estate and repossessed assets decreased to $199,000 for 2Q11 compared to $504,000 for 2Q10.

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 2010 Form 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.

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Results of Operations - Second Quarter Comparison

The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:

	Three Months Ended June 30,
	2011			2010			Increase (Decrease)
	(dollars in thousands, except per share amounts)
Interest income	$	9,135		$	9,703		$	(568	)
Interest expense		2,050			2,472			(422	)
Net interest income		7,085			7,231			(146	)
Provision for loan losses		3,157			2,872			285
Net interest income after provision for loan losses		3,928			4,359			(431	)
Non-interest income		815			933			(118	)
Non-interest expenses		5,115			5,397			(282	)
Loss before provision for income taxes		(372	)		(105	)		(267	)
Benefit for income taxes		(151	)		(43	)		(108	)
Net loss	$	(221	)	$	(62	)	$	(159	)
Preferred stock dividends		262			262			-
Net loss applicable to common shareholders	$	(483	)	$	(324	)	$	(159	)
Loss per common share:
Basic	$	(0.08	)	$	(0.05	)	$	(0.03	)
Diluted	$	(0.08	)	$	(0.05	)	$	(0.03	)
Dividends per common share	$	-		$	-		$	-
Comprehensive loss	$	(228	)	$	(100	)	$	(128	)

The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:

	Three Months Ended June 30,
	2011 versus 2010
	Total			Change due to
	change			Rate			Volume
	(in thousands)
Loans, net	$	(458	)	$	7		$	(465	)
Investment securities		(107	)		(114	)		7
Other		(3	)		(1	)		(2	)
Total interest-earning assets		(568	)		(108	)		(460	)

Deposits		(486	)		(270	)		(216	)
Other borrowings		64			63			1
Total interest-bearing liabilities		(422	)		(207	)		(215	)
Net interest income	$	(146	)	$	99		$	(245	)

Net Interest Income

Net interest income declined by $146,000 for 2Q11 compared to 2Q10. Total interest income declined by $568,000. Of this decline, $460,000 was due to the decline in average earning assets from $649.1 million for 2Q10 to $620.8 million for 2Q11.

The decline in interest expense was due in almost equal proportion to lower rates and a decline in the average balance of interest-bearing liabilities from $574.7 million for 2Q10 to $541.8 million for 2Q11. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 4.47% for 2Q10 to 4.58% for 2Q11.

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Provision for Loan Losses

The provision for loan losses was $3.2 million for 2Q11 compared to $2.9 million for 2Q10.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended June 30, 2011:

	Allowance 3/31/11		Provision			Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/11
						(in thousands)
Commercial real estate	$	2,831	$	2,012		$	(427	)	$	-	$	(427	)	$	4,416
Manufactured housing		4,280		281			(268	)		2		(266	)		4,295
Commercial		1,880		486			(145	)		32		(113	)		2,253
SBA		3,324		286			(355	)		96		(259	)		3,351
Single family real estate		178		48			(38	)		11		(27	)		199
HELOC		584		65			-			-		-			649
Consumer		95		(21	)		-			-		-			74
Total	$	13,172	$	3,157		$	(1,233	)	$	141	$	(1,092	)	$	15,237

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended June 30, 2010:

	Allowance 3/31/10		Provision			Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/10
						(in thousands)
Commercial real estate	$	2,560	$	502		$	(648	)	$	-	$	(648	)	$	2,414
Manufactured housing		2,706		596			(411	)		3		(408	)		2,894
Commercial		2,945		224			(707	)		70		(637	)		2,532
SBA		5,549		1,366			(1,710	)		98		(1,612	)		5,303
Single family real estate		147		30			(52	)		1		(51	)		126
HELOC		378		229			(114	)		3		(111	)		496
Consumer		124		(75	)		-			23		23			72
Total	$	14,409	$	2,872		$	(3,642	)	$	198	$	(3,444	)	$	13,837

Included in the Company’s held-to-maturity portfolio are home equity loans, “HELOC”, which guidance issued by the SEC characterizes as higher-risk. The HELOC portfolio of $21.0 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties. In 2Q11, there were no charge-offs in this portfolio. As of June 30, 2011, $499,000 of the portfolio was past due. The allowance for loan losses for this portfolio is $649,000, or 3.1%. The Company believes that, overall, this portfolio is adequately supported by real estate collateral.

The percentage of net non-accrual loans to the total loan portfolio has increased to 5.23% as of June 30, 2011 from 2.13% at December 31, 2010.

