10-Q 1 form10q.htm COMMUNITY WEST BANCSHARES 10-Q 9-30-2016

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 September30, 2016 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒YES  ☐NO

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

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

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 8,094,489 as of October 31, 2016.
 


Table of Contents
 
Index
Page
Part I.  Financial Information
 
 
Item 1 – Financial Statements
 
    3
   
4
   
5
   
6
   
7
   
8
 
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
 
     
 
29
 
46
 
46
       
Part II.  Other Information
 
 
46
 
Item 1A – Risk Factors
 
 
47
 
47
 
47
 
47
 
Item 6 – Exhibits
47
   
48
 
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
   
September 30,
2016
   
December 31,
2015
 
   
(unaudited)
       
   
(in thousands, except share amounts)
 
Assets:
           
Cash and due from banks
 
$
2,578
   
$
2,768
 
Federal funds sold
   
17
     
21
 
Interest-earning demand in other financial institutions
   
15,064
     
32,730
 
Cash and cash equivalents
   
17,659
     
35,519
 
Money market investments
   
100
     
99
 
Investment securities - available-for-sale, at fair value; amortized cost of $22,003 at September 30, 2016 and $23,558 at December 31, 2015
   
21,982
     
23,441
 
Investment securities - held-to-maturity, at amortized cost; fair value of $9,610 at September 30, 2016 and $7,399 at December 31, 2015
   
9,218
     
7,025
 
Federal Home Loan Bank stock, at cost
   
2,070
     
1,886
 
Federal Reserve Bank stock, at cost
   
1,373
     
1,373
 
Loans:
               
Held for sale, at lower of cost or fair value
   
62,381
     
64,488
 
Held for investment, net of allowance for loan losses of $7,190 at September 30, 2016 and $6,916 at December 31, 2015
   
532,331
     
472,058
 
Total loans
   
594,712
     
536,546
 
Other assets acquired through foreclosure, net
   
55
     
198
 
Premises and equipment, net
   
3,388
     
2,993
 
Other assets
   
13,979
     
12,133
 
Total assets
 
$
664,536
   
$
621,213
 
Liabilities:
               
Deposits:
               
Non-interest-bearing demand
 
$
88,024
   
$
76,469
 
Interest-bearing demand
   
258,360
     
250,509
 
Savings
   
14,388
     
13,690
 
Certificates of deposit ($250 or more)
   
92,319
     
66,722
 
Other certificates of deposit
   
137,510
     
136,948
 
Total deposits
   
590,601
     
544,338
 
Other borrowings
   
5,500
     
10,500
 
Other liabilities
   
4,223
     
4,431
 
Total liabilities
   
600,324
     
559,269
 
Stockholders’ equity:
               
Common stock — no par value, 20,000,000 shares authorized; 8,094,489 shares issued and outstanding at September 30, 2016 and 8,205,858  at December 31, 2015
   
41,492
     
42,355
 
Retained earnings
   
22,733
     
19,657
 
Accumulated other comprehensive income (loss)
   
(13
)
   
(68
)
Total stockholders’ equity
   
64,212
     
61,944
 
Total liabilities and stockholders’ equity
 
$
664,536
   
$
621,213
 
 
See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
Interest income:
 
(in thousands, except per share amounts)
 
Loans, including fees
 
$
8,228
   
$
7,131
   
$
22,817
   
$
21,253
 
Investment securities and other
   
288
     
244
     
817
     
834
 
Total interest income
   
8,516
     
7,375
     
23,634
     
22,087
 
Interest expense:
                               
Deposits
   
733
     
587
     
2,088
     
1,761
 
Other borrowings
   
74
     
6
     
219
     
82
 
Total interest expense
   
807
     
593
     
2,307
     
1,843
 
Net interest income
   
7,709
     
6,782
     
21,327
     
20,244
 
Provision (credit) for loan losses
   
22
     
(445
)
   
(164
)
   
(1,997
)
Net interest income after provision for loan losses
   
7,687
     
7,227
     
21,491
     
22,241
 
Non-interest income:
                               
Other loan fees
   
270
     
244
     
827
     
789
 
Document processing fees
   
130
     
141
     
381
     
364
 
Service charges
   
100
     
92
     
292
     
252
 
Other
   
59
     
77
     
215
     
366
 
Total non-interest income
   
559
     
554
     
1,715
     
1,771
 
Non-interest expenses:
                               
Salaries and employee benefits
   
3,809
     
3,412
     
10,755
     
9,729
 
Occupancy, net
   
564
     
507
     
1,631
     
1,439
 
Professional services
   
196
     
212
     
653
     
736
 
Data processing
   
173
     
135
     
513
     
388
 
Depreciation
   
162
     
103
     
486
     
290
 
Advertising and marketing
   
154
     
116
     
447
     
348
 
FDIC assessment
   
74
     
99
     
270
     
252
 
Stock-based compensation
   
97
     
73
     
261
     
333
 
Loan servicing and collection
   
108
     
10
     
198
     
281
 
Loan litigation settlement, net
   
     
(50
)
   
     
7,103
 
Other
   
499
     
421
     
1,464
     
1,291
 
Total non-interest expenses
   
5,836
     
5,038
     
16,678
     
22,190
 
Income before provision for income taxes
   
2,410
     
2,743
     
6,528
     
1,822
 
Provision for income taxes
   
929
     
1,152
     
2,639
     
803
 
Net income
   
1,481
     
1,591
     
3,889
     
1,019
 
Dividends on preferred stock
   
     
125
     
     
401
 
Discount on partial redemption of preferred stock
   
     
     
     
(129
)
Net income available to common stockholders
 
$
1,481
   
$
1,466
   
$
3,889
   
$
747
 
Earnings per share:
                               
Basic
 
$
0.18
   
$
0.18
   
$
0.48
   
$
0.09
 
Diluted
 
$
0.18
   
$
0.17
   
$
0.46
   
$
0.09
 
Weighted average number of common shares outstanding:
                               
Basic
   
8,096
     
8,203
     
8,128
     
8,204
 
Diluted
   
8,421
     
8,508
     
8,442
     
8,503
 
Dividends declared per common share
 
$
0.035
   
$
0.03
   
$
0.10
   
$
0.08
 
 
See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Net income
 
$
1,481
   
$
1,591
   
$
3,889
   
$
1,019
 
Other comprehensive income (loss), net:
                               
Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of $32, ($64), ($39) and $42 for each respective period)
   
(46
)
   
92
     
55
     
(61
)
Net other comprehensive income (loss)
   
(46
)
   
92
     
55
     
(61
)
Comprehensive income
 
$
1,435
   
$
1,683
   
$
3,944
   
$
958
 
 
See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
 
   
Common Stock
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Retained
Earnings
   
Total
Stockholders'
Equity
 
   
Shares
   
Amount
 
   
(in thousands)
 
Balance, December 31, 2015:
   
8,206
   
$
42,355
   
$
(68
)
 
$
19,657
   
$
61,944
 
Net income
   
     
     
     
3,889
     
3,889
 
Exercise of stock options
   
72
     
213
     
     
     
213
 
Stock based compensation
   
     
261
     
     
     
261
 
Common stock repurchases
   
(184
)
   
(1,337
)
   
     
     
(1,337
)
Dividends on common stock
   
     
     
     
(813
)
   
(813
)
Other comprehensive income, net
   
     
     
55
     
     
55
 
Balance, September 30, 2016
   
8,094
   
$
41,492
   
$
(13
)
 
$
22,733
   
$
64,212
 
 
See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
   
Nine Months Ended September 30,
 
   
2016
   
2015
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
 
$
3,889
   
$
1,019
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision (credit) for loan losses
   
(164
)
   
(1,997
)
Depreciation
   
486
     
290
 
Stock based compensation
   
261
     
333
 
Deferred income taxes
   
(304
)
   
42
 
Net accretion of discounts and premiums for investment securities
   
(82
)
   
(71
)
(Gains)/Losses on:
               
Sale of repossessed assets, net
   
14
     
(33
)
Sale of loans, net
   
     
(83
)
Sale of assets, net
   
     
32
 
Loans originated for sale and principal collections, net
   
2,107
     
1,351
 
Changes in:
               
Other assets
   
(1,633
)
   
537
 
Other liabilities
   
(208
)
   
(6
)
Servicing rights, net
   
50
     
44
 
Net cash provided by operating activities
   
4,416
     
1,458
 
Cash flows from investing activities:
               
Principal pay downs and maturities of available-for-sale securities
   
9,483
     
5,635
 
Purchase of available-for-sale securities
   
(7,840
)
   
(7,416
)
Purchases of securities held-to-maturity
   
(2,697
)
   
 
Proceeds from principal pay downs and maturities of securities held-to-maturity
   
498
     
1,189
 
Loan originations and principal collections, net
   
(60,322
)
   
(38,545
)
Purchase of restricted stock, net
   
(184
)
   
(170
)
Net increase in interest-bearing deposits in other financial institutions
   
(1
)
   
 
Purchase of premises and equipment, net
   
(881
)
   
(225
)
Proceeds from sale of other real estate owned and repossessed assets, net
   
342
     
508
 
Net cash used in investing activities
   
(61,602
)
   
(39,024
)
Cash flows from financing activities:
               
Net increase in deposits
   
46,263
     
49,702
 
Net  increase in borrowings
   
(5,000
)
   
(5,000
)
Exercise of stock options
   
213
     
3
 
Cash dividends paid on common stock
   
(813
)
   
(656
)
Common stock repurchase
   
(1,337
)
   
(21
)
Redemption of preferred stock
   
     
(1,311
)
Cash dividends paid on preferred stock
   
     
(417
)
Net cash provided by financing activities
   
39,326
     
42,300
 
Net (decrease) increase in cash and cash equivalents
   
(17,860
)
   
4,734
 
Cash and cash equivalents at beginning of year
   
35,519
     
18,959
 
Cash and cash equivalents at end of period
 
$
17,659
   
$
23,693
 
Supplemental disclosure:
               
Cash paid during the period for:
               
Interest
 
$
2,226
   
$
1,830
 
Income taxes
   
4,200
     
650
 
Non-cash investing and financing activity:
               
Transfers to other assets acquired through foreclosure, net
   
213
     
544
 
 
See the accompanying notes.
 
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 suggest 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, 2016 and 2015 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, 2015.

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, 2015 and for the three and nine months ended September 30, 2015 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 SBA and commercial agriculture.  In the third quarter of 2015, the Company announced its exit from originating single family residential loans for sale.  The Company did not incur any lower of cost or fair value provision in the three months ended September 30, 2016 and 2015.

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.

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 included 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, Small Business Administration (“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.

Outstanding – This is the highest quality rating that is assigned to any loan in the portfolio.  These loans are made to the highest quality borrowers with strong financial statements and unquestionable repayment sources.  Collateral securing these types of credits are generally cash deposits in the bank or marketable securities held in custody.

