COMMUNITY WEST BANCSHARES / - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019 or

☐	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. ☒YES ☐NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒YES ☐NO

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

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock of the registrant issued and outstanding of 8,466,963 as of October 30, 2019.

Table of Contents

Index			Page
Part I.	Financial Information
	Item 1 – Financial Statements
		Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	2
		Consolidated Income Statements for the three and nine months ended September 30, 2019 and 2018 (unaudited)	3
		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4
		Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	5
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	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, 2018.

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk		46
	Item 4 – Controls and Procedures		46

Part II.	Other Information
	Item 1 – Legal Proceedings		47
	Item 1A – Risk Factors		47
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		47
	Item 3 – Defaults Upon Senior Securities		47
	Item 4 – Mine Safety Disclosures		47
	Item 5 – Other Information		47
	Item 6 – Exhibits		48

Signatures			48

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

COMMUNITY WEST BANCSHARES

CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks	$	1,854		$	2,975
Federal funds sold		4			8
Interest-earning demand in other financial institutions		54,489			53,932
Cash and cash equivalents		56,347			56,915
Investment securities - available-for-sale, at fair value; amortized cost of $22,006 at September 30, 2019 and $25,156 at December 31, 2018		21,907			24,931
Investment securities - held-to-maturity, at amortized cost; fair value of $6,837 at September 30, 2019 and $7,269 at December 31, 2018		6,637			7,301
Investment securities - measured at fair value; amortized cost of $66 at September 30, 2019 and December 31, 2018.		163			121
Federal Home Loan Bank stock, at cost		2,714			2,714
Federal Reserve Bank stock, at cost		1,373			1,373
Loans:
Held for sale, at lower of cost or fair value		44,816			48,355
Held for investment, net of allowance for loan losses of $8,868 at September 30, 2019 and $8,691 at December 31, 2018		735,773			711,197
Total loans		780,589			759,552
Other assets acquired through foreclosure, net		317			-
Premises and equipment, net		7,836			6,381
Other assets		25,369			18,003
Total assets	$	903,252		$	877,291
Liabilities:
Deposits:
Non-interest-bearing demand	$	114,366		$	108,161
Interest-bearing demand		333,679			270,431
Savings		15,481			14,641
Certificates of deposit ($250,000 or more)		90,298			93,439
Other certificates of deposit		207,848			229,334
Total deposits		761,672			716,006
Other borrowings		45,000			75,000
Other liabilities		16,984			10,134
Total liabilities		823,656			801,140

Stockholders’ equity:
Common stock — no par value, 60,000,000 shares authorized; 8,466,963 shares issued and outstanding at September 30, 2019 and 8,533,346 at December 31, 2018		42,446			42,964
Retained earnings		37,217			33,328
Accumulated other comprehensive (loss)		(67	)		(141	)
Total stockholders’ equity		79,596			76,151
Total liabilities and stockholders’ equity	$	903,252		$	877,291

See the accompanying notes.

Table of Contents

COMMUNITY WEST BANCSHARES

CONSOLIDATED INCOME STATEMENTS (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019		2018
Interest income:	(in thousands, except per share amounts)
Loans, including fees	$	11,306		$	10,612		$	32,754	$	30,283
Investment securities and other		413			589			1,357		1,307
Total interest income		11,719			11,201			34,111		31,590
Interest expense:
Deposits		2,615			2,222			7,642		5,373
Other borrowings		306			351			950		928
Total interest expense		2,921			2,573			8,592		6,301
Net interest income		8,798			8,628			25,519		25,289
Provision (credit) for loan losses		(75	)		(197	)		45		(224	)
Net interest income after provision for loan losses		8,873			8,825			25,474		25,513
Non-interest income:
Other loan fees		302			379			883		998
Document processing fees		96			120			307		367
Service charges		129			113			407		351
Other		120			29			346		252
Total non-interest income		647			641			1,943		1,968
Non-interest expenses:
Salaries and employee benefits		4,254			4,147			12,953		12,338
Occupancy, net		788			778			2,338		2,303
Professional services		341			326			1,127		931
Data processing		215			201			640		619
Depreciation		219			199			650		552
FDIC assessment		(15	)		169			309		547
Advertising and marketing		187			154			546		487
Stock based compensation		90			81			282		284
Other		385			347			1,096		1,131
Total non-interest expenses		6,464			6,402			19,941		19,192
Income before provision for income taxes		3,056			3,064			7,476		8,289
Provision for income taxes		902			695			2,232		2,239
Net income	$	2,154		$	2,369		$	5,244	$	6,050
Earnings per share:
Basic	$	0.25		$	0.29		$	0.62	$	0.73
Diluted	$	0.25		$	0.27		$	0.61	$	0.69
Weighted average number of common shares outstanding:
Basic		8,465			8,261			8,470		8,233
Diluted		8,567			8,761			8,577		8,724
Dividends declared per common share	$	0.055		$	0.050		$	0.160	$	0.140

See the accompanying notes.

Table of Contents

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
	(in thousands)
Net income	$	2,154	$	2,369		$	5,244	$	6,050
Other comprehensive income, net:
Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($3), $34, ($52) and $82 for each respective period presented)		4		(48	)		74		(125	)
Net other comprehensive income (loss)		4		(48	)		74		(125	)
Comprehensive income	$	2,158	$	2,321		$	5,318	$	5,925

See the accompanying notes.

Table of Contents

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

Three Months Ended September 30, 2019	Common Stock						Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	Shares			Amount			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	(in thousands)
Balance, June 30, 2019:		8,465		$	42,372		$	(71	)	$	35,528		$	77,829
Net income		—			—			—			2,154			2,154
Exercise of stock options		12			85			—			—			85
Stock based compensation		—			90			—			—			90
Common stock repurchase		(10	)		(101	)		—			—			(101	)
Dividends on common stock		—			—			—			(465	)		(465	)
Other comprehensive income, net		—			—			4			—			4
Balance, September 30, 2019		8,467		$	42,446		$	(67	)	$	37,217		$	79,596

Three Months Ended September 30, 2018	Common Stock				Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	Shares		Amount		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	(in thousands)
Balance, June 30, 2018:		8,254	$	43,117	$	(111	)	$	30,442		$	73,448
Net income		—		—		—			2,369			2,369
Exercise of stock options		21		120		—			—			120
Stock based compensation		—		81		—			—			81
Dividends on common stock		—		—		—			(413	)		(413	)
Other comprehensive loss, net		—		—		(48	)		—			(48	)
Balance, September 30, 2018		8,275	$	43,318	$	(159	)	$	32,398		$	75,557

Nine Months Ended September 30, 2019	Common Stock						Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares			Amount			Income (Loss)			Earnings			Equity
	(in thousands)
Balance, December 31, 2018:		8,533		$	42,964		$	(141	)	$	33,328		$	76,151
Net income		—			—			—			5,244			5,244
Exercise of stock options		34			230			—			—			230
Stock based compensation		—			282			—			—			282
Common stock repurchase		(100	)		(1,030	)		—			—			(1,030	)
Dividends on common stock		—			—			—			(1,355	)		(1,355	)
Other comprehensive income, net		—			—			74			—			74
Balance, September 30, 2019		8,467		$	42,446		$	(67	)	$	37,217		$	79,596

Nine Months Ended September 30, 2018	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, December 31, 2017:		8,193	$	42,604	$	25		$	27,441		$	70,070
Net income		—		—		—			6,050			6,050
Exercise of stock options		82		430		—			—			430
Stock based compensation		—		284		—			—			284
Dividends on common stock		—		—		—			(1,152	)		(1,152	)
Other comprehensive loss, net		—		—		(125	)		—			(125	)
Impact of ASU 2016-01 and 2018-02 as of January 1, 2018		—		—		(59	)		59			—
Balance, September 30, 2018		8,275	$	43,318	$	(159	)	$	32,398		$	75,557

See the accompanying notes.

Table of Contents

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended September 30,
	2019			2018
	(in thousands)
Cash flows from operating activities:
Net income	$	5,244		$	6,050
Adjustments to reconcile net income to cash provided by operating activities:
(Credit) provision for loan losses		45			(224	)
Depreciation		650			552
Stock based compensation		282			284
Deferred income taxes		(166	)		(466	)
Net accretion of discounts and premiums for investment securities		90			70
Losses on:
Sale of repossessed assets, net		11			62
Sale of assets, net		7			—
Loans originated for sale and principal collections, net		3,539			4,150
Changes in:
Investment securities held at fair value		(42	)		12
Other assets		16			(2,464	)
Other liabilities		(340	)		2,570
Servicing assets, net		20			67
Net cash provided by operating activities		9,356			10,663
Cash flows from investing activities:
Principal pay downs and maturities of available-for-sale securities		3,070			2,646
Purchases of securities held-to-maturity		—			(794	)
Principal pay downs and maturities of held-to-maturity securities		654			869
Loan originations and principal collections, net		(25,798	)		(23,132	)
Purchase of restricted stock, net		—			(367	)
Purchase of premises and equipment, net		(2,112	)		(1,178	)
Proceeds from sale of other real estate owned and repossessed assets, net		751			484
Net cash used in investing activities		(23,435	)		(21,472	)
Cash flows from financing activities:
Net increase in deposits		45,666			20,258
Net (decrease) increase in borrowings		(30,000	)		(6,843	)
Exercise of stock options		230			430
Cash dividends paid on common stock		(1,355	)		(1,152	)
Common stock repurchase		(1,030	)		—
Net cash provided by financing activities		13,511			12,693
Net increase cash and cash equivalents		(568	)		1,884
Cash and cash equivalents at beginning of period		56,915			45,869
Cash and cash equivalents at end of period	$	56,347		$	47,753
Supplemental disclosure:
Cash paid during the period for:
Interest	$	9,717		$	5,586
Income Taxes		1,610			2,010
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		1,177			174
Operating lease right-of-use asset		(7,190	)		—
Operating lease liability		6,538			—

See the accompanying notes.

Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”). Unless indicated otherwise or unless the context suggests otherwise, these entities are referred to herein collectively and on a consolidated basis as the “Company.”

Basis of Presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiary are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and the fair value of securities available for sale. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all necessary adjustments have been reflected in the financial statements during their preparation.

Interim Financial Information

The accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by GAAP for complete financial statements. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company’s audited consolidated financial statements.

Reclassifications

Certain amounts in the consolidated financial statements as of December 31, 2018 and for the three and nine months ended September 30, 2018 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income, comprehensive income or stockholders’ equity as previously reported.

Loans Held For Sale

Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision. Loans held for sale are mostly comprised of commercial agriculture and Small Business Association (“SBA”). The Company did not incur any lower of cost or fair value provision in the three and nine months ended September 30, 2019 and 2018.

Loans Held for Investment and Interest and Fees from Loans

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.

Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.

Table of Contents

When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for through interest income.

Nonaccrual loans: For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection. Other personal loans are typically charged off no later than 120 days delinquent.

For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed. Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.

Impaired 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. The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell. All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.

Troubled debt restructured loan (“TDR”): A TDR is a loan on which the Company, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominately term extensions. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.

Allowance for Loan Losses and Provision for Loan Losses

The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”). The ALL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio. This process involves deriving probable loss estimates that are based on migration analysis and historical loss rates, in addition to qualitative factors that are based on management’s judgment. The migration analysis and historical loss rate calculations are based on the annualized loss rates utilizing a twelve-quarter loss history. Migration analysis is utilized for the Commercial Real Estate (“CRE”), Commercial, Commercial Agriculture, SBA, Home Equity Line of Credit (“HELOC”), Single Family Residential, and Consumer portfolios. The historical loss rate method is utilized primarily for the Manufactured Housing portfolio. The migration analysis takes into account the risk rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off. The following is a description of the characteristics of loan ratings. Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.

Substantially Risk Free – These borrowers have virtually no probability of default or loss given default and present no identifiable or potential adverse risk to the Company. Documented repayment is either backed by the full faith and credit of the United States Government, or secured by cash collateral of the principal borrowed. The collateral must be in the possession of the Company and free from potential claim. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.

Nominal Risk – This rating is for the highest quality borrowers with nominal probability of default or loss given default from the transaction. Typically this is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity and excellent debt service ability. The Borrower’s financial outlook is stable due to a broad range of operations or products and is able to weather an economic downturn without significant impact to liquidity or net worth. Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations. Transaction can include marketable securities as collateral, properly margined.

Table of Contents

Pass/Management Attention Risk – The loans in the four remaining pass categories range from minimal risk to moderate risk to acceptable risk to management attention risk. Loans rated in the first three categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in the minimal and moderate risk categories 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 with 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. Loans rated management attention risk indicate that although the borrower meets the criteria for a rating of acceptable risk or better, the credit possesses an identified and elevated risk level that should be resolved in a short period of time. Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in the submission of financial reporting or covenant violations that are not indicative of a protracted trend.

Special Mention - A Special Mention loan has potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due. They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.

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

Loss - Loans 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 realized in the future. Losses are taken in the period in which they are considered uncollectible.

The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans. The allowance is charged for losses when management believes that full recovery on the loan is unlikely. The following is the Company’s policy regarding charging off loans.

Commercial, CRE 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 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. Generally, loan balances are charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists. In the event there is no perceived equity, the loan is charged-off in full. Unsecured loans which are delinquent over 90 days are, without clear support, also charged-off in full.

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 impairment. Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists. In the event there is no perceived equity, the loan is generally fully charged-off.

Consumer Loans

All consumer loans (excluding real estate mortgages, HELOCs and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.

Table of Contents

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

•

Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required ALL for all non-impaired loans. In addition, the migration results are adjusted based upon qualitative factors that affect the specific portfolio category. Reserves on impaired loans are determined based upon the individual characteristics of the loan.

•

Manufactured Housing – The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency. In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.

The Company evaluates and individually assesses for impairment loans classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR or when other conditions exist which lead management to review for possible impairment. Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans. The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods:

•

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

•

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

•

The loan’s observable market price.

Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.

The Company determines the appropriate ALL on a monthly basis. 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 appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers’ ability to pay and/or the value of the underlying collateral. Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on changes in any of the following factors:

•

Concentrations of credit

•

Trends in volume, maturity, and composition of loans

•

Volume and trend in delinquency, nonaccrual, and classified assets

•

Economic conditions

•

Geographic distance

•

Policy and procedures or underwriting standards

•

Staff experience and ability

•

Value of underlying collateral

•

Competition, legal, or regulatory environment

•

Results of outside exams and quality of loan review and Board oversight

Off Balance Sheet and Credit Exposure

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.

Table of Contents

As with outstanding loans, the Company applies qualitative factors to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate for loan losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is included in non-interest expense.

Foreclosed Real Estate and Repossessed Assets

Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses. Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets. Subsequent to the legal ownership date, the Company periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell. Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.

Income Taxes

The Company uses the asset and liability method, which recognizes an asset or liability 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 the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets are included in other assets on the consolidated balance sheets.

Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

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

Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income. Diluted earnings per share include the effect of all dilutive potential common shares for the period. Potentially dilutive common shares include stock options.

Recent Accounting Pronouncements

Effective January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update amends the accounting requirements for leases by requiring recognition of lease liabilities and related right-of-use assets on the balance sheet. Lessees are required to recognize a lease liability measured on a discounted basis, which is the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted Topic 842 using the modified retrospective approach as of the effective date, January 1, 2019. We have recorded the cumulative effects on our balance sheet as of the effective date. No adjustments were made to prior comparative periods. As a result of the adoption, there was no impact on net income. We recorded operating lease right-of-use assets of $8.4 million and lease liabilities of $8.4 million. As part of the adoption, we elected the package of practical expedients permitted under the transition guidance within Topic 842, which among other things, allowed us to carry forward the historical lease classifications. Leases with a term of 12 months or less are not recorded on the balance sheet. See Note 11, Leases for further information.

In June of 2016, the FASB issued update guidance codified within ASU-2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The guidance requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. On October 16, 2019, FASB voted to delay the effective date of this ASU for smaller reporting companies, such as the Company, until fiscal years beginning after December 15, 2022, pending final approval. The Company is currently evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.

Table of Contents

In March 2017, the FASB issued updated guidance codified within ASU-2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),” which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. The standard is effective for the Company as of January 1, 2019. The Company adopted this guidance as of January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.

2.	INVESTMENT SECURITIES

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

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	10,240	$	—	$	(67	)	$	10,173
U.S. government agency collateralized mortgage obligations (“CMO”)		11,766		31		(63	)		11,734
Total	$	22,006	$	31	$	(130	)	$	21,907

Securities held-to-maturity
U.S. government agency mortgage backed securities (“MBS”)	$	6,637	$	222	$	(22	)	$	6,837
Total	$	6,637	$	222	$	(22	)	$	6,837

Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	97	$	—		$	163
Total	$	66	$	97	$	—		$	163

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	12,225	$	—	$	(155	)	$	12,070
U.S. government agency collateralized mortgage obligations (“CMO”)		12,931		9		(79	)		12,861
Total	$	25,156	$	9	$	(234	)	$	24,931

Securities held-to-maturity
U.S. government agency mortgage backed securities (“MBS”)	$	7,301	$	118	$	(150	)	$	7,269
Total	$	7,301	$	118	$	(150	)	$	7,269

Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	55	$	—		$	121
Total	$	66	$	55	$	—		$	121

At September 30, 2019 and December 31, 2018, $28.5 million and $32.2 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.

Table of Contents

The maturity periods and weighted average yields of investment securities at the period ends indicated were as follows:

	September 30, 2019
	Less than One Year					One to Five Years					Five to Ten Years					Over Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale	(dollars in thousands)
U.S. government agency notes	$	1,992		2.6	%	$	1,116		2.8	%	$	7,065		3.3	%	$	—		—		$	10,173		3.1	%
U.S. government agency CMO		—		—			2,651		2.4	%		6,465		2.5	%		2,618		3	%		11,734		2.6	%
Total	$	1,992		2.6	%	$	3,767		2.5	%	$	13,530		2.9	%	$	2,618		3.0	%	$	21,907		2.8	%

Securities held-to-maturity
U.S. government agency MBS	$	—		—		$	1,907		4.7	%	$	3,947		3.1	%	$	783		3.6	%	$	6,637		3.6	%
Total	$	—		—		$	1,907		4.7	%	$	3,947		3.1	%	$	783		3.6	%	$	6,637		3.6	%

Securities measured at fair value
Farmer Mac class A stock	$	—		—		$	—		—		$	—		—		$	—		—		$	163		—
Total	$	—		—		$	—		—		$	—		—		$	—		—		$	163		—

	December 31, 2018
	Less than One Year					One to Five Years					Five to Ten Years					Over Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale	(dollars in thousands)
U.S. government agency notes	$	1,946		2.6	%	$	1,388		2.6	%	$	8,736		3.1	%	$	—		—		$	12,070		2.0	%
U.S. government agency CMO		—		—			2,717		2.5	%		7,284		2.8	%		2,860		3.2	%		12,861		1.9	%
Total	$	1,946		2.6	%	$	4,105		2.5	%	$	16,020		3.0	%	$	2,860		3.2	%	$	24,931		2.0	%

Securities held-to-maturity
U.S. government agency MBS	$	—		—		$	2,058		4.7	%	$	4,449		3.2	%	$	794		3.6	%	$	7,301		3.3	%
Total	$	—		—		$	2,058		4.7	%	$	4,449		3.2	%	$	794		3.6	%	$	7,301		3.3	%

Securities measured at fair value
Farmer Mac class A stock	$	—		—		$	—		—		$	—		—		$	—		—		$	121		—
Total	$	—		—		$	—		—		$	—		—		$	—		—		$	121		—

The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:

	September 30, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available-for-sale	(in thousands)
Due in one year or less	$	1,998	$	1,992	$	1,998	$	1,946
After one year through five years		3,773		3,767		4,138		4,105
After five years through ten years		13,586		13,530		16,107		16,020
After ten years		2,649		2,618		2,913		2,860
Total	$	22,006	$	21,907	$	25,156	$	24,931

Securities held-to-maturity
Due in one year or less	$	—	$	—	$	—	$	—
After one year through five years		1,907		2,003		2,058		2,153
After five years through ten years		3,947		3,964		4,449		4,323
After ten years		783		870		794		793
Total	$	6,637	$	6,837	$	7,301	$	7,269

Securities measured at fair value
Farmer Mac class A stock	$	66	$	163	$	66	$	121
Total	$	66	$	163	$	66	$	121

Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities. Changes in interest rates may also impact prepayments.

Table of Contents

The following tables show all securities that are in an unrealized loss position:

	September 30, 2019
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	3	$	1,167	$	65	$	9,006	$	68	$	10,173
U.S. government agency CMO		15		5,120		47		2,338		62		7,458
Total	$	18	$	6,287	$	112	$	11,344	$	130	$	17,631

Securities held-to-maturity
U.S. Government-agency MBS	$	—	$	—	$	22	$	2,153	$	22	$	2,153
Total	$	—	$	—	$	22	$	2,153	$	22	$	2,153

	December 31, 2018
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	21	$	4,001	$	134	$	8,070	$	155	$	12,071
U.S. government agency CMO		2		4,749		77		3,289		79		8,038
Equity securities: Farmer Mac class A stock		—		—		—		—		—		—
Total	$	23	$	8,750	$	211	$	11,359	$	234	$	20,109
Securities held-to-maturity
U.S. Government-agency MBS	$	10	$	1,706	$	140	$	2,094	$	150	$	3,800
Total	$	10	$	1,706	$	140	$	2,094	$	150	$	3,800

As of September 30, 2019 and December 31, 2018, there were 20 and 21 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, repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2019 and December 31, 2018, 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.	LOANS HELD FOR SALE

SBA and Agriculture Loans

As of September 30, 2019 and December 31, 2018, the Company had approximately $11.1 million and $13.6 million, respectively, of SBA loans included in loans held for sale. As of September 30, 2019 and December 31, 2018, the principal balance of SBA loans serviced for others was $5.4 million and $7.2 million, respectively.