The allowance for loan losses compared to net non-accrual loans has declined to 51.26% as of June 30, 2011 from 105% as of December 31, 2010.

Non-Interest Income

Non-interest income includes gains from sale of loans, loan document fees, service charges on deposit accounts, loan servicing fees and other revenues not derived from interest on earning assets. Total non-interest income decreased by $118,000, or 12.6%, for 2Q11 compared to 2Q10, primarily due to lower loan origination fees and referral fees on SBA 504 loans.

Non-Interest Expenses

Non-interest expenses declined $282,000, or 5.2%, for 2Q11 compared to 2Q10. The loss on sale and write-down of foreclosed real estate and repossessed assets declined $305,000 to $199,000 for 2Q11 from 2Q10.

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Results of Operations – Six-Month Comparison

The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:

	Six Months Ended June 30,						Increase
	2011			2010			(Decrease)
	(dollars in thousands, except per share amounts)
Interest income	$	18,466		$	19,645		$	(1,179	)
Interest expense		4,311			5,119			(808	)
Net interest income		14,155			14,526			(371	)
Provision for loan losses		4,140			5,946			(1,806	)
Net interest income after provision for loan losses		10,015			8,580			1,435
Non-interest income		1,553			1,772			(219	)
Non-interest expenses		10,924			10,368			556
Income (loss) before provision for income taxes		644			(16	)		660
Provision for income taxes		269			(5	)		274
Net income (loss)	$	375		$	(11	)	$	386
Preferred stock dividends		524			524			0
Net loss applicable to common shareholders	$	(149	)	$	(535	)	$	386
Loss per common share:
Basic	$	(0.02	)	$	(0.09	)	$	0.07
Diluted	$	(0.02	)	$	(0.09	)	$	0.07
Dividends per common share	$	-		$	-		$	-
Comprehensive loss	$	332		$	(35	)	$	367

The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:

	Six Months Ended June 30,
	2011 versus 2010
	Total			Change due to
	change			Rate			Volume
				(in thousands)
Loans, net	$	(948	)	$	(133	)	$	(815	)
Investment securities		(222	)		(223	)		1
Other		(9	)		(2	)		(7	)
Total interest-earning assets		(1,179	)		(358	)		(821	)

Deposits		(875	)		(565	)		(310	)
Other borrowings		67			169			(102	)
Total interest-bearing liabilities		(808	)		(396	)		(412	)
Net interest income	$	(371	)	$	38		$	(409	)

Net Interest Income

Net interest income declined by $371,000 for the first six months of 2011 compared to the same period in 2010. Total interest income declined by $1.2 million. Of this decline, $821,000 was due to the decline in average earning assets from $655.0 million for the six months ended June 30, 2010 to $627.0 million for the same period in 2011 and $358,000 was due to the decline in rates.

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The decline in interest expense was due in almost equal proportion to lower rates and a decline in the average balance of interest-bearing liabilities from $577.2 million for the first six months of 2010 to $550.9 million for the same period of 2011. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 4.47% for the first six months of 2010 to 4.55% for the same period in 2011.

Provision for Loan Losses

The provision for loan losses was $4.1 million for first six months of 2011 compared to $5.9 million for same period of 2010.

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the six months ended June 30, 2011:

	Allowance 12/31/10		Provision		Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/11
					(in thousands)
Commercial real estate	$	2,532	$	2,326	$	(444	)	$	2	$	(442	)	$	4,416
Manufactured housing		4,168		649		(549	)		27		(522	)		4,295
Commercial		2,094		585		(468	)		42		(426	)		2,253
SBA		3,753		238		(778	)		138		(640	)		3,351
Single family real estate		135		240		(188	)		12		(176	)		199
HELOC		547		101		-			1		1			649
Consumer		73		1		-			-		-			74
Total	$	13,302	$	4,140	$	(2,427	)	$	222	$	(2,205	)	$	15,237

The following schedule summarizes the provision, charge-offs and recoveries by loan category for the six months ended June 30, 2010:

	Allowance 12/31/09		Provision			Charge-offs			Recoveries		Net Charge-offs			Allowance 6/30/10
						(in thousands)
Commercial real estate	$	2,869	$	193		$	(648	)	$	-	$	(648	)	$	2,414
Manufactured housing		2,255		1,509			(873	)		3		(870	)		2,894
Commercial		3,448		(262	)		(728	)		74		(654	)		2,532
SBA		4,801		3,757			(3,390	)		135		(3,255	)		5,303
Single family real estate		143		66			(86	)		3		(83	)		126
HELOC		124		728			(359	)		3		(356	)		496
Consumer		93		(45	)		-			24		24			72
Total	$	13,733	$	5,946		$	(6,084	)	$	242	$	(5,842	)	$	13,837

Non-Interest Income

Total non-interest income declined by $219,000, or 12.4%, for the first six months of 2011 compared to the same period in 2010. The decline was primarily due to lower loan origination fees and fees earned on the SBA504 loans.