Good – Loans rated in this category are strong loans, underwritten well, that bear little risk of loss to the Company.  Loans in this category are loans to quality borrowers with very good financial statements that present an identifiable strong primary source and good secondary source of repayment.  Generally, these credits are well collateralized by good quality and liquid assets or low loan to value market real estate.

Pass - Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company.  Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.  In the case of individuals, borrowers 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.

Watch – Acceptable credit that requires a temporary increase in attention by management.  This can be caused by declines in sales, margins, liquidity or working capital.  Generally the primary weakness is lack of current financial statements and industry issues.

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 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.

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
·
International risk
·
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.

As with outstanding loans, the Company applies qualitative factors and utilization rates 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 available to common shareholders.  Diluted earnings per share include the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include stock options and warrants.

Recent Accounting Pronouncements

In May 2014, the FASB issued guidance codified within ASU 2014-09, “Revenue Recognition - Revenue from Contracts with Customers,” which amends the guidance in former Topic 605, Revenue Recognition.  The new revenue recognition standard will supersede virtually all revenue guidance in U.S. GAAP, including industry specific guidance.  The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards.  ASU 2014-09 is effective for the Company for annual reporting periods beginning after December 15, 2016.  In August 2015, this effective date was extended for the Company to December 15, 2017.  The Company may elect to apply the amendments of this Update using one of the following two methods: 1) retrospectively to each prior reporting period presented or 2) retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application.  The Company is currently evaluating the impact of the provisions in this standard on the Company’s consolidated financial statements.

In January 2016, the FASB issued guidance codified within ASU 2016-01, “Financial Instruments – Overall, Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain guidance on classification and measurement of financial instruments.  The update is intended to enhance the reporting model for financial instruments to provide users of financial instruments with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments.  ASU 2016-01 is effective for the Company for annual reporting periods beginning after December 15, 2017.  The Company is currently evaluating the impact of the provisions in this standard on the Company’s consolidated financial statements.

In February 2016, the FASB amended its standards with respect to the accounting for leases.  The amended guidance serves to replace all current U.S. GAAP guidance on this topic and requires that an operating lease be recognized on the statement of financial condition as a “right-to-use” asset along with a corresponding liability representing the rent obligation.  Key aspects of current lessor accounting remain unchanged from existing guidance.  This standard is expected to result in an increase to assets and liabilities recognized and, therefore, increase risk-weighted assets for regulatory capital purposes.  The guidance requires the use of the modified retrospective transition approach for existing leases that have not expired before the date of initial application and will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The standard is effective for the Company as of January 1, 2019.  The Company is currently evaluating the impact of the amended guidance on the Company’s Consolidated Financial Statements.

In March 2016, the FASB issued update guidance codified within ASU-2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” which amends the guidance on certain aspects of share-based payments to employees.  The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled.  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.  The standard is effective for the Company as of January 1, 2017.  The Company is currently evaluating the impact of the amended guidance on the Company’s Consolidated Financial Statements.

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.  The standard is effective for the Company as of January 1, 2020.  The Company is currently evaluating the impact of the amended guidance 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, 2016
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
3,762
   
$
8
   
$
(31
)
 
$
3,739
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
18,175
     
65
     
(76
)
   
18,164
 
Equity securities: Farmer Mac class A stock
   
66
     
13
     
-
     
79
 
Total
 
$
22,003
   
$
86
   
$
(107
)
 
$
21,982
 
                                 
Securities held-to-maturity
                               
U.S. government agency mortgage backed securities ("MBS")
 
$
9,218
   
$
402
   
$
(10
)
 
$
9,610
 
Total
 
$
9,218
   
$
402
   
$
(10
)
 
$
9,610
 

   
December 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
11,257
   
$
5
   
$
(115
)
 
$
11,147
 
U.S. government agency CMO
   
12,235
     
54
     
(58
)
   
12,231
 
Equity securities: Farmer Mac class A stock
   
66
     
-
     
(3
)
   
63
 
Total
 
$
23,558
   
$
59
   
$
(176
)
 
$
23,441
 
                                 
Securities held-to-maturity
                               
U.S. government agency MBS
 
$
7,025
   
$
374
   
$
-
   
$
7,399
 
Total
 
$
7,025
   
$
374
   
$
-
   
$
7,399
 

At September 30, 2016 and December 31, 2015, $31.2 million and $30.5 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.

The maturity periods and weighted average yields of investment securities at September 30, 2016 and December 31, 2015 were as follows:

   
September 30, 2016
 
   
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
 
$
2,001
     
2.6
%
 
$
-
     
-
   
$
1,738
     
1.3
%
 
$
-
     
-
   
$
3,739
     
2.0
%
U.S. government agency CMO
   
-
     
-
     
8,316
     
1.2
%
   
8,423
     
1.1
%
   
1,425
     
1.3
%
   
18,164
     
1.2
%
Farmer Mac class A stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
79
     
-
 
Total
 
$
2,001
     
2.6
%
 
$
8,316
     
1.2
%
 
$
10,161
     
1.1
%
 
$
1,425
     
1.3
%
 
$
21,982
     
1.3
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
-
     
-
   
$
3,548
     
3.7
%
 
$
5,670
     
2.6
%
 
$
-
     
-
   
$
9,218
     
3.0
%
Total
 
$
-
     
-
   
$
3,548
     
3.7
%
 
$
5,670
     
2.6
%
 
$
-
     
-
   
$
9,218
     
3.0
%
 
   
December 31, 2015
 
   
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
 
$
8,957
     
2.9
%
 
$
-
     
-
   
$
2,190
     
0.9
%
 
$
-
     
-
   
$
11,147
     
2.5
%
U.S. government agency CMO
   
-
     
-
     
4,337
     
1.3
%
   
4,527
     
0.7
%
   
3,367
     
1.2
%
   
12,231
     
1.0
%
Farmer Mac class A stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
63
     
-
 
Total
 
$
8,957
     
2.9
%
 
$
4,337
     
1.3
%
 
$
6,717
     
0.8
%
 
$
3,367
     
1.2
%
 
$
23,441
     
1.7
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
-
     
-
   
$
1,746
     
3.6
%
 
$
5,279
     
3.1
%
 
$
-
     
-
   
$
7,025
     
3.2
%
Total
 
$
-
     
-
   
$
1,746
     
3.6
%
 
$
5,279
     
3.1
%
 
$
-
     
-
   
$
7,025
     
3.2
%

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

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Securities available-for-sale
 
(in thousands)
 
Due in one year or less
 
$
1,993
   
$
2,001
   
$
9,053
   
$
8,957
 
After one year through five years
   
8,292
     
8,316
     
4,335
     
4,337
 
After five years through ten years
   
10,178
     
10,161
     
6,713
     
6,717
 
After ten years
   
1,474
     
1,425
     
3,391
     
3,367
 
Farmer Mac class A stock
   
66
     
79
     
66
     
63
 
   
$
22,003
   
$
21,982
   
$
23,558
   
$
23,441
 
Securities held-to-maturity
                               
Due in one year or less
 
$
-
   
$
-
   
$
-
   
$
-
 
After one year through five years
   
3,548
     
3,803
     
1,746
     
1,888
 
After five years through ten years
   
5,670
     
5,807
     
5,279
     
5,511
 
After ten years
   
-
     
-
     
-
     
-
 
   
$
9,218
   
$
9,610
   
$
7,025
   
$
7,399
 

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.

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

   
September 30, 2016
 
   
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
 
$
-
   
$
-
   
$
31
   
$
1,738
   
$
31
   
$
1,738
 
U.S. government agency CMO
   
25
     
8,325
     
51
     
1,749
     
76
     
10,074
 
Equity securities: Farmer Mac class A stock
   
-
     
-
     
-
             
-
     
-
 
   
$
25
   
$
8,325
   
$
82
   
$
3,487
   
$
107
   
$
11,812
 
Securities held-to-maturity
                     
U.S. Government-agency MBS
 
$
10
   
$
2,682
   
$
-
   
$
-
   
$
10
   
$
2,682
 
Total
 
$
10
   
$
2,682
   
$
-
   
$
-
   
$
10
   
$
2,682
 
 
   
December 31, 2015
 
   
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
 
$
48
   
$
7,224
   
$
67
   
$
1,924
   
$
115
   
$
9,148
 
U.S. government agency CMO
   
9
     
1,654
     
49
     
1,945
     
58
     
3,599
 
Equity securities: Farmer Mac class A stock
   
-
     
-
     
3
     
63
     
3
     
63
 
   
$
57
   
$
8,878
   
$
119
   
$
3,932
   
$
176
   
$
12,810
 
Securities held-to-maturity
                     
U.S. Government-agency MBS
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Total
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 

As of September 30, 2016 and December 31, 2015, there were 14 and nine 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, 2016 and December 31, 2015, 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 INVESTMENT

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

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Manufactured housing
 
$
191,946
   
$
177,891
 
Commercial real estate
   
225,572
     
179,491
 
Commercial
   
85,711
     
77,349
 
SBA
   
11,427
     
13,744
 
HELOC
   
10,789
     
10,934
 
Single family real estate
   
14,334
     
19,073
 
Consumer
   
82
     
123
 
     
539,861
     
478,605
 
Allowance for loan losses
   
(7,190
)
   
(6,916
)
Deferred (fees) costs, net
   
(160
)
   
560
 
Discount on SBA loans
   
(180
)
   
(191
)
Total loans held for investment, net
 
$
532,331
   
$
472,058
 
 
The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans:

   
September 30, 2016
 
   
Current
   
30-59 Days*
Past Due
   
60-89 Days*
Past Due
   
Over 90 Days*
Past Due
   
Total
Past Due
   
Total
   
Recorded
Investment
Over 90 Days
and Accruing
 
   
(in thousands)
 
Manufactured housing
 
$
191,837
   
$
109
   
$
-
   
$
-
   
$
109
   
$
191,946
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
172,756
     
-
     
-
     
-
     
-
     
172,756
     
-
 
SBA 504 1st trust deed
   
21,651
     
-
     
-
     
-
     
-
     
21,651
     
-
 
Land
   
3,982
     
-
     
-
     
-
     
-
     
3,982
     
-
 
Construction
   
27,183
     
-
     
-
     
-
     
-
     
27,183
     
-
 
Commercial
   
85,711
     
-
     
-
     
-
     
-
     
85,711
     
-
 
SBA
   
11,126
     
301
     
-
     
-
     
301
     
11,427
     
-
 
HELOC
   
10,690
     
99
     
-
     
-
     
99
     
10,789
     
-
 
Single family real estate
   
14,334
     
-
     
-
     
-
     
-
     
14,334
     
-
 
Consumer
   
82
     
-
     
-
     
-
     
-
     
82
     
-
 
Total
 
$
539,352
   
$
509
   
$
-
   
$
-
   
$
509
   
$
539,861
   
$
-
 

* Table reports past dues based on Call Report definitions of number of payments past due.