The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.

As of September 30, 2019 and December 31, 2018, the Company had $33.7 million and $34.8 million of USDA loans included in loans held for sale, respectively. As of September 30, 2019 and December 31, 2018, the principal balance of USDA loans serviced for others was $2.0 million.

Table of Contents

4.	LOANS HELD FOR INVESTMENT

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

	September 30, 2019			December 31, 2018
	(in thousands)
Manufactured housing	$	253,229		$	247,114
Commercial real estate		392,288			365,809
Commercial		76,497			83,753
SBA		5,916			5,557
HELOC		4,847			6,756
Single family real estate		11,936			11,261
Consumer		70			46
		744,783			720,296
Allowance for loan losses		(8,868	)		(8,691	)
Deferred fees, net		(85	)		(337	)
Discount on SBA loans		(57	)		(71	)
Total loans held for investment, net	$	735,773		$	711,197

The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans:

	September 30, 2019
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Nonaccrual		Total		Recorded Investment Over 90 Days and Accruing
	(in thousands)
Manufactured housing	$	252,392	$	480	$	—	$	—	$	480	$	357	$	253,229	$	—
Commercial real estate:
Commercial real estate		330,969		—		—		—		—		87		331,056		—
SBA 504 1st trust deed		19,162		—		—		—		—		—		19,162		—
Land		4,673		—		—		—		—		—		4,673		—
Construction		37,397		—		—		—		—		—		37,397		—
Commercial		71,841		—		—		—		—		4,656		76,497		—
SBA		4,181		17		—		—		17		1,718		5,916		—
HELOC		4,847		—		—		—		—		—		4,847		—
Single family real estate		11,936		—		—		—		—		—		11,936		—
Consumer		70		—		—		—		—		—		70		—
Total	$	737,468	$	497	$	—	$	—	$	497	$	6,818	$	744,783	$	—

	December 31, 2018
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Nonaccrual		Total		Recorded Investment Over 90 Days and Accruing
	(in thousands)
Manufactured housing	$	246,456	$	285	$	144	$	—	$	429	$	229	$	247,114	$	—
Commercial real estate:
Commercial real estate		267,377		2,478		—		—		2,478		102		269,957		—
SBA 504 1st trust deed		20,835		—		322		—		322		—		21,157		—
Land		6,381		—		—		—		—		—		6,381		—
Construction		67,835		479		—		—		479		—		68,314		—
Commercial		78,857		15		—		—		15		4,881		83,753		—
SBA		4,741		—		—		—		—		816		5,557		—
HELOC		6,558		—		—		—		—		198		6,756		—
Single family real estate		11,221		16		—		24		40		—		11,261		—
Consumer		46		—		—		—		—		—		46		—
Total	$	710,307	$	3,273	$	466	$	24	$	3,763	$	6,226	$	720,296	$	—

Table of Contents

Allowance for Loan Losses

The following table summarizes the changes in the allowance for loan losses:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Beginning balance	$	8,887		$	8,622		$	8,691		$	8,420
Charge-offs		—			—			(31	)		(6	)
Recoveries		56			94			163			329
Net recoveries		56			94			132			323
Provision (credit)		(75	)		(197	)		45			(224	)
Ending balance	$	8,868		$	8,519		$	8,868		$	8,519

As of September 30, 2019 and December 31, 2018, the Company had reserves for credit losses on undisbursed loans of $81,000 and $73,000, respectively, which were included in other liabilities.

The following tables summarize the changes in the allowance for loan losses by portfolio type:

	For the Three Months Ended September 30,
	Manufactured Housing			Commercial Real Estate			Commercial		SBA			HELOC			Single Family Real Estate			Consumer		Total
2019	(in thousands)
Beginning balance	$	2,199		$	5,358		$	1,150	$	40		$	49		$	91		$	—	$	8,887
Charge-offs		—			—			—		—			—			—			—		—
Recoveries		6			21			10		17			1			1			—		56
Net (charge-offs) recoveries		6			21			10		17			1			1			—		56
Provision (credit)		(17	)		(41	)		17		(20	)		(14	)		—			—		(75	)
Ending balance	$	2,188		$	5,338		$	1,177	$	37		$	36		$	92		$	—	$	8,868

2018
Beginning balance	$	2,145		$	5,007		$	1,221	$	57		$	93		$	99		$	—	$	8,622
Charge-offs		—			—			—		—			—			—			—		—
Recoveries		6			—			19		34			35			—			—		94
Net (charge-offs) recoveries		6			—			19		34			35			—			—		94
Provision (credit)		17			(134	)		4		(38	)		(36	)		(10	)		—		(197	)
Ending balance	$	2,168		$	4,873		$	1,244	$	53		$	92		$	89		$	—	$	8,519

	For the Nine Months Ended September 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate			Consumer		Total
2019	(in thousands)
Beginning balance	$	2,196		$	5,028	$	1,210		$	79		$	90		$	88		$	—	$	8,691
Charge-offs		—			—		(31	)		—			—			—			—		(31	)
Recoveries		49			33		49			28			3			1			—		163
Net (charge-offs) recoveries		49			33		18			28			3			1			—		132
Provision (credit)		(57	)		277		(51	)		(70	)		(57	)		3			—		45
Ending balance	$	2,188		$	5,338	$	1,177		$	37		$	36		$	92		$	—	$	8,868

2018
Beginning balance	$	2,180		$	4,844	$	1,133		$	73		$	92		$	98		$	—	$	8,420
Charge-offs		(6	)		—		—			—			—			—			—		(6	)
Recoveries		114			15		43			102			54			1			—		329
Net (charge-offs) recoveries		108			15		43			102			54			1			—		323
Provision (credit)		(120	)		14		68			(122	)		(54	)		(10	)		—		(224	)
Ending balance	$	2,168		$	4,873	$	1,244		$	53		$	92		$	89		$	—	$	8,519

Table of Contents

The following tables present impairment method information related to loans and allowance for loan losses by loan portfolio segment:

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Loans Held for Investment as of September 30, 2019:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	5,785	$	—	$	—	$	—	$	—	$	475	$	—	$	6,260
Impaired loans with no allowance recorded		2,149		87		5,969		1,718		—		1,867		—		11,790
Total loans individually evaluated for impairment		7,934		87		5,969		1,718		—		2,342		—		18,050
Loans collectively evaluated for impairment		245,295		392,201		70,528		4,198		4,847		9,594		70		726,733
Total loans held for investment	$	253,229	$	392,288	$	76,497	$	5,916	$	4,847	$	11,936	$	70	$	744,783
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	5,785	$	—	$	—	$	—	$	—	$	475	$	—	$	6,260
Impaired loans with no allowance recorded		2,994		152		6,302		2,149		—		1,867		—		13,464
Total loans individually evaluated for impairment		8,779		152		6,302		2,149		—		2,342		—		19,724
Loans collectively evaluated for impairment		245,295		392,201		70,528		4,198		4,847		9,594		70		726,733
Total loans held for investment	$	254,074	$	392,353	$	76,830	$	6,347	$	4,847	$	11,936	$	70	$	746,457
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	349	$	—	$	—	$	—	$	18	$	—	$	—	$	367
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment		349		—		—		—		18		—		—		367
Loans collectively evaluated for impairment		1,839		5,338		1,177		37		18		92		—		8,501
Total loans held for investment	$	2,188	$	5,338	$	1,177	$	37	$	36	$	92	$	—	$	8,868

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Loans Held for Investment as of December 31, 2018:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	8,726	$	243	$	—	$	—	$	—	$	775	$	—	$	9,744
Impaired loans with no allowance recorded		3,269		102		7,811		815		198		1,964		—		14,159
Total loans individually evaluated for impairment		11,995		345		7,811		815		198		2,739		—		23,903
Loans collectively evaluated for impairment		235,119		365,464		75,942		4,742		6,558		8,522		46		696,393
Total loans held for investment	$	247,114	$	365,809	$	83,753	$	5,557	$	6,756	$	11,261	$	46	$	720,296
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	8,726	$	243	$	—	$	—	$	—	$	775	$	—	$	9,744
Impaired loans with no allowance recorded		4,321		160		8,078		1,211		249		1,963		—		15,982
Total loans individually evaluated for impairment		13,047		403		8,078		1,211		249		2,738		—		25,726
Loans collectively evaluated for impairment		235,119		365,464		75,942		4,742		6,558		8,522		46		696,393
Total loans held for investment	$	248,166	$	365,867	$	84,020	$	5,953	$	6,807	$	11,260	$	46	$	722,119
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	432	$	9	$	—	$	—	$	—	$	24	$	—	$	465
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment		432		9		—		—		—		24		—		465
Loans collectively evaluated for impairment		1,764		5,019		1,210		79		90		64		—		8,226
Total loans held for investment	$	2,196	$	5,028	$	1,210	$	79	$	90	$	88	$	—	$	8,691

Included in impaired loans are $1.7 million and $3.1 million of loans guaranteed by government agencies at September 30, 2019 and December 31, 2018, respectively. A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table below as “Impaired loans without specific valuation allowance under ASC 310.” The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of September 30, 2019 and December 31, 2018.

