Community West Bancshares in Goleta, Calif., said that a litigation settlement concerning its sale of residential-mortgage loans will reduce its second-quarter profit.

The $572 million-asset Community West on Friday said it has agreed to pay $7.5 million to settle claims by Residential Funding Co. in Minneapolis that the bank misrepresented the quality of loans it sold them. After Residential Funding securitized the loans, they defaulted or became delinquent. Residential Funding later filed for bankruptcy.

The settlement will reduce Community West's second-quarter net income by $4.2 million, and reduce earnings per share and book value per share by 51 cents. Community West said insurance will recover some of the loss.

CWB's Tier 1 leverage ratio as of March 31, adjusted for the settlement, would have been 10.97%.

Residential Funding has filed similar lawsuits against other banks, which remain pending in courts in New York and Minnesota.

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