   
December 31, 2015
 
   
Current
   
30-59 Days*
Past Due
   
60-89 Days*
Past Due
   
Over 90 Days*
Past Due
   
Total
Past Due
   
Total
   
Recorded
Investment
Over 90 Days
and Accruing
 
   
(in thousands)
 
Manufactured housing
 
$
177,480
   
$
-
   
$
372
   
$
39
   
$
411
   
$
177,891
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
138,004
     
-
     
-
     
612
     
612
     
138,616
     
-
 
SBA 504 1st trust deed
   
25,099
     
-
     
-
     
463
     
463
     
25,562
     
-
 
Land
   
2,895
     
-
     
-
     
-
     
-
     
2,895
     
-
 
Construction
   
12,016
     
-
     
402
     
-
     
402
     
12,418
     
-
 
Commercial
   
77,305
     
-
     
-
     
44
     
44
     
77,349
     
-
 
SBA
   
13,743
     
1
     
-
     
-
     
1
     
13,744
     
-
 
HELOC
   
10,934
     
-
     
-
     
-
     
-
     
10,934
     
-
 
Single family real estate
   
19,073
     
-
             
-
     
-
     
19,073
     
-
 
Consumer
   
123
     
-
     
-
     
-
     
-
     
123
     
-
 
Total
 
$
476,672
   
$
1
   
$
774
   
$
1,158
   
$
1,933
   
$
478,605
   
$
-
 

* Table reports past dues based on Call Report definitions of number of payments past due.

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,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Beginning balance
 
$
7,028
   
$
7,243
   
$
6,916
   
$
7,877
 
Charge-offs
   
(100
)
   
(33
)
   
(162
)
   
(258
)
Recoveries
   
240
     
247
     
600
     
1,390
 
Net recoveries
   
140
     
214
     
438
     
1,132
 
Provision (credit)
   
22
     
(445
)
   
(164
)
   
(1,997
)
Ending balance
 
$
7,190
   
$
7,012
   
$
7,190
   
$
7,012
 

As of September 30, 2016 and December 31, 2015, the Company had reserves for credit losses on undisbursed loans of $83,000 and $61,000 which were included in Other liabilities.
 
The following tables summarize 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
 
2016
 
(in thousands)
 
Beginning balance
 
$
2,188
   
$
3,078
   
$
1,251
   
$
322
   
$
62
   
$
126
   
$
1
   
$
7,028
 
Charge-offs
   
-
     
-
     
-
     
(100
)
   
-
     
-
     
-
     
(100
)
Recoveries
   
121
     
-
     
40
     
12
     
66
     
1
     
-
     
240
 
Net (charge-offs) recoveries
   
121
     
-
     
40
     
(88
)
   
66
     
1
     
-
     
140
 
Provision (credit)
   
(102
)
   
194
     
66
     
(142
)
   
(25
)
   
31
     
-
     
22
 
Ending balance
 
$
2,207
   
$
3,272
   
$
1,357
   
$
92
   
$
103
   
$
158
   
$
1
   
$
7,190
 
                                                                 
2015
     
Beginning balance
 
$
3,808
   
$
1,779
   
$
795
   
$
686
   
$
45
   
$
129
   
$
1
   
$
7,243
 
Charge-offs
   
(33
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(33
)
Recoveries
   
38
     
13
     
40
     
153
     
3
     
-
     
-
     
247
 
Net (charge-offs) recoveries
   
5
     
13
     
40
     
153
     
3
     
-
     
-
     
214
 
Provision (credit)
   
(220
)
   
43
     
35
     
(284
)
   
(5
)
   
(15
)
   
1
     
(445
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 

   
For The Nine Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2016
 
(in thousands)
 
Beginning balance
 
$
3,525
   
$
1,853
   
$
939
   
$
451
   
$
43
   
$
103
   
$
2
   
$
6,916
 
Charge-offs
   
(41
)
   
-
     
-
     
(121
)
   
-
     
-
     
-
     
(162
)
Recoveries
   
126
     
13
     
120
     
196
     
74
     
71
     
-
     
600
 
Net (charge-offs) recoveries
   
85
     
13
     
120
     
75
     
74
     
71
     
-
     
438
 
Provision (credit)
   
(1,403
)
   
1,406
     
298
     
(434
)
   
(14
)
   
(16
)
   
(1
)
   
(164
)
Ending balance
 
$
2,207
   
$
3,272
   
$
1,357
   
$
92
   
$
103
   
$
158
   
$
1
   
$
7,190
 
                                                                 
2015
     
Beginning balance
 
$
4,032
   
$
1,459
   
$
986
   
$
1,066
   
$
140
   
$
192
   
$
2
   
$
7,877
 
Charge-offs
   
(258
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(258
)
Recoveries
   
103
     
533
     
383
     
361
     
8
     
2
     
-
     
1,390
 
Net (charge-offs) recoveries
   
(155
)
   
533
     
383
     
361
     
8
     
2
     
-
     
1,132
 
Provision (credit)
   
(284
)
   
(157
)
   
(499
)
   
(872
)
   
(105
)
   
(80
)
   
-
     
(1,997
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 

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, 2016:
 
(in thousands)
 
Recorded Investment:
                                               
Impaired loans with an allowance recorded
 
$
6,109
   
$
1,340
   
$
3,485
   
$
327
   
$
46
   
$
2,049
   
$
-
   
$
13,356
 
Impaired loans with no allowance recorded
   
2,771
     
76
     
-
     
2,041
     
490
     
195
     
-
     
5,573
 
Total loans individually evaluated for impairment
   
8,880
     
1,416
     
3,485
     
2,368
     
536
     
2,244
     
-
     
18,929
 
Loans collectively evaluated for impairment
   
183,066
     
224,156
     
82,226
     
9,059
     
10,253
     
12,090
     
82
     
520,932
 
Total loans held for investment
 
$
191,946
   
$
225,572
   
$
85,711
   
$
11,427
   
$
10,789
   
$
14,334
   
$
82
   
$
539,861
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
6,203
   
$
1,514
   
$
3,485
   
$
420
   
$
58
   
$
2,049
   
$
-
   
$
13,729
 
Impaired loans with no allowance recorded
   
4,316
     
1,035
     
-
     
2,455
     
507
     
228
     
-
     
8,541
 
Total loans individually evaluated for impairment
   
10,519
     
2,549
     
3,485
     
2,875
     
565
     
2,277
     
-
     
22,270
 
Loans collectively evaluated for impairment
   
183,066
     
224,156
     
82,226
     
9,059
     
10,253
     
12,090
     
82
     
520,932
 
Total loans held for investment
 
$
193,585
   
$
226,705
   
$
85,711
   
$
11,934
   
$
10,818
   
$
14,367
   
$
82
   
$
543,202
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
511
   
$
20
   
$
164
   
$
-
   
$
-
   
$
27
   
$
-
   
$
722
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
511
     
20
     
164
     
-
     
-
     
27
     
-
     
722
 
Loans collectively evaluated for impairment
   
1,696
     
3,252
     
1,193
     
92
     
103
     
131
     
1
     
6,468
 
Total loans held for investment
 
$
2,207
   
$
3,272
   
$
1,357
   
$
92
   
$
103
   
$
158
   
$
1
   
$
7,190
 
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Loans Held for Investment as of December 31, 2015:
 
(in thousands)
 
Recorded Investment:
                                               
Impaired loans with an allowance recorded
 
$
4,914
   
$
376
   
$
2,966
   
$
1,695
   
$
19
   
$
1,970
   
$
-
   
$
11,940
 
Impaired loans with no allowance recorded
   
3,672
     
2,247
     
44
     
1,052
     
294
     
282
     
-
     
7,591
 
Total loans individually evaluated for impairment
   
8,586
     
2,623
     
3,010
     
2,747
     
313
     
2,252
     
-
     
19,531
 
Loans collectively evaluated for impairment
   
169,305
     
176,868
     
74,339
     
10,997
     
10,621
     
16,821
     
123
     
459,074
 
Total loans held for investment
 
$
177,891
   
$
179,491
   
$
77,349
   
$
13,744
   
$
10,934
   
$
19,073
   
$
123
   
$
478,605
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
4,964
   
$
439
   
$
2,966
   
$
1,909
   
$
19
   
$
1,970
   
$
-
   
$
12,267
 
Impaired loans with no allowance recorded
   
3,975
     
2,734
     
50
     
1,553
     
309
     
352
     
-
     
8,973
 
Total loans individually evaluated for impairment
   
8,939
     
3,173
     
3,016
     
3,462
     
328
     
2,322
     
-
     
21,240
 
Loans collectively evaluated for impairment
   
169,305
     
176,868
     
74,339
     
10,997
     
10,621
     
16,821
     
123
     
459,074
 
Total loans held for investment
 
$
178,244
   
$
180,041
   
$
77,355
   
$
14,459
   
$
10,949
   
$
19,143
   
$
123
   
$
480,314
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
483
   
$
3
   
$
45
   
$
25
   
$
-
   
$
17
   
$
-
   
$
573
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
483
     
3
     
45
     
25
     
-
     
17
     
-
     
573
 
Loans collectively evaluated for impairment
   
3,042
     
1,850
     
894
     
426
     
43
     
86
     
2
     
6,343
 
Total loans held for investment
 
$
3,525
   
$
1,853
   
$
939
   
$
451
   
$
43
   
$
103
   
$
2
   
$
6,916
 

Included in impaired loans are $2.0 million and $2.2 million of loans guaranteed by government agencies at September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.

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

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Impaired loans with a specific valuation allowance under ASC 310
 
$
13,356
   
$
11,940
 
Impaired loans without a specific valuation allowance under ASC 310
   
5,573
     
7,591
 
Total impaired loans
 
$
18,929
   
$
19,531
 
Valuation allowance related to impaired loans
 
$
722
   
$
573
 

The following table summarizes impaired loans by class of loans:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Manufactured housing
 
$
8,880
   
$
8,586
 
Commercial real estate
   
223
     
875
 
SBA 504 1st trust deed
   
1,193
     
1,748
 
Commercial
   
3,485
     
3,010
 
SBA
   
2,368
     
2,747
 
HELOC
   
536
     
313
 
Single family real estate
   
2,244
     
2,252
 
Total
 
$
18,929
   
$
19,531
 
 
The following tables summarize average investment in impaired loans by class of loans and the related interest income recognized:

   
Three Months Ended
September 30,
 
   
2016
   
2015
 
   
Average Investment
in Impaired Loans
   
Interest
Income
   
Average Investment
in Impaired Loans
   
Interest
Income
 
   
(in thousands)
 
Manufactured housing
 
$
8,306
   
$
174
   
$
7,490
   
$
197
 
Commercial real estate:
                               
Commercial real estate
   
510
     
-
     
860
     
-
 
SBA 504 1st trust deed
   
1,148
     
5
     
1,712
     
31
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
 
Commercial
   
3,346
     
49
     
2,825
     
-
 
SBA
   
1,266
     
41
     
663
     
17
 
HELOC
   
510
     
-
     
190
     
8
 
Single family real estate
   
2,134
     
26
     
2,284
     
24
 
Consumer
   
-
     
-
     
-
     
-
 
Total
 
$
17,220
   
$
295
   
$
16,024
   
$
277
 

   
Nine Months Ended
September 30,
 
   
2016
   
2015
 
   
Average Investment
in Impaired Loans
   
Interest
Income
   
Average Investment
in Impaired Loans
   
Interest
Income
 
   
(in thousands)
 
Manufactured housing
 
$
8,482
   
$
499
   
$
7,346
   
$
448
 
Commercial real estate:
                               
Commercial real estate
   
682
     
3
     
1,548
     
-
 
SBA 504 1st
   
1,625
     
33
     
1,417
     
65
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
 
Commercial
   
3,190
     
148
     
2,895
     
-
 
SBA
   
891
     
97
     
1,226
     
53
 
HELOC
   
410
     
7
     
137
     
8
 
Single family real estate
   
2,173
     
83
     
1,441
     
57
 
Consumer
   
-
     
-
     
-
     
-
 
Total
 
$
17,453
   
$
870
   
$
16,010
   
$
631
 

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,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Nonaccrual loans
 
$
4,187
   
$
6,956
 
Government guaranteed portion of loans included above
 
$
1,161
   
$
1,943
 
                 
Troubled debt restructured loans, gross
 
$
14,425
   
$
13,741
 
Loans 30 through 89 days past due with interest accruing
 
$
-
   
$
-
 
Allowance for loan losses to gross loans held for investment
   
1.33
%
   
1.44
%

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, 2016 and 2015 was $0.1 million, respectively.  Foregone interest on nonaccrual and TDR loans for the nine months ended September 30, 2016 and 2015 was $0.3 million and $0.6 million, respectively.
 