Table of Contents

The table below reflects recorded investment in loans classified as impaired:

	September 30, 2019		December 31, 2018
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	6,260	$	9,744
Impaired loans without a specific valuation allowance under ASC 310		11,790		14,159
Total impaired loans	$	18,050	$	23,903
Valuation allowance related to impaired loans	$	367	$	465

The following table summarizes impaired loans by class of loans:

	September 30, 2019		December 31, 2018
	(in thousands)
Manufactured housing	$	7,934	$	11,995
Commercial real estate :
Commercial real estate		87		102
SBA 504 1st trust deed		—		243
Land		—		—
Construction		—		—
Commercial		5,969		7,811
SBA		1,718		815
HELOC		—		198
Single family real estate		2,342		2,739
Consumer		—		—
Total	$	18,050	$	23,903

The following tables summarize average investment in impaired loans by class of loans and the related interest income recognized:

	Three Months Ended September 30,
	2019				2018
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	7,656	$	151	$	8,175	$	162
Commercial real estate:
Commercial real estate		108		—		111		—
SBA 504 1st trust deed		215		—		407		5
Land		—		—		—		—
Construction		—		—		—		—
Commercial		6,248		82		7,444		47
SBA		1,297		32		902		17
HELOC		112		—		203		11
Single family real estate		2,236		31		2,223		27
Consumer		—		—		—		—
Total	$	17,872	$	296	$	19,465	$	269

Table of Contents

	Nine Months Ended September 30,
	2019				2018
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	9,247	$	470	$	8,226	$	497
Commercial real estate:
Commercial real estate		107		—		116		—
SBA 504 1st trust deed		175		9		378		14
Land		—		—		—		—
Construction		—		—		—		—
Commercial		6,260		161		7,737		145
SBA		1,090		32		921		18
HELOC		155		11		207		12
Single family real estate		2,425		96		2,276		81
Consumer		—		—		—		—
Total	$	19,459	$	779	$	19,861	$	767

The Company is not committed to lend additional funds on these impaired loans.

The following table reflects the recorded investment in certain types of loans at the periods indicated:

	September 30, 2019			December 31, 2018
	(in thousands)
Nonaccrual loans	$	6,818		$	6,226
Government guaranteed portion of loans included above	$	1,342		$	2,848

Troubled debt restructured loans, gross	$	12,608		$	16,749
Loans 30 through 89 days past due with interest accruing	$	497		$	3,763
Loans 90 days or more past due with interest accruing	$	—		$	—
Allowance for loan losses to gross loans held for investment		1.19	%		1.21	%

The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Foregone interest on nonaccrual and TDR loans for the three months ended September 30, 2019 and 2018, was $0.2 million and $0.1 million respectively. Foregone interest on nonaccrual and TDR loans for the three months ended September 30, 2019 and 2018, was $0.4 million and $0.3 million respectively.

The following table presents the composition of nonaccrual loans by class of loans:

	September 30, 2019		December 31, 2018
	(in thousands)
Manufactured housing	$	357	$	229
Commercial real estate:
Commercial real estate		87		102
SBA 504 1st trust deed		—		—
Land		—		—
Construction		—		—
Commercial		4,656		4,881
SBA		1,718		816
HELOC		—		198
Single family real estate		—		—
Consumer		—		—
Total	$	6,818	$	6,226

Table of Contents

Included in nonaccrual loans are $1.3 million of loans guaranteed by government agencies at September 30, 2019 and $2.8 million at December 31, 2018.

The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA directly. After the foreclosure and collection process is complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA. Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore a repurchase reserve has not been established related to these loans.

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company rates loans with potential problems as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. For a detailed discussion on these risk classifications see “Note 1 Summary of Significant Accounting Policies - Allowance for Loan Losses and Provision for Loan Losses”. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.

The following tables present gross loans by risk rating:

	September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	252,823	$	—	$	406	$	—	$	253,229
Commercial real estate:
Commercial real estate		329,013		1,956		87		—		331,056
SBA 504 1st trust deed		18,629		—		533		—		19,162
Land		4,673		—		—		—		4,673
Construction		35,372		—		2,024		—		37,396
Commercial		70,596		149		5,752		—		76,497
SBA		1,416		70		2,502		—		3,988
HELOC		4,847		—		—		—		4,847
Single family real estate		11,932		—		5		—		11,937
Consumer		70		—		—		—		70
Total, net		729,371		2,175		11,309		—		742,855
Government guarantee		—		—		1,928		—		1,928
Total	$	729,371	$	2,175	$	13,237	$	—	$	744,783

	December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	246,884	$	—	$	230	$	—	$	247,114
Commercial real estate:
Commercial real estate		269,855		—		102		—		269,957
SBA 504 1st trust deed		20,109		—		1,048		—		21,157
Land		6,381		—		—		—		6,381
Construction		66,683		1,631		—		—		68,314
Commercial		73,580		—		7,771		—		81,351
SBA		2,770		34		1,557				4,361
HELOC		6,558		—		198		—		6,756
Single family real estate		11,256		—		5		—		11,261
Consumer		46		—		—		—		46
Total, net		704,122		1,665		10,911	$	—		716,698
Government guarantee		—		—		3,598		—		3,598
Total	$	704,122	$	1,665	$	14,509	$	—	$	720,296

Troubled Debt Restructured Loan (TDR)

A TDR is a loan on which the bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, extensions, deferrals, renewals and rewrites. The majority of the bank’s modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. A TDR is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.

Table of Contents

The following tables summarize the financial effects of TDR loans by loan class for the periods presented:

	For the Nine Months Ended September 30, 2019
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
SBA		1	$	48	$	48	$	48	$	—	$	—
Total		1	$	48	$	48	$	48	$	—	$	—

	For the Three Months Ended September 30, 2018
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
Manufactured housing		2	$	—	$	166	$	53	$	166	$	3
Commercial		-		-		-		—		-		—
Total		2	$	—	$	166	$	53	$	166	$	3

	For the Nine Months Ended September 30, 2018
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
Manufactured housing		12	$	1,047	$	1,213	$	1,100	$	1,213	$	66
Commercial		3		1,781		1,781		—		1,781		—
Total		15	$	2,828	$	2,994	$	1,100	$	2,994	$	66

There were no new TDR loans for the three months ended September 30, 2019. The average rate concessions were 200 basis points for the nine months ended September 30, 2019 and 50 and 73 basis points for the three and nine months ended September 30, 2018, respectively. The average term extension in months was 47 for the nine months ended September 30, 2019 and 180 and 151 for the three and nine months ended September 30, 2018, respectively.

A TDR loan is deemed to have a payment default when the borrower fails to make 2 consecutive payments or the collateral is transferred to repossessed assets. The Company had no TDR’s with payment defaults for the three or nine months ended September 30, 2019 or 2018.

At September 30, 2019 there were no material loan commitments outstanding on TDR loans.

Table of Contents

5.	OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

The following table summarizes the changes in other assets acquired through foreclosure:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Balance, beginning of period	$	1,074		$	213		$	—		$	372
Additions		—			—			1,177			174
Proceeds from dispositions		(750	)		(213	)		(750	)		(484	)
(Loss) gain on sales, net		(1	)		—			(11	)		(62	)
Third-party portion of writedown/loss		(6	)		—			(99	)		—
Balance, end of period	$	317		$	—		$	317		$	—

The third-party portion of writedown/loss above is related to a foreclosed agricultural loan 90% guaranteed by the Farm Service Agency (“FSA”).

6.	FAIR VALUE MEASUREMENT

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:

•

Level 1— Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2— Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market.

•

Level 3— Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of discounted cash flow models and similar techniques.

The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.

FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2019 and December 31, 2018. The estimated fair value amounts for September 30, 2019 and December 31, 2018 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.

Table of Contents

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following tables summarize the fair value of assets measured on a recurring basis:

	Fair Value Measurements at the End of the Reporting Period Using:
September 30, 2019	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Assets:	(in thousands)
Investment securities measured at fair value	$	163	$	—	$	—	$	163
Investment securities available-for-sale		—		21,907		—		21,907
Interest only strips		—		—		42		42
Servicing assets		—		—		42		42
Total	$	163	$	21,907	$	84	$	22,154

	Fair Value Measurements at the End of the Reporting Period Using:
December 31, 2018	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Assets:	(in thousands)
Investment securities measured at fair value	$	121	$	—	$	—	$	121
Investment securities available-for-sale		—		24,931		—		24,931
Interest only strips		—		—		63		63
Servicing assets		—		—		49		49
	$	121	$	24,931	$	112	$	25,164

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, the Company retained interest only strip assets (“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. I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.

The Company had elected to use the amortizing method for the treatment of servicing assets and had measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds. In connection with the sale of certain SBA and USDA loans the Company recorded servicing assets and elected to measure those assets at fair value in accordance with ASC 825-10. Significant assumptions in the valuation of servicing assets include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing assets are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

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

Table of Contents

The following summarizes the fair value measurements of assets measured on a non-recurring basis:

			Fair Value Measurements at the End of the Reporting Period Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in thousands)
September 30, 2019:
Impaired loans	$	6,367	$	—	$	6,367	$	—
Loans held for sale		45,789		—		45,789		—
Foreclosed real estate and repossessed assets		317		—		317		—
	$	52,473	$	—	$	52,473	$	—

			Fair Value Measurements at the End of the Reporting Period Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in thousands)
December 31, 2018:
Impaired loans	$	5,592	$	—	$	5,592	$	—
Loans held for sale		49,050		—		49,050		—
Foreclosed real estate and repossessed assets		-		—		—		—
	$	54,642		—		54,642		—

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 loan’s collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation. When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy. For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.

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

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.

Table of Contents

The estimated fair value of the Company’s financial instruments are as follows:

	September 30, 2019
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	56,347	$	56,347	$	—	$	—	$	56,347
FRB and FHLB stock		4,087		—		4,087		—		4,087
Investment securities		28,707		163		28,744		—		28,907
Loans, net		780,589		—		772,604		11,683		784,287
Financial liabilities:
Deposits		761,672		—		765,328		—		765,328
Other borrowings		45,000		—		45,260		—		45,260

	December 31, 2018
	Carrying Amount		Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	56,915	$	56,915	$	—	$	—	$	56,915
FRB and FHLB stock		4,087		—		4,087		—		4,087
Investment securities		32,353		121		32,079		—		32,200
Loans, net		759,552		—		735,377		17,846		753,223
Financial liabilities:
Deposits		716,006		—		712,900		—		712,900
Other borrowings		75,000		—		74,930		—		74,930

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents

The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.

Money market investments

The carrying amounts reported in the consolidated balance sheets for money market investments approximate their fair value.

Investment securities

The fair value of Farmer Mac class A stock is based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.

The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.

Federal Reserve Stock and Federal Home Loan Bank Stock

CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintains an investment in capital stock of the Federal Reserve Bank (“FRB”). These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics or based on the agreed-upon sale price. As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy. At September 30, 2019 and December 31, 2018, the Company had loans held for sale with an aggregate carrying value of $44.8 million and $48.4 million respectively.

Loans

Fair value of loans is estimated by calculating loan level fair values for all loans utilizing a discounted cash flow methodology incorporating “exit pricing” analytics in conformance with ASU 2016-01. All active loans were valued in the portfolio as of date of exercise, excluding any loans held for sale, and utilized assumptions such as probability of default, loss given default, recovery delay and prepayment assumptions. Fair value was calculated in accordance with ASC 820. The fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values of impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.

Table of Contents

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. The fair value measurement of deposit liabilities is categorized as Level 2 in the fair value hierarchy.

Federal Home Loan Bank advances and other borrowings

The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The FHLB advances have been categorized as Level 2 in the fair value hierarchy.