Non-Interest Expenses

Non-interest expenses increased $556,000, or 5.4%, to $10.9 million for the first six months of 2011 compared to $10.4 million for the same period in 2010. The increase was primarily in “Other” expense and included an increase of $277,000 related to foreclosed real estate and repossessed assets for the first six months of 2011 compared to the same period in 2010. The provision related to undisbursed loans was $66,000 for the first six months of 2011 compared to a credit of $275,000 for same period of 2010, an increase of $341,000.

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Interest Rates and Differentials

The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Interest-earning assets:	(dollars in thousands)						(dollars in thousands)
Interest-earning deposits in other financial institutions including Federal funds sold:
Average balance	$	1,259		$	1,579		$	1,257		$	3,298
Interest income		3			5			5			14
Average yield		0.78	%		1.39	%		0.83	%		0.89	%
Investment securities:
Average balance	$	45,458		$	44,271		$	45,110		$	45,016
Interest income		267			375			552			774
Average yield		2.36	%		3.40	%		2.46	%		3.47	%
Gross loans:
Average balance	$	574,059		$	603,219		$	580,585		$	606,673
Interest income		8,865			9,323			17,909			18,857
Average yield		6.19	%		6.20	%		6.22	%		6.27	%
Total interest-earning assets:
Average balance	$	620,776		$	649,069		$	626,952		$	654,987
Interest income		9,135			9,703			18,466			19,645
Average yield		5.90	%		6.00	%		5.94	%		6.05	%
Interest-bearing liabilities:
Interest-bearing demand deposits:
Average balance	$	281,304		$	232,922		$	277,920		$	219,021
Interest expense		687			827			1,486			1,635
Average cost of funds		0.98	%		1.42	%		1.08	%		1.51	%
Savings deposits:
Average balance	$	21,386		$	20,979		$	21,066		$	19,495
Interest expense		105			115			213			223
Average cost of funds		1.96	%		2.20	%		2.04	%		2.30	%
Time certificates of deposit:
Average balance	$	169,080		$	251,196		$	181,084		$	261,652
Interest expense		680			1,016			1,442			2,159
Average cost of funds		1.61	%		1.62	%		1.61	%		1.66	%
Convertible debentures:
Average balance	$	7,870		$	-		$	7,900		$	-
Interest expense		177			-			353			-
Average cost of funds		9.00	%		-			9.00	%		-
Other borrowings:
Average balance	$	61,849		$	69,587		$	62,917		$	76,989
Interest expense		401			514			817			1,102
Average cost of funds		2.60	%		2.96	%		2.62	%		2.89	%
Total interest-bearing liabilities:
Average balance	$	541,849		$	574,684		$	550,887		$	577,157
Interest expense		2,050			2,472			4,311			5,119
Average cost of funds		1.52	%		1.73	%		1.58	%		1.79	%
Net interest income	$	7,085		$	7,231		$	14,155		$	14,526
Net interest spread		4.38	%		4.27	%		4.36	%		4.26	%
Average net margin		4.58	%		4.47	%		4.55	%		4.47	%

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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 $12.6 million, or 1.86%, to $665.8 million at June 30, 2011 compared to $678.4 million at June 30, 2010. Average total equity increased by 3.16% to $62.8 million at June 30, 2011 from $60.9 million at June 30, 2010. Average total gross loans at June 30, 2011 decreased by $26.1 million, or 4.3%, to $580.6 million from $606.7 million at June 30, 2010. Average deposits also decreased from $539.0 million at June 30, 2010 to $528.5 million as of June 30, 2011.

The book value per common share was $7.84 at June 30, 2011 and $7.92 at December 31, 2010.