The following table presents the composition of nonaccrual loans by class of loans:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Manufactured housing
 
$
1,006
   
$
1,615
 
Commercial real estate
   
223
     
875
 
SBA 504 1st trust deed
   
933
     
1,481
 
Commercial
   
-
     
44
 
SBA
   
1,294
     
2,346
 
HELOC
   
536
     
313
 
Single family real estate
   
195
     
282
 
Consumer
   
-
     
-
 
Total
 
$
4,187
   
$
6,956
 

Included in nonaccrual loans are $1.2 million of loans guaranteed by government agencies at September 30, 2016 and $1.9 million at December 31, 2015.

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 classifies problem and potential problem loans 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” of this Form 10-Q.   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, 2016
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
188,821
   
$
-
   
$
3,125
   
$
-
   
$
191,946
 
Commercial real estate:
                                       
Commercial real estate
   
170,521
     
2,012
     
223
     
-
     
172,756
 
SBA 504 1st trust deed
   
20,458
     
-
     
1,193
     
-
     
21,651
 
Land
   
3,982
     
-
     
-
     
-
     
3,982
 
Construction
   
27,183
     
-
     
-
     
-
     
27,183
 
Commercial
   
75,775
     
7,038
     
2,898
     
-
     
85,711
 
SBA
   
8,580
     
109
     
430
     
-
     
9,119
 
HELOC
   
10,005
     
-
     
784
     
-
     
10,789
 
Single family real estate
   
14,133
     
-
     
201
     
-
     
14,334
 
Consumer
   
82
     
-
     
-
     
-
     
82
 
Total, net
   
519,540
     
9,159
     
8,854
     
-
     
537,553
 
SBA guarantee
   
-
     
-
     
2,308
     
-
     
2,308
 
Total
 
$
519,540
   
$
9,159
   
$
11,162
   
$
-
   
$
539,861
 
 
   
December 31, 2015
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
173,971
   
$
-
   
$
3,920
   
$
-
   
$
177,891
 
Commercial real estate:
                                       
Commercial real estate
   
131,857
     
2,481
     
4,278
     
-
     
138,616
 
SBA 504 1st trust deed
   
23,231
     
583
     
1,748
     
-
     
25,562
 
Land
   
2,895
     
-
     
-
     
-
     
2,895
 
Construction
   
12,418
     
-
     
-
     
-
     
12,418
 
Commercial
   
66,788
     
6,805
     
3,756
     
-
     
77,349
 
SBA
   
10,733
     
158
     
547
     
64
     
11,502
 
HELOC
   
10,115
     
-
     
819
     
-
     
10,934
 
Single family real estate
   
18,678
     
-
     
395
     
-
     
19,073
 
Consumer
   
123
     
-
     
-
     
-
     
123
 
Total, net
   
450,809
     
10,027
     
15,463
     
64
     
476,363
 
SBA guarantee
   
-
     
-
     
2,242
     
-
     
2,242
 
Total
 
$
450,809
   
$
10,027
   
$
17,705
   
$
64
   
$
478,605
 

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.

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

   
For the Three Months Ended September 30, 2016
 
   
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
   
10
   
$
735
   
$
735
   
$
735
   
$
735
   
$
40
 
Total
   
10
   
$
735
   
$
735
   
$
735
   
$
735
   
$
40
 

   
For the Nine Months Ended September 30, 2016
 
   
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
   
20
   
$
1,619
   
$
1,619
   
$
1,619
   
$
1,619
   
$
98
 
SBA
   
1
     
92
     
92
     
-
     
92
     
-
 
HELOC
   
1
     
257
     
257
     
-
     
257
     
-
 
Single family real estate
   
1
     
105
     
105
     
105
     
105
     
7
 
Commercial
   
3
     
718
     
718
     
-
     
718
     
7
 
Total
   
26
   
$
2,791
   
$
2,791
   
$
1,724
   
$
2,791
   
$
112
 
 
   
For the Three Months Ended September 30, 2015
 
   
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
   
11
   
$
1,292
   
$
1,292
   
$
1,292
   
$
1,292
   
$
58
 
Total
   
11
   
$
1,292
   
$
1,292
   
$
1,292
   
$
1,292
   
$
58
 

   
For the Nine Months Ended September 30, 2015
 
   
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
   
19
   
$
1,756
   
$
1,746
   
$
1,443
   
$
1,599
   
$
73
 
SBA
   
1
     
297
     
297
     
-
     
297
     
5
 
HELOC
   
1
     
54
     
54
     
54
     
54
     
-
 
Single family real estate
   
1
     
1,917
     
1,917
     
1,917
     
1,917
     
35
 
Total
   
22
   
$
4,024
   
$
4,014
   
$
3,414
   
$
3,867
   
$
113
 

The average rate concessions were 100 basis points and 81 basis points, respectively, for the three and nine months ended September 30, 2016 and 100 basis points and 76 basis points for the three and nine months ended September 30, 2015, respectively.  The average term extension in months was 179 and 152 for the third quarter and year to date 2016, and 180 and 149 for the third quarter and year to date 2015, respectively.

A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to repossessed assets.  The Company had no TDR’s with payment defaults for the nine months ended September 30, 2016 or 2015.

At September 30, 2016 there were no material loan commitments outstanding on TDR loans.

4.
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,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Balance, beginning of period
 
$
129
   
$
267
   
$
198
   
$
137
 
Additions
   
48
     
209
     
213
     
544
 
Proceeds from dispositions
   
(115
)
   
(286
)
   
(342
)
   
(508
)
Gains (losses) on sales, net
   
(7
)
   
16
     
(14
)
   
33
 
Balance, end of period
 
$
55
   
$
206
   
$
55
   
$
206
 

5.
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, 2016 and December 31, 2015.  The estimated fair value amounts for September 30, 2016 and December 31, 2015 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.

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, 2016
 
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 available-for-sale
 
$
79
   
$
21,903
   
$
-
   
$
21,982
 
Interest only strips
   
-
     
-
     
126
     
126
 
Servicing assets
   
-
     
-
     
157
     
157
 
   
$
79
   
$
21,903
   
$
283
   
$
22,265
 

   
Fair Value Measurements at the End of the Reporting Period Using:
 
December 31, 2015
 
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 available-for-sale
 
$
63
   
$
23,378
   
$
-
   
$
23,441
 
Interest only strips
   
-
     
-
     
226
     
226
 
Servicing assets
   
-
     
-
     
182
     
182
 
   
$
63
   
$
23,378
   
$
408
   
$
23,849
 
 
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.

Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds.  In connection with the sale of 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.

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)
 
As of September 30, 2016:
                       
Impaired loans
 
$
3,016
   
$
-
   
$
3,016
   
$
-
 
Foreclosed real estate and repossessed assets
   
55
     
-
     
55
     
-
 
   
$
3,071
   
$
-
   
$
3,071
   
$
-
 
                                 
As of December 31, 2015:
     
Impaired loans
 
$
4,545
   
$
-
   
$
4,545
   
$
-
 
Foreclosed real estate and repossessed assets
   
198
     
-
     
198
     
-
 
   
$
4,743
   
$
-
   
$
4,743
   
$
-
 

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.

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

   
September 30, 2016
 
   
Carrying
Amount
   
Fair Value
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
17,659
   
$
17,659
   
$
-
   
$
-
   
$
17,659
 
Interest-bearing deposits in other financial institutions
   
100
     
100
     
-
     
-
     
100
 
FRB and FHLB stock
   
3,443
     
-
     
3,443
     
-
     
3,443
 
Investment securities
   
31,200
     
79
     
31,513
     
-
     
31,592
 
Loans held for sale
   
62,381
     
-
     
66,872
     
-
     
66,872
 
Loans, net
   
532,331
     
-
     
520,834
     
15,152
     
535,986
 
Financial liabilities:
                                       
Deposits
   
590,601
     
-
     
591,360
     
-
     
591,360
 
Other borrowings
   
5,500
     
-
     
5,500
     
-
     
5,500
 

   
December 31, 2015
 
   
Carrying
Amount
   
Fair Value
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
35,519
   
$
35,519
   
$
-
   
$
-
   
$
35,519
 
Interest-bearing deposits in other financial institutions
   
99
     
99
     
-
     
-
     
99
 
FRB and FHLB stock
   
3,259
     
-
     
3,259
     
-
     
3,259
 
Investment securities
   
30,466
     
63
     
30,777
     
-
     
30,840
 
Loans held for sale
   
64,488
     
-
     
69,262
     
-
     
69,262
 
Loans, net
   
472,058
     
-
     
458,726
     
13,679
     
472,405
 
Financial liabilities:
                                       
Deposits
   
544,338
     
-
     
544,350
     
-
     
544,350
 
Other borrowings
   
10,500
     
-
     
10,489
     
-
     
10,489
 

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 maintain 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, 2016 and December 31 2015, the Company had loans held for sale with an aggregate carrying value of $60.3 million and $64.5 million respectively.

Loans

Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation.  As a result, 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.
 
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, 2016 and $0.1 million were outstanding at December 31, 2015.  Unfunded loan commitments at September 30, 2016 and December 31, 2015 were $60.5 million and $46.9 million, respectively.