Off-balance sheet instruments

Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

There were no standby letters of credit outstanding at September 30, 2019 or at December 31, 2018. Unfunded loan commitments at September 30, 2019 and December 31, 2018 were $63.0 million and $57.5 million, respectively.

7.	OTHER BORROWINGS

Federal Home Loan Bank Advances – The Company through the bank has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities. Total FHLB advances were $45.0 million and $70.0 million at September 30, 2019 and December 31, 2018, respectively, borrowed at fixed rates. The Company also had $120.0 million of letters of credit with FHLB at September 30, 2019 to secure public funds. At September 30, 2019, CWB had pledged to the FHLB $28.5 million of securities and $328.8 million of loans. At September 30, 2019, CWB had $71.5 million available for additional borrowing. At December 31, 2018, CWB had pledged to the FHLB $32.2 million of securities and $269.4 million of loans. At December 31, 2018, CWB had $35.9 million available for additional borrowing. Total FHLB interest expense for the three months ended September 30, 2019 and 2018 was $0.3 million. Total FHLB interest expense for the nine months ended September 30, 2019 and September 30, 2018 was $0.8 million and $0.7 million, respectively.

Federal Reserve Bank – The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans for up to 28 days. There were no outstanding FRB advances as of September 30, 2019 and December 31, 2018. Available borrowing capacity was $106.3 million and $103.8 million as of September 30, 2019 and December 31, 2018, respectively.

Federal Funds Purchased Lines – The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There was no amount outstanding as of September 30, 2019 and December 31, 2018.

Line of Credit - In July of 2017, the Company entered into a revolving line of credit agreement for up to $15.0 million. The Company must maintain a compensating deposit with the lender of 25% of the outstanding principal balance in a non-interest-bearing deposit account, which was zero at September 30, 2019. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a minimum total risked based capital ratio of 10.0%. The line of credit was modified to $10.0 million as of July 17, 2019. In September, the line of credit balance was paid down to zero.

Table of Contents

8.	STOCKHOLDERS’ EQUITY

The following table summarizes the changes in other comprehensive income (loss) by component, net of tax for the period indicated:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	Unrealized holding gains (losses) on AFS						Unrealized holding gains (losses) on AFS
	(in thousands)
Beginning balance	$	(71	)	$	(111	)	$	(141	)	$	25
Other comprehensive income before reclassifications		4			(48	)		74			(125	)
Amounts reclassified from accumulated other comprehensive income		—			—			—			(59	)
Net current-period other comprehensive income		4			(48	)		74			(184	)
Ending Balance	$	(67	)	$	(159	)	$	(67	)	$	(159	)

The adoption of ASU-2018-02 during the first quarter of 2018 created a $6,000 reclassification within accumulated other comprehensive income to retained earnings. The Company also recorded a $53,000 adjustment during the first quarter of 2018 from AOCI to retained earnings on adoption of ASU 2016-01.

Common Stock

On February 28, 2019, the Board of Directors increased the common stock repurchase program to $4.5 million and extended the repurchase program until August 31, 2021. Under this program the Company has repurchased 350,189 common stock shares for $3.0 million at an average price of $8.71 per share. There were 99,983 repurchased common stock shares under this program during the nine months ended September 30, 2019.

During the three and nine months ended September 30, 2019, the Company paid common stock dividends of $0.5 million and $1.4 million, respectively. During the three and nine months ended September 30, 2018, the Company paid common stock dividends of $0.4 and $1.2 million, respectively.

9.	CAPITAL REQUIREMENT

The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015 and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III redefines the regulatory capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted assets and adds a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes preferred equity.

The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of September 30, 2019 and December 31, 2018. The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)
September 30, 2019
CWB’s actual regulatory ratios		11.18	%		10.04	%		10.04	%		9.02	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.50	%		8.50	%		7.00	%		5.00	%
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A

Table of Contents

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)
December 31, 2018
CWB’s actual regulatory ratios		10.83	%		9.68	%		9.68	%		8.57	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		5.00	%
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A

There are no conditions or events since September 30, 2019 that management believes have changed the Company’s or the Bank’s risk-based capital category.

10.	REVENUE RECOGNITION

The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 on January 1, 2018. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income. However the recognition of these income streams did not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Exchange Fees and Other Service Charges

Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks and other services. The Company’s performance obligation for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for periods indicated.

Non-interest income	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
In-scope of Topic 606:	(in thousands)
Service charges on deposit accounts	$	114	$	95	$	360	$	281
Exchange fees and other service charges		43		43		121		142
Non-interest income (in-scope of Topic 606)		157		138		481		423
Non-interest income (out-of-scope of Topic 606)		490		503		1,462		1,545
	$	647	$	641	$	1,943	$	1,968

Table of Contents

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2019 and December 31, 2018, the Company did not have any signficant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

11.

LEASES

As described in Note 1 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, effective January 1, 2019, we adopted Topic 842. We have operating leases for office space. Our office leases are typically for terms of between 2 and 10 years. Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments. When renewal options exist, we generally do not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset. As part of the adoption, we elected the package of practical expedients permitted under the transition guidance, but not the hindsight practical expedient. As of September 30, 2019, the balance of the right-of-use assets was $6.7 million and the lease liabilities were $6.8 million. The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying Consolidated Balance Sheets.

	Nine Months Ended September 30,
	2019			2018
Lease cost:	(in thousands)
Operating lease cost		860			—
Sublease income		—			—
Total lease cost		860			—

Other information
Cash paid for amounts included in the measurement of lease liabilities		—			—
Operating cash flows from operating leases		844			—
Weighted average remaining lease term - operating leases	9.75 years				N/A
Weighted average discount rate - operating leases		3.22	%		N/A

Future minimum operating lease payments:

	September 30,
	2019		2018
	(in thousands)
2019	$	273	$	—
2020		1,015		—
2021		884		—
2022		779		—
2023		705		—
Thereafter		4,004		—
Total future minimum lease payments	$	7,660	$	—
Less remaining imputed interest		1,122		—
Total lease liabilities	$	6,538	$	—

Table of Contents

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 included herein and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This report contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. In addition, the words “anticipates,” “expects,” “believes,” “estimates” and “intends” or the negative of these terms or other comparable terminology constitute “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Except as required by law, the Company disclaims any obligation to update any such forward-looking statements or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Forward-looking statements contained in this Quarterly Report on Form 10-Q involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission and the following factors that could cause actual results to differ materially from those presented:

•

general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the real estate or securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;

•

changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;

•

legislative or regulatory changes which may adversely affect the Company’s business;

•

the water shortage in certain areas of California and its impact on the economy;

•

the Company’s success in implementing its new business initiatives, including expanding its product line, adding new branches and successfully building its brand image;

•

changes in interest rates which may reduce or increase net interest margin and net interest income;

•

increases in competitive pressure among financial institutions or non-financial institutions;

•

technological changes which may be more difficult to implement or more expensive than anticipated;

•

changes in borrowing facilities, capital markets and investment opportunities which may adversely affect the business;

•

changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;

•

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;

•

the ability to originate loans with attractive terms and acceptable credit quality;

•

the ability to attract and retain key members of management;

•

the ability to realize cost efficiencies; and

•

a failure or breach of our operational or security systems or infrastructure.

For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and in item 1A of Part II of this Quarterly Report.

Financial Overview and Highlights

Community West Bancshares (“CWBC”) incorporated under the laws of the state of California, is a bank holding company headquartered in Goleta, California providing full service banking and lending through its wholly-owned subsidiary Community West Bank (“CWB” or the “Bank”), which has eight California branch banking offices in Goleta, Ventura, Santa Maria, Santa Barbara, Westlake Village, San Luis Obispo, Oxnard, and Paso Robles. These entities are collectively referred to herein as the “Company”.

Table of Contents

Financial Result Highlights for the Third Quarter of 2019

The significant factors impacting the Company’s third quarter earnings performance were:

•

Net income was $2.2 million, or $0.25 per diluted share, in 3Q19, compared to $1.6 million, or $0.18 per diluted share in 2Q19, and $2.4 million, or $0.27 per diluted share in 3Q18.

•

Net interest margin improved to 4.10% for 3Q19, compared to 4.07% for 2Q19 and 4.02% for 3Q18.

•

Total non-interest expense was $6.5 million in 3Q19, compared to $6.8 million in 2Q19 and $6.4 million in 3Q18.

•

Total demand deposits decreased slightly to $448.0 million at September 30, 2019, compared to $456.3 million at June 30, 2019, and increased $75.4 million compared to $372.6 million at September 30, 2018.

•

Total loans increased to $789.5 million at September 30, 2019, compared to $788.9 million at June 30, 2019, and increased $35.7 million compared to $753.7 million at September 30, 2018.

•

Book value per common share increased to $9.40 at September 30, 2019, compared to $9.19 at June 30, 2019, and $9.13 at September 30, 2018.

•

Provision (credit) for loan losses was ($75,000) for the quarter, compared to a provision for loan losses of $177,000 for 2Q19, and a credit for loan losses of ($197,000) for 3Q18.

•

Total risked based capital improved to 11.18% for the Bank at September 30, 2019, compared to 10.67% at June 30, 2019 and 10.79% at September 30, 2018.

•

Net nonaccrual loans totaled $5.5 million at September 30, 2019, compared to $3.0 million at June 30, 2019, and $3.8 million at September 30, 2018.

•

Other real estate owned was $317,000 at September 30, 2019, compared to $1.1 million at June 30, 2019, and zero at September 30, 2018.

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the three and nine months ended September 30, 2019 throughout the analysis sections of this report.

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 investment securities. These critical accounting policies are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.