Selected balance sheet accounts (dollars in thousands)	June 30, 2011		December 31, 2010		Increase (Decrease)			Percent Increase (Decrease)

Cash and cash equivalents	$	7,536	$	6,226	$	1,310			21.04	%
Investment securities available-for-sale		23,718		23,342		376			1.61	%
Investment securities held-to-maturity		15,185		16,893		(1,708	)		(10.11	)%
Loans - held for sale		76,144		82,320		(6,176	)		(7.50	)%
Loans - held for investment, net		477,301		498,312		(21,011	)		(4.22	)%
Total assets		643,831		667,604		(23,773	)		(3.56	)%

Total deposits		511,134		529,893		(18,759	)		(3.54	)%
Other borrowings and convertible debentures		67,862		72,081		(4,219	)		(5.85	)%

Total stockholders' equity		61,838		61,642		196			0.32	%

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The following schedule shows the balance and percentage change in the various deposits:

	June 30, 2011		December 31, 2010		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Non-interest-bearing deposits	$	54,386	$	35,767	$	18,619			52.06	%
Interest-bearing deposits		275,144		262,431		12,713			4.84	%
Savings		22,343		20,371		1,972			9.68	%
Time certificates of $100,000 or more		127,505		163,117		(35,612	)		(21.83	)%
Other time certificates		31,756		48,207		(16,451	)		(34.13	)%
Total deposits	$	511,134	$	529,893	$	(18,759	)		(3.54	)%

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 recorded investment in loans that is considered to be impaired:

	June 30,			December 31,
	2011			2010
	(in thousands)
Impaired loans without specific valuation allowances	$	6,804		$	13,285
Impaired loans with specific valuation allowances		28,140			1,703
Specific valuation allowances allocated to impaired loans		(1,570	)		(362	)
Impaired loans, net	$	33,374		$	14,626

The following schedule reflects the average investment in impaired loans:	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(in thousands)				(in thousands)
Average investment in impaired loans	$	32,206	$	17,598	$	28,805	$	16,079
Interest income recognized on impaired loans	$	260	$	213	$	440	$	215

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The following schedule reflects recorded investment at the dates indicated in certain types of loans:

	June 30,			December 31,
	2011			2010
	(dollars in thousands)
Nonaccrual loans	$	48,054		$	34,950
SBA guaranteed portion of loans included above		(18,330	)		(22,279	)
Nonaccrual loans, net	$	29,724		$	12,671

Troubled debt restructured loans, gross	$	15,259		$	11,088
Loans 30 through 89 days past due with interest accruing	$	9,085		$	2,586
Allowance for loan losses to gross loans held for investment		3.09	%		2.60	%

Liquidity and Capital Resources

Liquidity Management

The Company has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits. Ultimately, public confidence is gained through profitable operations, sound credit quality and a strong capital position. The Company’s liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective. Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk. The Company has asset/liability committees (ALCO) at the Board and Bank management level to review asset/liability management and liquidity issues.

The Company 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 $60.0 million at June 30, 2011 and $64.0 million at December 31, 2010 borrowed at fixed rates. At June 30, 2011, CWB had securities and loans pledged to the FHLB with a carrying value of $38.9 million and $69.2 million, respectively. At December 31, 2010, CWB had securities and loans pledged with a carrying value of $40.2 million and $76.6 million, respectively. Total FHLB interest expense for the six months ended June 30, 2011 and June 30, 2010 was $817,000 and $1.1 million, respectively. At June 30, 2011, CWB had $63.7 million available for additional borrowing. CWB has established a credit line with the Federal Reserve Bank. Advances are collateralized in the aggregate by eligible loans for up to 28 days. The discount rate is 0.75% and there were no outstanding FRB advances as of June 30, 2011 and December 31, 2010. CWB had $109.3 million in borrowing capacity as of June 30, 2011.

CWB also maintains four federal funds purchased lines for a total borrowing capacity of $23.5 million. Of the $23.5 million in borrowing capacity, two of the lines for $10.0 million require the Company to furnish acceptable collateral.

The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits. The liquidity ratio of the Company was 17% at June 30, 2011 and December 31, 2010. 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.

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CWBC’s routine funding requirements primarily consist of certain operating expenses, TARP preferred dividends and, beginning in the fourth quarter of 2010, interest payments on outstanding convertible debentures. Normally, CWBC obtains funding to meet its obligations from dividends collected from CWB and has the capability to issue debt securities. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. CWBC anticipates that for the foreseeable future, it will fund its expenses, TARP preferred dividends and interest payments on the debentures from proceeds of the debenture offering and will not receive dividends from CWB.