6.
OTHER BORROWINGS AND CONVERTIBLE DEBENTURES

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.  There were no FHLB advances outstanding at September 30, 2016 and $5.0 million at December 31, 2015, borrowed at a fixed rate of 0.55%.  The Company also had $100.0 million of letters of credit with FHLB at September 30, 2016 to secure public funds.  At September 30, 2016, CWB had pledged to the FHLB, $31.2 million of securities and $155.9 million of loans.  At September 30, 2016, CWB had $55.8 million available for additional borrowing.  At December 31, 2015, CWB had pledged to the FHLB, $30.5 million of securities and $140.0 million of loans.  At December 31, 2015, CWB had $67.8 million available for additional borrowing.  Total FHLB interest expense for the three months ended September 30, 2016 and 2015 was $7,000 and $6,000, respectively.  Total FHLB interest expense for the nine months ended September 30, 2016 and 2015 were $21,000 and $0.1 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, 2016 and December 31, 2015.  Available borrowing capacity was $94.9 million and $94.0 million as of September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.

Line of Credit - In October of 2015, the Company entered into a one year revolving line of credit agreement for up to $10.0 million.  At September 30, 2016, the balance was $5.5 million at a rate of 4.274%.  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 $1.4 million at September 30, 2016 and December 31, 2015, respectively.  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 Company incurs a quarterly unused commitment fee of 50 basis points per annum on the average available balance.  The outstanding balance of the revolving line of credit converts to a term loan at maturity with quarterly payments of 5% and maturity date of October 31, 2021.
 
7.
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,
 
   
2016
   
2015
   
2016
   
2015
 
   
Unrealized holding gains
(losses) on AFS
   
Unrealized holding gains
(losses) on AFS
 
   
(in thousands)
 
Beginning balance
 
$
33
   
$
(122
)
 
$
(68
)
 
$
31
 
Other comprehensive income (loss) before reclassifications
   
(46
)
   
92
     
55
     
(61
)
Amounts reclassified from accumulated other comprehensive income
   
-
     
-
     
-
     
-
 
Net current-period other comprehensive income (loss)
   
(46
)
   
92
     
55
     
(61
)
Ending Balance
 
$
(13
)
 
$
(30
)
 
$
(13
)
 
$
(30
)

There were no reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2016 or 2015.

Common Stock

During the first nine months of 2016, the Company repurchased 183,569 common stock shares for an average price of $7.26 a share under the common stock repurchase program.  During the three months ended September 30, 2016, the Company repurchased 45,786 common stock shares at an average price of $7.78 a share.

During the three and nine months ended September 30, 2016, the Company paid common stock dividends of $0.3 million and $0.8 million, respectively.  During the three and nine months ended September 30, 2015, the Company paid common stock dividends of $0.2 million and $0.7 million, respectively.

Common Stock Warrant

The Warrant issued as part of the TARP provides for the purchase of up to 521,158 shares of the common stock, at an exercise price of $4.49 per share (“Warrant Shares”).  The Warrant is immediately exercisable and expires on December 19, 2018.  The exercise price and the ultimate number of shares of common stock that may be issued under the Warrant are subject to certain anti-dilution adjustments, such as upon stock splits or distributions of securities or other assets to holders of the common stock, and upon certain issuances of the common stock at or below a specified price relative to the then current market price of the common stock.  In the second quarter of 2013, the Treasury sold its warrant position to a private investor.  Pursuant to the Securities Purchase Agreement, the private investor has agreed not to exercise voting power with respect to any Warrant Shares.

8.
EARNINGS PER SHARE

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands, except per share amounts)
 
Net income
 
$
1,481
   
$
1,591
   
$
3,889
   
$
1,019
 
Less: dividends and accretion on preferred stock and discount on partial redemption
   
-
     
125
     
-
     
272
 
Net income available to common stockholders
 
$
1,481
   
$
1,466
   
$
3,889
   
$
747
 
Weighted average number of common shares outstanding - basic
   
8,096
     
8,203
     
8,128
     
8,204
 
Weighted average number of common shares outstanding - diluted
   
8,421
     
8,508
     
8,442
     
8,503
 
Earnings per share:
                               
Basic
 
$
0.18
   
$
0.18
   
$
0.48
   
$
0.09
 
Diluted
 
$
0.18
   
$
0.17
   
$
0.46
   
$
0.09
 

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, 2016 and December 31, 2015.  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/Tier1
Capital (To Average
Assets)
 
September 30, 2016
                       
CWB's actual regulatory ratios
   
13.08
%
   
11.83
%
   
11.83
%
   
10.48
%
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 requirements including fully-phased in capital conservation buffer (2019)
   
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/Tier1
Capital (To Average
Assets)
 
December 31, 2015
                       
CWB's actual regulatory ratios
   
13.70
%
   
12.45
%
   
12.45
%
   
10.38
%
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 requirements including fully-phased in capital conservation buffer (2019)
   
10.50
%
   
8.50
%
   
7.00
%
   
N/A
 

The Company has evaluated the impact of the Final Rules and believes that, as of September 30, 2016, the Company would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis as if all such requirements were currently in effect.  There are no conditions or events since September 30, 2016 that management believes have changed the Company’s or the Bank’s risk-based capital category.
 
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, 2015, 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, 2015 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 five California branch banking offices in Goleta, Santa Barbara, Santa Maria, Ventura and Westlake Village and a loan production office in San Luis Obispo.  These entities are collectively referred to herein as the “Company”.

Financial Result Highlights for the Third Quarter of 2016

Net income available to common shareholders of the Company of $1.5 million, or $0.18 per diluted share in the third quarter of 2016 (3Q16) compared to a net income available to common shareholders of $1.5 million or $0.17 per diluted share in the third quarter a year ago (3Q15).
 
The significant factors impacting the Company’s third quarter earnings performance were:

·
Net income of $1.5 million in 3Q16 compared to $1.6 million in 3Q15.
·
Net interest margin for 3Q16 was 4.81% compared to 4.55% for 3Q15.
·
Total net loans increased $58.2 million to $594.7 million at September 30, 2016 compared to $536.5 million at December 31, 2015.
·
Total deposits increased $46.3 million to $590.6 million at September 30, 2016 from $544.3 at December 31, 2015.
·
Net nonaccrual loans decreased 43.3% to $3.0 million at September 30, 2016, compared to $5.3 million at September 30, 2015, and down 40% from $5.0 million at December 31, 2015.
·
Allowance for loan losses was $7.2 million at September 30, 2016, or 1.33% of total loans held for investment compared to 1.44% at December 31, 2015 and 1.50% at September 30, 2015.
·
Most key asset quality ratios improved for Q3 2016 compared to Q3 2015.  Nonaccrual loans and net other assets acquired through foreclosure to total assets improved to 0.46% from 0.91% in Q3 2015 and net nonaccrual loans to gross loans improved to 0.50% at the end of Q3 2016 compared to 0.99% at the end of Q3 2015.

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, 2016 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, 2015 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,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands, except per share amounts)
 
                         
Net income available to common stockholders
 
$
1,481
   
$
1,466
   
$
3,889
   
$
747
 
Basic earnings per share
   
0.18
     
0.18
     
0.48
     
0.09
 
Diluted earnings per share
   
0.18
     
0.17
     
0.46
     
0.09
 
Total assets
   
664,536
     
601,037
                 
Total loans
   
601,902
     
532,998
                 
Total deposits
   
590,601
     
526,786
                 
Total stockholders' equity
   
64,212
     
65,912
                 
Book value per common share
   
7.93
     
7.36
                 
Net interest margin
   
4.81
%
   
4.55
%
   
4.58
%
   
4.76
%
Return on average assets
   
0.91
%
   
1.05
%
   
0.82
%
   
0.24
%
Return on average stockholders' equity
   
9.17
%
   
9.64
%
   
8.19
%
   
2.03
%
 
The following table sets forth a summary financial overview for the comparable three and nine months ended September 30, 2016 and 2015:

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2016
   
2015
   
(Decrease)
   
2016
   
2015
   
(Decrease)
 
   
(in thousands, except per share amounts)
 
Consolidated Income Statement Data:
                                   
Interest income
 
$
8,516
   
$
7,375
   
$
1,141
   
$
23,634
   
$
22,087
   
$
1,547
 
Interest expense
   
807
     
593
     
214
     
2,307
     
1,843
     
464
 
Net interest income
   
7,709
     
6,782
     
927
     
21,327
     
20,244
     
1,083
 
Provision (credit) for loan losses
   
22
     
(445
)
   
467
     
(164
)
   
(1,997
)
   
1,833
 
Net interest income after provision for loan losses
   
7,687
     
7,227
     
460
     
21,491
     
22,241
     
(750
)
Non-interest income
   
559
     
554
     
5
     
1,715
     
1,771
     
(56
)
Non-interest expenses
   
5,836
     
5,038
     
798
     
16,678
     
22,190
     
(5,512
)
Income before income taxes
   
2,410
     
2,743
     
(333
)
   
6,528
     
1,822
     
4,706
 
Provision for income taxes
   
929
     
1,152
     
(223
)
   
2,639
     
803
     
1,836
 
Net income  (loss)
 
$
1,481
   
$
1,591
   
$
(110
)
 
$
3,889
   
$
1,019
   
$
2,870
 
Dividends on preferred stock
   
-
     
125
     
(125
)
   
-
     
401
     
(401
)
Discount on partial redemption of preferred stock
   
-
     
-
     
-
     
-
     
(129
)
   
129
 
Net income (loss) available to common stockholders
 
$
1,481
   
$
1,466
   
$
15
   
$
3,889
   
$
747
   
$
3,142
 
Income (loss) per share - basic
 
$
0.18
   
$
0.18
   
$
0.00
   
$
0.48
   
$
0.09
   
$
0.39
 
Income (loss) per share - diluted
 
$
0.18
   
$
0.17
   
$
0.00
   
$
0.46
   
$
0.09
   
$
0.37
 
 
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,
 
   
2016
   
2015
 
   
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
 
$
22,251
   
$
25
     
0.45
%
 
$
30,174
   
$
23
     
0.30
%
Investment securities
   
33,797
     
263
     
3.10
%
   
34,725
     
221
     
2.52
%
Loans (1)
   
581,477
     
8,228
     
5.63
%
   
526,119
     
7,131
     
5.38
%
Total earning assets
   
637,525
     
8,516
     
5.31
%
   
591,018
     
7,375
     
4.95
%
Nonearning Assets
                                               
Cash and due from banks
   
2,759
                     
1,395
                 
Allowance for loan losses
   
(7,132
)
                   
(7,331
)
               
Other assets
   
15,982
                     
16,694
                 
Total assets
 
$
649,134
                   
$
601,776
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
250,332
     
235
     
0.37
%
   
255,735
     
228
     
0.35
%
Savings deposits
   
14,214
     
27
     
0.76
%
   
14,397
     
28
     
0.77
%
Time deposits
   
222,189
     
471
     
0.84
%
   
178,136
     
331
     
0.74
%
Total interest-bearing deposits
   
486,735
     
733
     
0.60
%
   
448,268
     
587
     
0.52
%
Other borrowings
   
10,446
     
74
     
2.82
%
   
10,489
     
6
     
0.23
%
Total interest-bearing liabilities
   
497,181
     
807
     
0.65
%
   
458,757
     
593
     
0.51
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
84,359
                     
74,840
                 
Other liabilities
   
3,334
                     
2,701
                 
Stockholders' equity
   
64,260
                     
65,478
                 
Total Liabilities and Stockholders' Equity
 
$
649,134
                   
$
601,776
                 
Net interest income and margin (3)
         
$
7,709
     
4.81
%
         
$
6,782
     
4.55
%
Net interest spread (4)
                   
4.66
%
                   
4.44
%

(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.
 