RESULTS OF OPERATIONS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands, except per share amounts)

Net income	$	2,154		$	2,369		$	5,244		$	6,050
Basic earnings per share		0.25			0.29			0.62			0.73
Diluted earnings per share		0.25			0.27			0.61			0.69
Total assets		903,252			854,709			903,252			854,709
Total loans		780,589			745,222			780,589			745,222
Total deposits		761,672			719,942			761,672			719,942
Total stockholders’ equity		79,596			75,557			79,596			75,557
Book value per common share		9.40			9.13			9.40			9.13
Net interest margin		4.10	%		4.02	%		4.06	%		4.11	%
Return on average assets		0.97	%		1.08	%		0.81	%		0.96	%
Return on average stockholders’ equity		10.85	%		12.57	%		9.03	%		11.07	%

Table of Contents

The following table sets forth a summary financial overview for the comparable three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Increase (Decrease)			Nine Months Ended September 30,					Increase (Decrease)
	2019			2018			Increase (Decrease)			2019		2018			Increase (Decrease)
	(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income	$	11,719		$	11,201		$	518		$	34,111	$	31,590		$	2,521
Interest expense		2,921			2,573			348			8,592		6,301			2,291
Net interest income		8,798			8,628			170			25,519		25,289			230
Credit (provision) for loan losses		(75	)		(197	)		122			45		(224	)		269
Net interest income after provision for loan losses		8,873			8,825			48			25,474		25,513			(39	)
Non-interest income		647			641			6			1,943		1,968			(25	)
Non-interest expenses		6,464			6,402			62			19,941		19,192			749
Income before income taxes		3,056			3,064			(8	)		7,476		8,289			(813	)
Provision for income taxes		902			695			207			2,232		2,239			(7	)
Net income	$	2,154		$	2,369		$	(215	)	$	5,244	$	6,050		$	(806	)
Income per share - basic	$	0.25		$	0.29		$	(0.04	)	$	0.62	$	0.73		$	(0.11	)
Income per share - diluted	$	0.25		$	0.27		$	(0.02	)	$	0.61	$	0.69		$	(0.08	)

Table of Contents

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 September 30,
	2019								2018
	Average Balance			Interest		Average Yield/Cost (2)			Average Balance			Interest		Average Yield/Cost (2)
Interest-Earning Assets	(in thousands)
Federal funds sold and interest-earning deposits	$	28,144		$	152		2.14	%	$	59,087		$	229		1.54	%
Investment securities		33,839			261		3.06	%		37,850			360		3.77	%
Loans (1)		788,965			11,306		5.69	%		755,146			10,612		5.58	%
Total earnings assets		850,948			11,719		5.46	%		852,083			11,201		5.22	%
Nonearning Assets
Cash and due from banks		2,198								2,824
Allowance for loan losses		(8,913	)							(8,589	)
Other assets		33,272								20,856
Total assets	$	877,505							$	867,174
Interest-Bearing Liabilities
Interest-bearing demand deposits		291,218			914		1.25	%		271,314			617		0.90	%
Savings deposits		15,835			32		0.80	%		14,303			32		0.89	%
Time deposits		307,160			1,669		2.16	%		339,405			1,573		1.84	%
Total interest-bearing deposits		614,213			2,615		1.69	%		625,022			2,222		1.41	%
Other borrowings		45,924			306		2.64	%		49,831			351		2.79	%
Total interest-bearing liabilities		660,137			2,921		1.76	%		674,853			2,573		1.51	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		121,332								109,369
Other liabilities		17,273								8,153
Stockholders’ equity		78,763								74,799
Total Liabilities and Stockholders’ Equity	$	877,505							$	867,174
Net interest income and margin (3)				$	8,798		4.10	%				$	8,628		4.02	%
Net interest spread (4)							3.70	%							3.71	%

(1)	Includes nonaccrual loans.

(2)	Annualized.

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

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

Table of Contents

	Nine Months Ended September 30,
	2019								2018
	Average Balance			Interest		Average Yield/Cost (2)			Average Balance			Interest		Average Yield/Cost (2)
Interest-Earning Assets	(in thousands)
Federal funds sold and interest-earning deposits	$	27,883		$	437		2.10	%	$	37,476		$	418		1.49	%
Investment securities		35,083			920		3.51	%		38,613			889		3.08	%
Loans (1)		778,425			32,754		5.63	%		747,518			30,283		5.42	%
Total earnings assets		841,391			34,111		5.42	%		823,607			31,590		5.13	%
Nonearning Assets
Cash and due from banks		2,473								3,294
Allowance for loan losses		(8,796	)							(8,513	)
Other assets		32,254								20,567
Total assets	$	867,322							$	838,955
Interest-Bearing Liabilities
Interest-bearing demand deposits		290,106			2,679		1.23	%		264,994			1,412		0.71	%
Savings deposits		15,627			94		0.80	%		14,339			92		0.86	%
Time deposits		303,658			4,869		2.14	%		323,050			3,869		1.60	%
Total interest-bearing deposits		609,391			7,642		1.68	%		602,383			5,373		1.19	%
Other borrowings		46,414			949		2.73	%		44,828			928		2.77	%
Total interest-bearing liabilities		655,805			8,591		1.75	%		647,211			6,301		1.30	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		116,965								111,407
Other liabilities		16,919								7,250
Stockholders’ equity		77,633								73,087
Total Liabilities and Stockholders’ Equity	$	867,322							$	838,955
Net interest income and margin (3)				$	25,520		4.06	%				$	25,289		4.11	%
Net interest spread (4)							3.67	%							3.83	%

(1)	Includes nonaccrual loans.

(2)	Annualized.

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

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

Table of Contents

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

	Three Months Ended September 30, 2019 versus 2018									Nine Months Ended September 30, 2019 versus 2018
	Increase (Decrease) Due to Changes in (1)									Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)									(in thousands)
Interest income:
Federal funds sold and interest-earning deposits	$	(167	)	$	90		$	(77	)	$	(151	)	$	170		$	19
Investment securities		(31	)		(68	)		(99	)		(93	)		124			31
Loans, net		485			209			694			1,301			1,170			2,471
Total interest income		287			231			518			1,057			1,464			2,521

Interest expense:
Interest-bearing demand deposits		63			234			297			231			1,036			1,267
Savings deposits		3			(3	)		-			8			(6	)		2
Time deposits		(176	)		272			96			(310	)		1,310			1,000
Short-term borrowings		(26	)		(19	)		(45	)		32			(11	)		21
Total interest expense		(136	)		484			348			(39	)		2,329			2,290
Net increase	$	423		$	(253	)	$	170		$	1,096		$	(865	)	$	231

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

Comparison of interest income, interest expense and net interest margin

The Company’s primary source of revenue is interest income. Interest income for the three and nine months ended September 30, 2019 was $11.7 million and $34.1 million, compared to $11.2 million and $31.6 million for three and nine months ended September 30, 2018. Total interest income in the third quarter of 2019 benefited from loan growth of $35.4 million compared to the third quarter of 2018. Interest income from interest-bearing deposits in other institutions increased primarily due to an increased average balance held with the Federal Reserve Bank during the third quarter of 2019 compared to 2018. The annualized yield on interest-earning assets for the third quarter 2019 compared to 2018 was 5.46% and 5.22%, respectively. The federal funds target rate increased 25 basis points each in December 2017, March 2018, June 2018, September 2018, and December 2018 were partially responsible for the increased yield on interest-earning assets, primarily through the loan portfolio. In the third quarter of 2019, the Federal open Market Committee reduced the federal funds target rate by 50 basis points.

Interest expense for the three and nine months ended September 30, 2019 compared to 2018 increased by $0.3 million and $2.3 million, respectively. This increase in interest expense for the comparable periods was primarily due to increased interest-bearing demand balances and increased cost of funds on repricing of maturing time deposits. The annualized average cost of interest-bearing liabilities increased by 25 basis points to 1.76% for the three months ended September 30, 2019 compared to the same period in 2018. The cost of deposits increased by 28 basis points to 1.69% for the third quarter 2019 compared to 1.41% for the third quarter 2018. The cost of other borrowings for the comparable periods decreased by 15 basis points to 2.64% for the three months ended September 30, 2019 compared to the same period in 2018 due to the decrease in the balance of other borrowings at CWBC.

The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was an increase in the interest margin for the three months ended September 30, 2019 to 4.10% compared to 4.02% in the three months ended September 30, 2018. The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was a decrease in the interest margin for the nine months ended September 30, 2019 to 4.06% compared to 4.11% in the nine months ended September 30, 2018.

Provision for loan losses

The provision for loan losses in each period is reflected as a charge against earnings in that period. The provision for loan losses is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses were $(0.1) million and $(0.2) million for the third quarters of 2019 and 2018 respectively. The improvements in credit quality, historical loss rates and net recoveries resulted in the decrease in the ratio of allowance for loan losses to loans held for investment from 1.21% at September 30, 2018 to 1.19% at September 30, 2019.

Table of Contents

The following schedule summarizes the provision, charge-offs (recoveries) by loan category for the three and nine months ended September 30, 2019 and 2018:

	For the Three Months Ended September 30,
	Manufactured Housing			Commercial Real Estate			Commercial		SBA			HELOC			Single Family Real Estate			Consumer		Total
2019	(in thousands)
Beginning balance	$	2,199		$	5,358		$	1,150	$	40		$	49		$	91		$	—	$	8,887
Charge-offs		—			—			—		—			—			—			—		—
Recoveries		6			21			10		17			1			1			—		56
Net (charge-offs) recoveries		6			21			10		17			1			1			—		56
Provision (credit)		(17	)		(41	)		17		(20	)		(14	)		—			—		(75	)
Ending balance	$	2,188		$	5,338		$	1,177	$	37		$	36		$	92		$	—	$	8,868

2018
Beginning balance	$	2,145		$	5,007		$	1,221	$	57		$	93		$	99		$	—	$	8,622
Charge-offs		—			—			—		—			—			—			—		—
Recoveries		6			—			19		34			35			—			—		94
Net (charge-offs) recoveries		6			—			19		34			35			—			—		94
Provision (credit)		17			(134	)		4		(38	)		(36	)		(10	)		—		(197	)
Ending balance	$	2,168		$	4,873		$	1,244	$	53		$	92		$	89		$	—	$	8,519

	For the Nine Months Ended September 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate			Consumer		Total
2019	(in thousands)
Beginning balance	$	2,196		$	5,028	$	1,210		$	79		$	90		$	88		$	—	$	8,691
Charge-offs		—			—		(31	)		—			—			—			—		(31	)
Recoveries		49			33		49			28			3			1			—		163
Net (charge-offs) recoveries		49			33		18			28			3			1			—		132
Provision (credit)		(57	)		277		(51	)		(70	)		(57	)		3			—		45
Ending balance	$	2,188		$	5,338	$	1,177		$	37		$	36		$	92		$	—	$	8,868

2018
Beginning balance	$	2,180		$	4,844	$	1,133		$	73		$	92		$	98		$	—	$	8,420
Charge-offs		(6	)		—		—			—			—			—			—		(6	)
Recoveries		114			15		43			102			54			1			—		329
Net (charge-offs) recoveries		108			15		43			102			54			1			—		323
Provision (credit)		(120	)		14		68			(122	)		(54	)		(10	)		—		(224	)
Ending balance	$	2,168		$	4,873	$	1,244		$	53		$	92		$	89		$	—	$	8,519

The percentage of net nonaccrual loans to the total loan portfolio has increased to 0.69% as of September 30, 2019 from 0.45% at December 31, 2018.

The allowance for loan losses compared to net nonaccrual loans has decreased to 162% as of September 30, 2019 from 257% as of December 31, 2018. Total past due loans decreased to $0.5 million as of September 30, 2019 from $3.8 million as of December 31, 2018.