Interest Rate Risk

The Company is exposed to different types of interest rate risks. These risks include: lag, repricing, basis and prepayment risk.

Lag Risk – lag risk results from the inherent timing difference between the repricing of the Company’s adjustable rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. However, at a community bank such as CWB, when rates are rising, funding sources tend to reprice more slowly than the loans. Therefore, for CWB, the effect of this timing difference is generally favorable during a period of rising interest rates and unfavorable during a period of declining interest rates. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.

Repricing Risk – repricing risk is caused by the mismatch in the maturities / repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This is because loans tend to reprice more quickly than do funding sources. Typically, since CWB is somewhat asset sensitive, this would also tend to expand the net interest margin during times of interest rate increases. However, the margin relationship is somewhat dependent on the shape of the yield curve.

Basis Risk – item pricing tied to different indices may tend to react differently, however, all CWB’s variable products are priced off the prime rate.

Prepayment Risk – prepayment risk results from borrowers paying down / off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. Since a majority of CWB’s loan originations are adjustable rate and set based on prime, and there is little lag time on the reset, CWB does not experience significant prepayments. However, CWB does have more prepayment risk on its manufactured housing loans and its mortgage-backed investment securities.

Management of Interest Rate Risk

To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as our funding sources. CWB sells mortgage products and a portion of its SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.

Loan sales - The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. Increases in interest rates may also reduce the amount of loan and commitment fees received by CWB. A significant decline in interest rates could also decrease the size of CWB’s servicing portfolio and the related servicing income by increasing the level of prepayments.

Capital Resources

The Company (on a consolidated basis) and CWB are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s and CWB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and CWB must meet specific capital guidelines that involve quantitative measures of the Company’s and CWB’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and CWB’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

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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 the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital (as defined) to adjusted average assets (as defined). The Company’s and CWB’s actual capital amounts and ratios as of June 30, 2011 and December 31, 2010 are presented in the table below:

(dollars in thousands)	Total Capital		Tier 1 Capital		Risk-Weighted Assets		Adjusted Average Assets		Total Risk-Based Capital Ratio			Tier 1 Risk-Based Capital Ratio			Tier 1 Leverage Ratio
	(dollars in thousands)
June 30, 2011
CWBC (Consolidated)	$	76,120	$	61,629	$	521,434	$	659,059		14.60	%		11.82	%		9.35	%
Capital in excess of well capitalized									$	23,977		$	30,343		$	28,676
CWB	$	69,812	$	63,186	$	521,194	$	658,796		13.39	%		12.12	%		9.59	%
Capital in excess of well capitalized									$	17,693		$	31,914		$	30,246

December 31, 2010
CWBC (Consolidated)	$	76,283	$	61,385	$	538,685	$	676,397		14.16	%		11.40	%		9.08	%
Capital in excess of well capitalized									$	22,415		$	29,064		$	27,565
CWB	$	69,308	$	62,494	$	538,463	$	676,127		12.87	%		11.61	%		9.24	%
Capital in excess of well capitalized									$	15,462		$	30,186		$	28,688

Well capitalized ratios										10.00	%		6.00	%		5.00	%
Minimum capital ratios										8.00	%		4.00	%		4.00	%

The Company and CWB each met the minimum ratios required to be classified as “well capitalized” under applicable regulatory guidelines.

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Supervision and Regulation

Banking is a complex, highly regulated industry. The banking regulatory scheme serves not to protect investors, but is designed to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry. Consequently, the Company's growth and earnings performance, as well as that of CWB, may be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve Bank ("FRB”), the FDIC, and the Office of the Comptroller of the Currency ("OCC"). For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

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 the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Company’s management has concluded that, as of the end of the period covered by this report, the Company’s 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 the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2011 and determined that there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2011 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.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

There have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC on March 25, 2011.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

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ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

REMOVED AND RESERVED

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

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 June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Income Statements; (iii) the Consolidated Statement of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements.

This certification is furnished to, but shall not be deemed filed, with the Commission. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.

Furnished, not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY WEST BANCSHARES
	(Registrant)

Date: August 12, 2011	/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

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EXHIBIT INDEX

Exhibit
Number	Description of Document

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 June 30, 2011, 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.

Furnished, not filed.

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Part I Financial Information Item 1. Financial Statements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Removed and Reserved Item 5. Other Information Item 6. Exhibits

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.

CWBC 10-Q Quarter ended June 30, 2011

Exhibits