   
Nine Months Ended September 30,
 
   
2016
   
2015
 
   
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
 
$
25,381
   
$
95
     
0.50
%
 
$
28,870
   
$
68
     
0.31
%
Investment securities
   
35,153
     
722
     
2.74
%
   
34,360
     
766
     
2.98
%
Loans (1)
   
561,365
     
22,817
     
5.43
%
   
505,708
     
21,253
     
5.62
%
Total earning assets
   
621,899
     
23,634
     
5.08
%
   
568,938
     
22,087
     
5.19
%
Nonearning Assets
                                               
Cash and due from banks
   
2,708
                     
1,587
                 
Allowance for loan losses
   
(7,017
)
                   
(7,578
)
               
Other assets
   
15,356
                     
16,554
                 
Total assets
 
$
632,946
                   
$
579,501
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
249,319
     
689
     
0.37
%
   
260,501
     
677
     
0.35
%
Savings deposits
   
14,112
     
82
     
0.78
%
   
14,774
     
95
     
0.86
%
Time deposits
   
215,308
     
1,317
     
0.82
%
   
154,575
     
989
     
0.86
%
Total interest-bearing deposits
   
478,739
     
2,088
     
0.58
%
   
429,850
     
1,761
     
0.55
%
Other borrowings
   
10,482
     
219
     
2.79
%
   
9,634
     
82
     
1.14
%
Total interest-bearing liabilities
   
489,221
     
2,307
     
0.63
%
   
439,484
     
1,843
     
0.56
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
76,511
                     
69,654
                 
Other liabilities
   
3,819
                     
3,364
                 
Stockholders' equity
   
63,395
                     
66,999
                 
Total Liabilities and Stockholders' Equity
 
$
632,946
                   
$
579,501
                 
Net interest income and margin (3)
         
$
21,327
     
4.58
%
         
$
20,244
     
4.76
%
Net interest spread (4)
                   
4.45
%
                   
4.63
%

(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.
 
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,
   
Nine Months Ended September 30
 
   
2016 versus 2015
   
2016 versus 2015
 
 
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:
                                   
Investment securities
 
$
(7
)
 
$
49
   
$
42
   
$
16
   
$
(60
)
 
$
(44
)
Federal funds sold and other
   
(9
)
   
11
     
2
     
(13
)
   
40
     
27
 
Loans, net
   
775
     
322
     
1,097
     
2,260
     
(696
)
   
1,564
 
Total interest income
   
759
     
382
     
1,141
     
2,263
     
(716
)
   
1,547
 
                                                 
Interest expense:
                                               
Interest checking
   
(5
)
   
12
     
7
     
(31
)
   
43
     
12
 
Savings
   
-
     
(1
)
   
(1
)
   
(4
)
   
(9
)
   
(13
)
Time deposits
   
92
     
48
     
140
     
372
     
(44
)
   
328
 
Other borrowings
   
-
     
68
     
68
     
18
     
119
     
137
 
Total interest expense
   
87
     
127
     
214
     
355
     
109
     
464
 
Net increase
 
$
672
   
$
255
   
$
927
   
$
1,908
   
$
(825
)
 
$
1,083
 

(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, 2016 was $8.5 million and $23.6 million, respectively, compared to $7.4 million and $22.1 million for the three and nine months ended September 30, 2015, respectively.  Total interest income in the third quarter of 2016 benefited from loan growth of $30.0 million compared to the second quarter of 2016, and $0.5 million from the payoff of a large past due relationship.  Interest income from investment securities and interest-bearing deposits in other institutions increased slightly due to higher yields.  The annualized yield on interest-earning assets for the third quarter 2016 compared to 2015 was 5.31% and 4.95%, respectively.

Interest expense for the three and nine months ended September 30, 2016 compared to 2015 increased by $0.2 million and $0.5 million, respectively.  This increase for the comparable periods was primarily due to increased interest paid on deposits and interest paid for the $5.5 million line of credit outstanding.  The annualized average cost of interest-bearing liabilities increased by 14 basis points to 0.65% for the three months ended September 30, 2016 compared to the same period in 2015.  The increase in deposit interest expense for the first nine months of 2016 compared to 2015 was due to both growth in interest bearing certificates of deposits and increased average cost of those deposits.  The cost of other borrowings increased for the comparable periods due to the $5.5 million line of credit.

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 third quarter of 2016 to 4.81% compared to 4.55% for the third quarter of 2015.  The net interest margin for the first nine months of 2016 decreased to 4.58 % compared to 4.76% for the first nine months of 2015.  The net interest margin in 2016 benefited by 39 basis points and 13 basis points for the quarter and year to date, respectively from the payoff of one large past due relationship.  The net interest margin in 2015 benefited by 26 basis points from the second quarter payoff of two large past due relationships.

Provision for loan losses

The provision for loan losses in each period is reflected as a charge against earnings in that period.  The provision for loan losses is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio.  The provision (credit) for loan losses was $22,000 for the third quarter of 2016 compared to ($0.4 million) for the third quarter of 2015.  The provision for the three months ended September 30, 2016 resulted from the increase in loan balances partially offset by $0.1 million net recoveries.  The provision (credit) for the nine months ended September 30, 2016 was ($0.2 million) compared to ($2.0 million) for the nine months ended September 30, 2015. 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 1.50% at September 30, 2015 to 1.33% at September 30, 2016.
 
The following schedule summarizes the provision, charge-offs (recoveries) by loan category for the three and nine months ended September 30, 2016 and 2015:

   
For the Three Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2016
 
(in thousands)
 
Beginning balance
 
$
2,188
   
$
3,078
   
$
1,251
   
$
322
   
$
62
   
$
126
   
$
1
   
$
7,028
 
Charge-offs
   
-
     
-
     
-
     
(100
)
   
-
     
-
     
-
     
(100
)
Recoveries
   
121
     
-
     
40
     
12
     
66
     
1
     
-
     
240
 
Net (charge-offs) recoveries
   
121
     
-
     
40
     
(88
)
   
66
     
1
     
-
     
140
 
Provision (credit)
   
(102
)
   
194
     
66
     
(142
)
   
(25
)
   
31
     
-
     
22
 
Ending balance
 
$
2,207
   
$
3,272
   
$
1,357
   
$
92
   
$
103
   
$
158
   
$
1
   
$
7,190
 
                                                                 
2015
     
Beginning balance
 
$
3,808
   
$
1,779
   
$
795
   
$
686
   
$
45
   
$
129
   
$
1
   
$
7,243
 
Charge-offs
   
(33
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(33
)
Recoveries
   
38
     
13
     
40
     
153
     
3
     
-
     
-
     
247
 
Net (charge-offs) recoveries
   
5
     
13
     
40
     
153
     
3
     
-
     
-
     
214
 
Provision (credit)
   
(220
)
   
43
     
35
     
(284
)
   
(5
)
   
(15
)
   
1
     
(445
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 

   
For The Nine Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2016
 
(in thousands)
 
Beginning balance
 
$
3,525
   
$
1,853
   
$
939
   
$
451
   
$
43
   
$
103
   
$
2
   
$
6,916
 
Charge-offs
   
(41
)
   
-
     
-
     
(121
)
   
-
     
-
     
-
     
(162
)
Recoveries
   
126
     
13
     
120
     
196
     
74
     
71
     
-
     
600
 
Net (charge-offs) recoveries
   
85
     
13
     
120
     
75
     
74
     
71
     
-
     
438
 
Provision (credit)
   
(1,403
)
   
1,406
     
298
     
(434
)
   
(14
)
   
(16
)
   
(1
)
   
(164
)
Ending balance
 
$
2,207
   
$
3,272
   
$
1,357
   
$
92
   
$
103
   
$
158
   
$
1
   
$
7,190
 
                                                                 
2015
     
Beginning balance
 
$
4,032
   
$
1,459
   
$
986
   
$
1,066
   
$
140
   
$
192
   
$
2
   
$
7,877
 
Charge-offs
   
(258
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(258
)
Recoveries
   
103
     
533
     
383
     
361
     
8
     
2
     
-
     
1,390
 
Net (charge-offs) recoveries
   
(155
)
   
533
     
383
     
361
     
8
     
2
     
-
     
1,132
 
Provision (credit)
   
(284
)
   
(157
)
   
(499
)
   
(872
)
   
(105
)
   
(80
)
   
-
     
(1,997
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 

The percentage of net nonaccrual loans to the total loan portfolio has decreased to 0.50% as of September 30, 2016 from 0.92% at December 31, 2015.

The allowance for loan losses compared to net nonaccrual loans has increased to 237.6% as of September 30, 2016 from 138% as of December 31, 2015.  Total past due loans decreased to $0.5 million as of September 30, 2016 from $1.9 million as of December 31, 2015.  The majority of this decrease was in commercial real estate, SBA 504 1st trust deed loans and construction loans past due.
 
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)
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Other loan fees
 
$
270
   
$
244
   
$
26
   
$
827
   
$
789
   
$
38
 
Document processing fees
   
130
     
141
     
(11
)
   
381
     
364
     
17
 
Service charges
   
100
     
92
     
8
     
292
     
252
     
40
 
Gains from loan sales, net
   
-
     
10
     
(10
)
   
-
     
117
     
(117
)
Other
   
59
     
67
     
(8
)
   
215
     
249
     
(34
)
Total non-interest income
 
$
559
   
$
554
   
$
5
   
$
1,715
   
$
1,771
   
$
(56
)

Total non-interest income increased slightly for the three months ended September 30, 2016 compared to 2015, and decreased by $0.1 million for the nine months ended September 30, 2016 compared to 2015.  Service charges for the three and nine months ended September 30, 2016 compared to 2015 increased slightly as the Company is in the process of enhancing its products and services.  Other loan fees for the third quarter and first nine months of 2016 compared to 2015 increased due to increased loan volumes.  Gains from loan sales decreased due to the Company’s exit from the mortgage wholesale lending business in the third quarter of 2015.