Non-Interest Income

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

The following table summarizes the Company’s non-interest income for the periods indicated:

	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,				Increase (Decrease)
	2019		2018		Increase (Decrease)			2019		2018		Increase (Decrease)
	(in thousands)
Other loan fees	$	302	$	379	$	(77	)	$	883	$	998	$	(115	)
Document processing fees		96		120		(24	)		307		367		(60	)
Service charges		129		113		16			407		351		56
Other		120		29		91			346		252		94
Total non-interest income	$	647	$	641	$	6		$	1,943	$	1,968	$	(25	)

Table of Contents

Total non-interest income increased slightly to $0.6 million for the three months ended September 30, 2019 compared to 2018. Other loan fees and document processing fees for the three and nine months ended September 30, 2019 decreased due to decreased loan fundings during the first nine months of 2019 compared to 2018. Service charges increased slightly during the nine months ended September 30, 2019 compared to 2018.

Non-Interest Expenses

The following table summarizes the Company’s non-interest expenses for the periods indicated:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2019			2018		Increase (Decrease)			2019		2018		Increase (Decrease)
	(in thousands)
Salaries and employee benefits	$	4,254		$	4,147	$	107		$	12,953	$	12,338	$	615
Occupancy, net		788			778		10			2,338		2,303		35
Professional services		341			326		15			1,127		931		196
Data processing		215			201		14			640		619		21
Depreciation		219			199		20			650		552		98
FDIC assessment		(15	)		169		(184	)		309		547		(238	)
Advertising and marketing		187			154		33			546		487		59
Stock based compensation		90			81		9			282		284		(2	)
Other		385			347		38			1,096		1,131		(35	)
Total non-interest expenses	$	6,464		$	6,402	$	62		$	19,941	$	19,192	$	749

Total non-interest expenses increased $0.1 million and $0.7 million in the three and nine months ended September 30, 2019 compared to 2018, respectively. The increase in non-interest expenses for the year is primarily due to increased salaries and employee benefits, occupancy, depreciation and advertising as a result of the Bank’s expansions in the Northern and Southern regions, and addition of customer relationship and support positions. Professional services increased $0.2 million in the nine months ended September 30, 2019 compared to 2018 due to increased consulting costs for operational training and project implementation. The Bank received a credit of $0.2 million on its FDIC assessment for the second quarter’s insurance period as of September 30, 2019. The decrease in other expenses were mainly due to higher loan origination cost deferrals during the nine months ended September 30, 2019 compared to 2018.

Income Taxes

Income tax provision for the three and nine months ended September 30, 2019 was $0.9 million and $2.2 million compared to $0.7 million and $2.2 million in the same period during 2018. The combined state and federal effective income tax rates for the nine months ended September 30, 2019 and 2018 were 29.9% and 27.0%, respectively. The effective tax rate decreased beginning in 2018 primarily as a result of the enacted tax rate change from 34% to 21% under the Tax Cuts and Jobs Act of December 2017.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets of $3.4 million at September 30, 2019 are reported in the consolidated balance sheet as a component of total assets.

Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.

A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

There was no valuation allowance on deferred tax assets at September 30, 2019 or December 31, 2018.

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 undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at September 30, 2019 and December 31, 2018.

Table of Contents

BALANCE SHEET ANALYSIS

Total assets increased $26.0 million to $903.3 million at September 30, 2019 from $877.3 million at December 31, 2018. Net loans increased by $21.0 million to $780.6 million at September 30, 2019 from $759.5 million at December 31, 2018. The majority of the loan increase was due to increases of $26.5 million and $6.1 million in our commercial real estate and manufactured housing portfolios, respectively. This increase was partially offset by a decrease of $7.3 million of commercial loans, $3.5 million in loans available-for-sale, and $3.0 million in investment securities available-for-sale.

Total liabilities increased $22.5 million to $823.7 million at September 30, 2019 from $801.1 million at December 31, 2018 mostly due to increased total deposits of $45.7 million. Non-interest-bearing demand deposits increased by $6.2 million and interest-bearing demand deposits increased by $63.2 million, while certificates of deposit decreased $24.6 million due to the company’s strategic initiative to reduce wholesale funding, including brokered deposits.

Total stockholders’ equity increased $3.4 million to $79.6 million at September 30, 2019 from $76.2 million at December 31, 2018. The $5.2 million increase in retained earnings from net income was partially offset by a $1.4 million decrease from common stock dividends. The book value per common share was $9.40 at September 30, 2019 compared to $8.92 at December 31, 2018.

Selected Balance Sheet Accounts

	September 30, 2019		December 31, 2018		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Cash and cash equivalents	$	56,347	$	56,915	$	(568	)		(1.0	)%
Investment securities available-for-sale		21,907		24,931		(3,024	)		(12.1	)%
Investment securities held-to-maturity		6,637		7,301		(664	)		(9.1	)%
Loans - held for sale		44,816		48,355		(3,539	)		(7.3	)%
Loans - held for investment, net		735,773		711,197		24,576			3.5	%
Total assets		903,252		877,291		25,961			3.0	%
Total deposits		761,672		716,006		45,666			6.4	%
Other borrowings		45,000		75,000		(30,000	)		(40.0	)%
Total stockholder’s equity		79,596		76,151		3,445			4.5	%

The table below summarizes the distribution of the Company’s loans held for investment at the end of each of the periods indicated.

	September 30, 2019			December 31, 2018
	(in thousands)
Manufactured housing	$	253,229		$	247,114
Commercial real estate		392,288			365,809
Commercial		76,497			83,753
SBA		5,916			5,557
HELOC		4,847			6,756
Single family real estate		11,936			11,261
Consumer		70			46
		744,783			720,296
Allowance for loan losses		(8,868	)		(8,691	)
Deferred costs, net		(85	)		(337	)
Discount on SBA loans		(57	)		(71	)
Total loans held for investment, net	$	735,773		$	711,197

The Company had $44.8 million of loans held for sale at September 30, 2019 compared to $48.4 million at December 31, 2018. Loans held for sale at September 30, 2019 consisted of $11.1 million SBA loans and $33.7 million commercial agriculture loans. Loans held for sale at December 31, 2018, were $13.6 million SBA loans and $34.8 million commercial agriculture loans.

Table of Contents

Concentrations of Lending Activities

The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company originates manufactured housing, commercial, SBA, construction, real estate and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of September 30, 2019 and December 31, 2018, manufactured housing loans comprised 32.1% and 32.2%, respectively, of total loans. As of September 30, 2019 and December 31, 2018, commercial real estate loans accounted for approximately 49.7% and 47.6% of total loans, respectively. Approximately 31.4% and 33.8% of these commercial real estate loans were owner-occupied at September 30, 2019 and December 31, 2018, respectively. Substantially all of these loans are secured by first liens with average loan to value ratios of 55.5% and 57.9% at September 30, 2019 and December 31, 2018, respectively. The Company was within established concentration policy limits at September 30, 2019 and December 31, 2018.

Asset Quality

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

	September 30, 2019			December 31, 2018
	(in thousands)
Nonaccrual loans (net of government guaranteed portion)	$	5,476		$	3,378
Troubled debt restructured loans, gross		12,608			16,749
Nonaccrual loans (net of government guaranteed portion) to gross loans		0.69	%		0.45	%
Net charge-offs (recoveries) (annualized) to average loans		(0.03	)%		(0.03	)%
Allowance for loan losses to nonaccrual loans (net of government guaranteed portion)		162	%		257	%
Allowance for loan losses to gross loans		1.19	%		1.21	%

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

	September 30, 2019			December 31, 2018
	(in thousands)
Total nonaccrual loans	$	6,818		$	6,226
Government guaranteed portion of loans included above		(1,342	)		(2,848	)
Total nonaccrual loans, without guarantees	$	5,476		$	3,378

Troubled debt restructured loans, gross	$	12,608		$	16,749
Loans 30 through 89 days past due with interest accruing	$	497		$	3,763
Loans 90 days or more past due with interest accruing	$	—		$	—
Allowance for loan losses to gross loans held for investment		1.19	%		1.21	%

Impaired 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.

A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial difficulty. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans are also considered impaired.

Table of Contents

The following schedule summarizes impaired loans and specific reserves by loan class as of the periods indicated:

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC			Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of September 30, 2019:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	5,785	$	—	$	—	$	—	$	—		$	475	$	—	$	6,260
Impaired loans with no allowance recorded		2,149		87		5,969		1,718		—			1,867		—		11,790
Total loans individually evaluated for impairment		7,934		87		5,969		1,718		—			2,342		—		18,050
Related Allowance for Credit Losses
Impaired loans with an allowance recorded		349		—		—		—		18			—		—		367
Impaired loans with no allowance recorded		—		—		—		—		—			—		—		—
Total loans individually evaluated for impairment		349		—		—		—		18			—		—		367
Total impaired loans, net	$	7,585	$	87	$	5,969	$	1,718	$	(18	)	$	2,342	$	—	$	17,683

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of December 31, 2018:
Recorded Investment:
Impaired loans with an allowance recorded	$	8,726	$	243	$	—	$	—	$	—	$	775	$	—	$	9,744
Impaired loans with no allowance recorded		3,269		102		7,811		815		198		1,964		—		14,159
Total loans individually evaluated for impairment		11,995		345		7,811		815		198		2,739		—		23,903
Related Allowance for Credit Losses
Impaired loans with an allowance recorded		432		9		—		—		—		24		—		465
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment		432		9		—		—		—		24		—		465
Total impaired loans, net	$	11,563	$	336	$	7,811	$	815	$	198	$	2,715	$	—	$	23,438

Total impaired loans decreased $5.9 million in the third quarter of 2019 compared to December 31, 2018. This decrease was primarily in impaired manufactured housing loans of $4.1 million although all the other loan categories had decreases.

Table of Contents

The following table summarizes the composite of nonaccrual loans:

	At September 30, 2019								At December 31, 2018
	Nonaccrual Balance		%			Percent of Total Loans			Nonaccrual Balance		%			Percent of Total Loans
	(dollars in thousands)
Manufactured housing	$	357		5.20	%		0.05	%	$	229		3.68	%		0.03	%
Commercial real estate		87		1.30	%		0.01	%		102		1.64	%		0.01	%
Commercial		4,656		68.30	%		0.63	%		4,881		78.40	%		0.64	%
SBA		1,718		25.20	%		0.23	%		816		13.11	%		0.11	%
HELOC		-		0.00	%		0.00	%		198		3.18	%		0.03	%
Single family real estate		-		0.00	%		0.00	%		-		0.00	%		0.00	%
Consumer		—		—			—			—		—			—
Total nonaccrual loans	$	6,818		100.00	%		0.92	%	$	6,226		100.00	%		0.82	%

Nonaccrual balances include $1.3 million and $2.8 million, of loans that are government guaranteed at September 30, 2019 and December 31, 2018, respectively. Nonaccrual loans net of government guarantees decreased $2.1 million or 62%, from $3.4 million at December 31, 2018 to $5.5 million at September 30, 2019.