Non-Interest Expenses

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

   
Three Months Ended
September 30,
   
Increase
(Decrease)
   
Nine Months Ended
September 30,
   
Increase
(Decrease)
 
   
2016
   
2015
       
2016
   
2015
     
   
(in thousands)
 
Salaries and employee benefits
 
$
3,809
   
$
3,412
   
$
397
   
$
10,755
   
$
9,729
   
$
1,026
 
Occupancy, net
   
564
     
507
     
57
     
1,631
     
1,439
     
192
 
Professional services
   
196
     
212
     
(16
)
   
653
     
736
     
(83
)
Data processing
   
173
     
135
     
38
     
513
     
388
     
125
 
Depreciation
   
162
     
103
     
59
     
486
     
290
     
196
 
Advertising and marketing
   
154
     
116
     
38
     
447
     
348
     
99
 
FDIC assessment
   
74
     
99
     
(25
)
   
270
     
252
     
18
 
Stock-based compensation
   
97
     
73
     
24
     
261
     
333
     
(72
)
Loan servicing and collection
   
108
     
10
     
98
     
198
     
281
     
(83
)
Loan Litigation settlement, net
   
-
     
(50
)
   
50
     
-
     
7,103
     
(7,103
)
Other
   
499
     
421
     
78
     
1,464
     
1,291
     
173
 
Total non-interest expenses
 
$
5,836
   
$
5,038
   
$
798
   
$
16,678
   
$
22,190
   
$
(5,512
)

Total non-interest expenses for the third quarter 2016 compared to 2015 increased by $0.8 million.  Total non-interest expense for the nine month ended September 30, 2016 compared to 2015 decreased by $5.5 million.  This decrease was due to the net loan litigation settlement in Q2 2015.  Excluding the litigation settlement, from the third quarter and year to date 2015 total non-interest expenses increased in 2016 by $0.7 million and $1.6 million, respectively.  The increases in non-interest expenses for both the quarter and year to date are primarily due to increased salaries and employee benefits, occupancy, and depreciation as a result of the Bank’s expansion in San Luis Obispo, addition of other customer relationship positions and accelerated depreciation as the result of the Santa Maria office move.  During the third quarter 2015, the Company added a loan production office in San Luis Obispo and has additionally added other new strategic positions throughout the Bank.  For the third quarter 2016 compared to 2015 data processing, advertising and marketing, stock-based compensation and other increased slightly due to the growth but were partially offset my slight declines in the FDIC assessment and professional services.  Loan servicing and collection increased $0.1 million for the third quarter of 2016 compared to 2015 mostly due to increased repossessed assets legal costs and one-time recoveries of loan expenses received in 2015.

Income Taxes

Income tax provision for the third quarter and first nine months of 2016 were $0.9 million and $2.6 million, respectively, compared to $1.2 million and $0.8 million for the third quarter and first nine months of 2015.  The effective income tax rate for the first nine months of 2016 was 40.4%.

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 $3.6 million at September 30, 2016 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, 2016 or December 31, 2015.

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, 2016 and December 31, 2015.

BALANCE SHEET ANALYSIS

Total assets increased $43.3 million to $664.5 million at September 30, 2016 from $621.2 million at December 31, 2015.  Net loans increased by $58.2 million to $594.7 million at September 30, 2016 from $536.5 million at December 31, 2015.  This increase was partially offset by a decreases of $17.9 million in cash and cash equivalents used to fund loan growth.

Total liabilities increased $41.1 million to $600.3 million at September 30, 2016 from $559.3 million at December 31, 2015 mostly due to increased deposits of $46.3 million.  Non-interest-bearing demand deposits increased by $11.6 million, interest-bearing demand deposits increased by $7.9 million and certificates of deposit increased by $26.2 million.  These increases were partially offset by decreased other borrowings of $5.0 million from the repayment of an FHLB advance.

Total stockholders’ equity increased $2.3 million to $64.2. million at September 30, 2016 from $61.9 million at December 31, 2015.  The $3.9 million increase in retained earnings from net income was partially offset by a net $0.9 million decrease in common stock mostly from $1.3 million repurchase of 183,569 shares of common stock, $0.2 million from exercise of stock options and $0.3 million of stock based compensation.  Common stock dividends of $0.8 million contributed to the decrease in retained earnings.  The book value per common share was $7.93 at September 30, 2016 compared to $7.55 at December 31, 2015.

Selected Balance Sheet Accounts

   
September 30,
2016
   
December 31,
2015
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
(dollars in thousands)
 
Cash and cash equivalents
 
$
17,659
   
$
35,519
   
$
(17,860
)
   
(50.3
)%
Investment securities available-for-sale
   
21,982
     
23,441
     
(1,459
)
   
(6.2
)%
Investment securities held-to-maturity
   
9,218
     
7,025
     
2,193
     
31.2
%
Loans - held for sale
   
62,381
     
64,488
     
(2,107
)
   
(3.3
)%
Loans - held for investment, net
   
532,331
     
472,058
     
60,273
     
12.8
%
Total assets
   
664,536
     
621,213
     
43,323
     
7.0
%
Total deposits
   
590,601
     
544,338
     
46,263
     
8.5
%
Other borrowings
   
5,500
     
10,500
     
(5,000
)
   
(47.6
)%
Total stockholder's equity
   
64,212
     
61,944
     
2,268
     
3.7
%
 
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,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Manufactured housing
 
$
191,946
   
$
177,891
 
Commercial real estate
   
225,572
     
179,491
 
Commercial
   
85,711
     
77,349
 
SBA
   
11,427
     
13,744
 
HELOC
   
10,789
     
10,934
 
Single family real estate
   
14,334
     
19,073
 
Consumer
   
82
     
123
 
     
539,861
     
478,605
 
Allowance for loan losses
   
(7,190
)
   
(6,916
)
Deferred costs, net
   
(160
)
   
560
 
Discount on SBA loans
   
(180
)
   
(191
)
Total loans held for investment, net
 
$
532,331
   
$
472,058
 

The Company had $62.3 million of loans held for sale at September 30, 2016 compared to $64.5 million at December 31, 2015.  Loans held for sale at September 30, 2016 consisted of $28.0 million SBA loans and $34.3 million commercial agriculture loans.  Loans held for sale at December 31, 2015, were $34.3 million SBA loans and $30.2 million commercial agriculture loans.

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 makes 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, 2016 and December 31, 2015, manufactured housing loans comprised 31.9% and 32.7%, respectively, of total loans.  As of September 30, 2016 and December 31, 2015, commercial real estate loans accounted for approximately 37.5% and 33.0% of total loans, respectively.  Approximately 44.0% and 53.7% of these commercial real estate loans were owner-occupied at September 30, 2016 and December 31, 2015, respectively.  Substantially all of these loans are secured by first liens with an average loan to value ratios of 53.3% and 50.3% at September 30, 2016 and December 31, 2015, respectively.  The Company was within established policy limits at September 30, 2016 and December 31, 2015.

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.

   
Three Months Ended
September 30,
 
   
2016
   
2015
 
   
(in thousands)
 
Nonaccrual loans (net of government guaranteed portion)
 
$
3,026
   
$
5,287
 
Troubled debt restructured loans, gross
   
14,425
     
12,654
 
Nonaccrual loans (net of government guaranteed portion) to gross loans
   
0.50
%
   
0.99
%
Net charge-offs (recoveries) (annualized) to average loans
   
(0.10
)%
   
(0.16
)%
Allowance for loan losses to nonaccrual loans (net of government guaranteed portion)
   
237.61
%
   
132.63
%
Allowance for loan losses to gross loans
   
1.19
%
   
1.32
%
 
The following table reflects the recorded investment in certain types of loans at the dates indicated:

   
September 30,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
Total nonaccrual loans
 
$
4,187
   
$
6,956
 
Government guaranteed portion of loans included above
   
(1,161
)
   
(1,943
)
Total nonaccrual loans, without guarantees
 
$
3,026
   
$
5,013
 
                 
Troubled debt restructured loans, gross
 
$
14,425
   
$
13,741
 
Loans 30 through 89 days past due with interest accruing
 
$
-
   
$
-
 
Allowance for loan losses to gross loans held for investment
   
1.33
%
   
1.44
%

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.

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, 2016:
 
(in thousands)
 
Recorded Investment:
                                               
Impaired loans with an allowance recorded
 
$
6,109
   
$
1,340
   
$
3,485
   
$
327
   
$
46
   
$
2,049
   
$
-
   
$
13,356
 
Impaired loans with no allowance recorded
   
2,771
     
76
     
-
     
2,041
     
490
     
195
     
-
     
5,573
 
Total loans individually evaluated for impairment
   
8,880
     
1,416
     
3,485
     
2,368
     
536
     
2,244
     
-
     
18,929
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
   
511
     
20
     
164
     
-
     
-
     
27
     
-
     
722
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
511
     
20
     
164
     
-
     
-
     
27
     
-
     
722
 
Total impaired loans, net
 
$
8,369
   
$
1,396
   
$
3,321
   
$
2,368
   
$
536
   
$
2,217
   
$
-
   
$
18,207
 

   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Impaired Loans as of December 31, 2015:
 
(in thousands)
 
Recorded Investment:
                                               
Impaired loans with an allowance recorded
 
$
4,914
   
$
376
   
$
2,966
   
$
1,695
   
$
19
   
$
1,970
   
$
-
   
$
11,940
 
Impaired loans with no allowance recorded
   
3,672
     
2,247
     
44
     
1,052
     
294
     
282
     
-
     
7,591
 
Total loans individually evaluated for impairment
   
8,586
     
2,623
     
3,010
     
2,747
     
313
     
2,252
     
-
     
19,531
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
   
483
     
3
     
45
     
25
     
-
     
17
     
-
     
573
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
483
     
3
     
45
     
25
     
-
     
17
     
-
     
573
 
Total impaired loans, net
 
$
8,103
   
$
2,620
   
$
2,965
   
$
2,722
   
$
313
   
$
2,235
   
$
-
   
$
18,958
 

Total impaired loans decreased in the third quarter of 2016 by $0.6 million compared to December 31, 2015.  A decrease in impaired commercial real estate loans of $1.2 million and a decrease in impaired SBA loans of $0.4 million were partially offset by an increase in impaired commercial loans of $0.5 million, an increase in impaired manufactured housing loans of $0.3 million and an increase in impaired HELOC loans of $0.2 million.  The decrease in impaired commercial real estate loans was from two loan payoffs and the decrease to impaired SBA loans was from nine loan payoffs and upgrades and one loan charge-off net of six additional impaired SBA loans.  The net increase to impaired manufactured housing loans was due to new additions net of pay-offs, upgrades, charge-offs and payments.  The increase in impaired commercial loans was due to three new loan additions minus one loan that paid in full.  The increase in impaired HELOC loans was due primarily to one loan addition
 
The following table summarizes the composite of nonaccrual loans net of govrnment guarantee:

   
At September 30, 2016
   
At December 31, 2015
 
   
Nonaccrual
Balance
   
%
   
Percent of
Total Loans
   
Nonaccrual
Balance
   
%
   
Percent of
Total Loans
 
   
(dollars in thousands)
 
Manufactured housing
 
$
1,006
     
24.03
%
   
0.17
%
 
$
1,615
     
23.22
%
   
0.30
%
Commercial real estate
   
1,156
     
27.60
%
   
0.20
%
   
2,356
     
33.87
%
   
0.43
%
Commercial
   
-
     
0.00
%
   
0.00
%
   
44
     
0.63
%
   
0.01
%
SBA
   
1,294
     
30.91
%
   
0.22
%
   
2,346
     
33.73
%
   
0.43
%
HELOC
   
536
     
12.80
%
   
0.09
%
   
313
     
4.50
%
   
0.06
%
Single family real estate
   
195
     
4.66
%
   
0.03
%
   
282
     
4.05
%
   
0.05
%
Consumer
   
-
     
0.00
%
   
0.00
%
   
-
     
0.00
%
   
0.00
%
Total nonaccrual loans
 
$
4,187
     
100.00
%
   
0.71
%
 
$
6,956
     
100.00
%
   
1.28
%

Nonaccrual balances include $1.2 million and $1.9 million, respectively, of loans that are government guaranteed at September 30, 2016 and December 31, 2015, respectively.  Nonaccrual loans net of government guarantees decreased $2.0 million or 40.0%, from $5.0 million at December 31, 2015 to $3.0 million at September 30, 2016.  The percentage of nonaccrual loans net of government guarantees to the total loan portfolio has decreased to 0.50% as of September 30, 2016 from 0.92% at December 31, 2015 and 0.99% at September 30, 2015.

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,
 
   
2016
   
2015
   
2016
   
2015
 
Allowance for loan losses:
 
(in thousands)
 
Balance at beginning of period
 
$
7,028
   
$
7,243
   
$
6,916
   
$
7,877
 
Provisions charged to operating expenses:
                               
Manufactured housing
   
(102
)
   
(220
)
   
(1,403
)
   
(284
)
Commercial real estate
   
194
     
43
     
1,406
     
(157
)
Commercial
   
66
     
35
     
298
     
(499
)
SBA
   
(142
)
   
(284
)
   
(434
)
   
(872
)
HELOC
   
(25
)
   
(5
)
   
(14
)
   
(105
)
Single family real estate
   
31
     
(15
)
   
(16
)
   
(80
)
Consumer
   
-
     
1
     
(1
)
   
-
 
Total Provision (credit)
   
22
     
(445
)
   
(164
)
   
(1,997
)
Recoveries of loans previously charged-off:
                               
Manufactured housing
   
121
     
38
     
126
     
103
 
Commercial real estate
   
-
     
13
     
13
     
533
 
Commercial
   
40
     
40
     
120
     
383
 
SBA
   
12
     
153
     
196
     
361
 
HELOC
   
66
     
3
     
74
     
8
 
Single family real estate
   
1
     
-
     
71
     
2
 
Consumer
   
-
     
-
     
-
     
-
 
Total recoveries
   
240
     
247
     
600
     
1,390
 
Loans charged-off:
                               
Manufactured housing
   
-
     
33
     
41
     
258
 
Commercial real estate
   
-
     
-
     
-
     
-
 
Commercial
   
-
     
-
     
-
     
-
 
SBA
   
100
     
-
     
121
     
-
 
HELOC
   
-
     
-
     
-
     
-
 
Single family real estate
   
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
 
Total charged-off
   
100
     
33
     
162
     
258
 
Net charge-offs (recoveries)
   
(140
)
   
(214
)
   
(438
)
   
(1,132
)
Balance at end of period
 
$
7,190
   
$
7,012
   
$
7,190
   
$
7,012
 

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, 2016
 
   
Number
of Loans
   
Loan
Balance (1)
   
Percent
   
Percent
of Total
Loans
 
   
(dollars in thousands)
 
Manufactured housing
   
23
   
$
964
     
5.88
%
   
0.16
%
Commercial real estate
   
4
     
4,664
     
28.47
%
   
0.77
%
Commercial
   
6
     
7,840
     
47.85
%
   
1.30
%
SBA
   
12
     
2,664
     
16.26
%
   
0.44
%
HELOC
   
1
     
248
     
1.51
%
   
0.04
%
Single family real estate
   
1
     
5
     
0.03
%
   
0.00
%
Total
   
47
   
$
16,385
     
100.00
%
   
2.71
%

(1)
Of the $16.4 million of potential problem loans, $3.5 million are guaranteed by government agencies.
 
   
December 31, 2015
 
   
Number of
Loans
   
Loan
Balance (1)
   
Percent
   
Percent
of Total
Loans
 
   
(dollars in thousands)
 
Manufactured housing
   
24
   
$
1,044
     
6.05
%
   
0.19
%
Commercial real estate
   
9
     
7,519
     
43.55
%
   
1.38
%
Commercial
   
10
     
7,551
     
43.74
%
   
1.39
%
SBA
   
14
     
464
     
2.69
%
   
0.09
%
HELOC
   
3
     
573
     
3.32
%
   
0.11
%
Single family real estate
   
2
     
113
     
0.65
%
   
0.02
%
Total
   
62
   
$
17,264
     
100.00
%
   
3.18
%

(1)
Of the $17.3 million of potential problem loans, $3.2 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,
   
December 31,
 
   
2016
   
2015
 
   
(in thousands)
 
U.S. government agency notes
 
$
3,739
   
$
11,147
 
U.S. government agency mortgage backed securities ("MBS")
   
9,218
     
7,025
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
18,164
     
12,231
 
Equity securities: Farmer Mac class A stock
   
79
     
63
 
   
$
31,200
   
$
30,466
 
 
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,
 
   
2016
   
2015
   
2016
   
2015
 
   
(in thousands)
 
Balance, beginning of period
 
$
129
   
$
267
   
$
198
   
$
137
 
Additions
   
48
     
209
     
213
     
544
 
Proceeds from dispositions
   
(115
)
   
(286
)
   
(342
)
   
(508
)
Gains (losses) on sales, net
   
(7
)
   
16
     
(14
)
   
33
 
Balance, end of period
 
$
55
   
$
206
   
$
55
   
$
206
 

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.  At September 30, 2015, the Company had a valuation allowance on foreclosed assets of $10,000.  At September 30, 2016, the Company had no mortgage loans in process of foreclosure.

Deposits

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

   
September 30,
   
December 31,
   
Increase
   
Percent
Increase
 
   
2016
   
2015
   
(Decrease)
   
(Decrease)
 
   
(dollars in thousands)
 
Non-interest bearing demand deposits
 
$
88,024
   
$
76,469
   
$
11,555
     
15.1
%
Interest-bearing demand deposits
   
258,360
     
250,509
     
7,851
     
3.1
%
Savings
   
14,388
     
13,690
     
698
     
5.1
%
Certificates of deposit ($250,000 or more)
   
92,319
     
66,722
     
25,597
     
38.4
%
Other certificates of deposit
   
137,510
     
136,948
     
562
     
0.4
%
Total deposits
 
$
590,601
   
$
544,338
   
$
46,263
     
8.5
%
 
Total deposits increased to $590.6 million at September 30, 2016 from $544.3 million at December 31, 2015, an increase of $46.3 million.  This increase was primarily from certificates of deposit.  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”).  CDARS provides a mechanism for obtaining FDIC insurance for large deposits.  At September 30, 2016 and December 31, 2015, the Company had $36.9 million and $24.3 million, respectively, of CDARS deposits.
 
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.

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 $5.0 million of FHLB advances at December 31, 2015 borrowed at a fixed rate.  The Company also had $100.0 million of letters of credit with FHLB at September 30, 2016 to secure public funds.  At September 30, 2016, CWB had pledged to the FHLB, $31.2 million of securities and $155.9 million of loans.  At September 30, 2016, CWB had $55.8 million available for additional borrowing.  At December 31, 2015, CWB had pledged to the FHLB, securities of $30.5 million at carrying value and $140.0 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, 2016 and December 31, 2015.  CWB had $94.9 million and $94.0 million in borrowing capacity as of September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.

The Company has a revolving line of credit facility with a correspondent bank with available borrowing capacity at September 30, 2016 of $4.5 million.

The Company continues to face strong competition for core deposits.  The liquidity ratio of the Company was 15.4% and 19.8% at September 30, 2016 and December 31, 2015, 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 and preferred 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 20,000,000 shares of common stock of which 8,094,489 have been issued at September 30, 2016.  Conversely, the Company may decide to repurchase shares of its outstanding common stock, depending on the market price and other relevant factors.

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, 2016 and December 31, 2015.  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/Tier1
Capital (To Average
Assets)
 
September 30, 2016
                       
CWB's actual regulatory ratios
   
13.08
%
   
11.83
%
   
11.83
%
   
10.48
%
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 requirements including fully-phased in capital conservation buffer (2019)
   
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/Tier1
Capital (To Average
Assets)
 
December 31, 2015
                       
CWB's actual regulatory ratios
   
13.70
%
   
12.45
%
   
12.45
%
   
10.38
%
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 requirements including fully-phased in capital conservation buffer (2019)
   
10.50
%
   
8.50
%
   
7.00
%
   
N/A
 

The Company has evaluated the impact of the Final Rules and believes that, as of September 30, 2016, the Company would meet all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis as if all such requirements were currently in effect.  There are no conditions or events since September 30, 2016 that management believes have changed the Company’s or the Bank’s risk-based capital category.
 
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, 2015 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 is set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  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, 2016 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

The Company is involved in various 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, 2015.  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, 2016.
 
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
   
-
     
-
     
-
     
-
 
August 1 – 31
   
45,786
   
$
7.78
     
45,786
   
$
1,641,930
 
September 1 – 30
   
-
     
-
     
-
     
-
 
Total
   
45,786
   
$
7.78
     
45,786
   
$
1,641,930
 

(a)
On August 27, 2015, the Board of Directors of the Company authorized the repurchase of up to $3.0 million of the outstanding common stock of the Company.  The repurchase program is expected to be executed over no more than a two-year period.  Stock repurchases may be made from time to time on the open market or through privately negotiated transactions.  As of September 30, 2016, approximately $1.6 million remains authorized for repurchase.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS

The following Exhibits are filed herewith.

Exhibit No.
 
 
  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.
 
 
101INS– XBRL Instance Document
 
101SCH–XBRL Taxonomy Extension Schema Document
 
101CAL– XBRL Taxonomy Calculation Linkbase Document
 
101DEF– XBRL Taxonomy Extension Definition Linkbase Document
 
101LAB– XBRL Taxonomy Label Linkbase Document
 
101PRE– XBRL Taxonomy Presentation Linkbase Document

*
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 2, 2016
BY:
/s/ Charles G. Baltuskonis
     
Charles G. Baltuskonis
     
Executive Vice President and
      Chief Financial Officer
       
     
On Behalf of Registrant and as a Duly Authorized Officer
     
and as Principal Financial and Accounting Officer
 
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.
 
 
101INS– XBRL Instance Document
 
101SCH–XBRL Taxonomy Extension Schema Document
 
101CAL– XBRL Taxonomy Calculation Linkbase Document
 
101DEF– XBRL Taxonomy Extension Definition Linkbase Document
 
101LAB– XBRL Taxonomy Label Linkbase Document
 
101PRE– XBRL Taxonomy Presentation Linkbase Document

*
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.
 
 
49