CWB or the SBA 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.

Allowance For Loan Losses

The following table summarizes the allocation of allowance for loan losses by loan type. However, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Allowance for loan losses:							(in thousands)
Balance at beginning of period	$	8,887		$	8,622		$	8,691		$	8,420
Provisions charged to operating expenses:
Manufactured housing		(17	)		17			(57	)		(120	)
Commercial real estate		(41	)		(134	)		277			14
Commercial		17			4			(51	)		68
SBA		(20	)		(38	)		(70	)		(122	)
HELOC		(14	)		(36	)		(57	)		(54	)
Single family real estate		—			(10	)		3			(10	)
Consumer		—			—			—			—
Total Provision (credit)		(75	)		(197	)		45			(224	)
Recoveries of loans previously charged-off:
Manufactured housing		6			6			49			114
Commercial real estate		21			—			33			15
Commercial		10			19			49			43
SBA		17			34			28			102
HELOC		1			35			3			54
Single family real estate		1			—			1			1
Consumer		—			—			—			—
Total recoveries		56			94			163			329
Loans charged-off:
Manufactured housing		—			—			—			6
Commercial real estate		—			—			—			—
Commercial		—			—			31			—
SBA		—			—			—			—
HELOC		—			—			—			—
Single family real estate		—			—			—			—
Consumer		—			—			—			—
Total charged-off		—			—			31			6
Net charge-offs (recoveries)		(56	)		(94	)		(132	)		(323	)
Balance at end of period	$	8,868		$	8,519		$	8,868		$	8,519

Table of Contents

Potential Problem Loans

The Company classifies loans consistent with federal banking regulations. These loan grades are described in further detail in Note 1, “Summary of Significant Accounting Policies” of this Form 10-Q. The following table presents information regarding potential problem loans consisting of loans graded watch or worse, but still performing:

	September 30, 2019
	Number of Loans		Loan Balance (1)		Percent			Percent of Total Loans
	(dollars in thousands)
Manufactured housing		1	$	48		0.79	%		0.01	%
Commercial real estate		5		4,513		74.06	%		0.58	%
Commercial		1		149		2.45	%		0.02	%
SBA		6		1,378		22.62	%		0.18	%
HELOC		—		—		0.00	%		0.00	%
Single family real estate		1		5		0.08	%		0.00	%
Total		14	$	6,093		100.00	%		0.79	%

(1)	Of the $6.1 million of potential problem loans, $1.5 million are guaranteed by government agencies.

	December 31, 2018
	Number of Loans		Loan Balance (1)		Percent			Percent of Total Loans
	(dollars in thousands)
Manufactured housing		—	$	—		0.00	%		0.00	%
Commercial real estate		4		2,435		67.88	%		0.32	%
Commercial		1		278		7.75	%		0.04	%
SBA		5		869		24.23	%		0.11	%
HELOC		—		—		0.00	%		0.00	%
Single family real estate		1		5		0.14	%		0.00	%
Total		11	$	3,587		100.00	%		0.47	%

(1)	Of the $3.6 million of potential problem loans, $1.5 million are guaranteed by government agencies.

Investment Securities

Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.

The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits and to manage liquidity, capital, and interest rate risk.

The carrying value of investment securities was as follows:

	September 30, 2019		December 31, 2018
	(in thousands)
U.S. government agency notes	$	10,173	$	12,070
U.S. government agency mortgage backed securities (“MBS”)		6,637		7,301
U.S. government agency collateralized mortgage obligations (“CMO”)		11,734		12,861
Equity securities: Farmer Mac class A stock		163		121
Total	$	28,707	$	32,353

Table of Contents

Other Assets Acquired Through Foreclosure

The following table represents the changes in other assets acquired through foreclosure:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	(in thousands)
Balance, beginning of period	$	1,074		$	213		$	—		$	372
Additions		—			—			1,177			174
Proceeds from dispositions		(750	)		(213	)		(750	)		(484	)
(Loss) gain on sales, net		(1	)		—			(11	)		(62	)
Third-party portion of writedown/loss		(6	)		—			(99	)		—
Balance, end of period	$	317		$	—		$	317		$	—

Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily manufactured housing) are classified as other real estate owned and other repossessed assets and are reported at fair value at the time of foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets are capitalized and costs related to holding the assets are charged to expense. The Company had no valuation allowance on foreclosed assets as of September 30, 2019 and September 30, 2018.

Deposits

The following table provides the balance and percentage change in the Company’s deposits:

	September 30, 2019		December 31, 2018		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Non-interest bearing demand deposits	$	114,366	$	108,161	$	6,205			5.7	%
Interest-bearing demand deposits		333,679		270,431		63,248			23.4	%
Savings		15,481		14,641		840			5.7	%
Certificates of deposit ($250,000 or more)		90,298		93,439		(3,141	)		(3.4	)%
Other certificates of deposit		207,848		229,334		(21,486	)		(9.4	)%
Total deposits	$	761,672	$	716,006	$	45,666			6.4	%

Total deposits increased to $761.7 million at September 30, 2019 from $716.0 million at December 31, 2018, an increase of $45.7 million. This increase was primarily from non-interest bearing demand deposits and interest-bearing demand deposits, offset by a decline in certificates of deposits. Deposits are the primary source of funding the Company’s asset growth. In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”). CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits. At September 30, 2019 and December 31, 2018, the Company had $27.8 million and $35.2 million, respectively, of CDARS and ICS deposits. As of September 30, 2019 the Company had $40.0 million of insured overnight funding.

Liquidity and Capital Resources

Liquidity Management

Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events.

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash and amounts due from banks, federal funds sold and non-pledged marketable securities, is a result of our operating, investing and financing activities and related cash flows. To ensure funds are available when necessary, on at least a quarterly basis, we project the amount of funds that will be required, and we strive to maintain relationships with a diversified customer base. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets.

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.

Table of Contents

The Company has asset and liability management committees (“ALCO”) at the Board and Bank management level to review asset and liability management and liquidity issues.

CWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”). Advances are collateralized in the aggregate by CWB’s eligible loans and securities. CWB had $45.0 million and $70.0 million of FHLB advances at September 30, 2019 and December 31, 2018, respectively, borrowed at fixed rates. The Company also had $120.0 million of letters of credit with FHLB at September 30, 2019 to secure public funds. At September 30, 2019, CWB had pledged to the FHLB, $28.5 million of securities and $328.8 million of loans. At September 30, 2019, CWB had $71.5 million available for additional borrowing. At December 31, 2018, CWB had pledged to the FHLB, securities of $32.2 million at carrying value and $269.4 million of loans.

CWB has established a credit line with the Federal Reserve Bank (“FRB”). There were no outstanding FRB advances as of September 30, 2019 and December 31, 2018. CWB had $106.3 million and $103.8 million in borrowing capacity as of September 30, 2019 and December 31, 2018, respectively.

The Company has federal funds purchased lines at correspondent banks with a total borrowing capacity of $20.0 million. There was no amount outstanding as of September 30, 2019 and December 31, 2018.

The Company continues to face strong competition for core deposits. The liquidity ratio of the Company was 13.6% and 14.8% at September 30, 2019 and December 31, 2018, respectively. The Company’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.

CWBC’s routine funding requirements primarily consist of certain operating expenses and common stock dividends. Normally, CWBC obtains funding to meet its obligations from dividends collected from the Bank and has the capability to issue debt securities. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval.

Capital Resources

Maintaining capital strength continues to be a long-term objective for the Company. Ample capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard depositor funds. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. The Company has the capacity to issue 60,000,000 shares of common stock of which 8,466,963 have been issued at September 30, 2019. Conversely, the Company may decide to repurchase shares of its outstanding common stock, depending on the market price and other relevant factors.

Table of Contents

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)
September 30, 2019
CWB’s actual regulatory ratios		11.18	%		10.04	%		10.04	%		9.02	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.50	%		8.50	%		7.00	%		5.00	%
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)
December 31, 2018
CWB’s actual regulatory ratios		10.83	%		9.68	%		9.68	%		8.57	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		5.00	%
Minimum capital requirements including fully-phased in capital conservation buffer (2019)		10.50	%		8.50	%		7.00	%		N/A

There are no conditions or events since September 30, 2019 that management believes have changed the Company’s or the Bank’s risk-based capital category.

Table of Contents

Supervision and Regulation

Banking is a complex, highly regulated industry. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the Federal Deposit Insurance Corporation’s (“FDIC”) insurance fund, and 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 financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (“OCC”), and FDIC.

The system of supervision and regulation applicable to financial services businesses governs most aspects of the business of CWBC and CWB, including: (i) the scope of permissible business; (ii) investments; (iii) reserves that must be maintained against deposits; (iv) capital levels that must be maintained; (v) the nature and amount of collateral that may be taken to secure loans; (vi) the establishment of new branches; (vii) mergers and consolidations with other financial institutions; and (viii) the payment of dividends.

From time to time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting or expanding the scope of permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations of banks and bank holding companies are frequently made in Congress and by various bank and other regulatory agencies. Future changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they may have a material effect on the Company’s business and earnings.

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, 2018 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

Certain qualitative and quantitative disclosures about market risk are set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K. For further discussion of interest rate risk, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Interest Rate Risk.”

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 disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Company’s management, which includes the Company’s Chief Executive Officer and the Chief Financial Officer, has concluded that, as of the end of the period covered by this report, disclosure controls and procedures are effective in ensuring that information relating to the Company (including its consolidated subsidiary) required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended September 30, 2019 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

Investing in our common stock involves various risks which are particular to our Company, our industry and our market area. Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following is a summary of the Company’s repurchases of its common stock during the three months ended September 30, 2019.

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (b)
July 1 – 31		0	$	0.00		0	$	1,536,165
August 1 – 31		5,108	$	9.62		5,108	$	1,485,969
September 1 – 30		5,115	$	9.77		5,115	$	1,435,784
Total		10,223	$	9.69		10,223	$	1,435,784

(a) On February 28, 2019, the Board of Directors increased the repurchase program to $4.5 million, and extended the repurchase program until August 31, 2021. As of September 30, 2019, approximately $1.5 million remains authorized for repurchase.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

Table of Contents

ITEM 6.

EXHIBITS

The following Exhibits are filed herewith.

Exhibit Number

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.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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.

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: November 6, 2019	BY: /s/ Susan C. Thompson
	Susan C. Thompson
	Executive Vice President and Chief Financial Officer

	On Behalf of Registrant and as a Duly Authorized Officer
	and as Principal Financial and Accounting Officer

Table of Contents

EXHIBIT INDEX

Exhibit Number
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.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase