Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒☑
The aggregate market value of common stock, held by non-affiliates of the registrant was $49,406,928$51,258,204 based on the June 30, 201729, 2019 closing price of $10.10$9.65 per common share, as reported on the Nasdaq Global Market. For purposes of the foregoing computation, all executive officers, directors and five percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or five percent beneficial owners are, in fact, affiliates of the registrant.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K (“Form(this “Form 10-K”) are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and State securities laws,the Private Securities Litigation Reform Act of 1995, including statements that are related to or are dependent upon estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
The forward-looking statements contained in this Form 10-K reflect our current views about future events and financial performance and involve certain risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ materiallysignificantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-K. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (“SEC”).
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” beginning on page 7. 5. Forward-looking statements speak only as of the date they are made and themade. The Company does not undertake any obligations to update forward-looking statements to reflect circumstances and or events that occur after the date the forward-looking statements are made.
Purpose
The following discussion is designed to provide insight oninto the financial condition and results of operations of Community West Bancshares (“CWBC”) and its wholly-owned subsidiary, Community West Bank N.A (“CWB” or the “Bank”). Unless otherwise stated, “the Company”the Company refers to CWBC and CWB as a consolidated entity. References to “CWBC or to the “holding company,” refer to Community West Bancshares, the parent company, on a stand-alone basis. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes to the Consolidated Financial Statements for the years ended December 31, 20172019 and 2016,2018, herein referred to as the “Consolidated Financial Statements”. These Consolidated Financial Statements are presented beginning on page 4948 of this Report.Form 10-K.
GENERAL
Community West Bancshares, or CWBC, a California corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or “BHCA,” with corporate headquarters in Goleta, California. OurCWBC’s common stock is listed on Nasdaq under the trading symbol “CWBC”. CWBC’s principal business is to serve as the holding company for ourits wholly-owned subsidiary Community West Bank, N.A., a national banking association chartered by the Office of the Comptroller of the Currency (“OCC”). Through CWB, the Company provides a variety of financial products and services to customers through seveneight full-service branch offices in the cities of Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, Paso Robles and Westlake California, and one loan production office in Paso Robles,Village, California.
PRODUCTS AND SERVICES
CWB is focused on relationship-based business banking to small to medium-sized businesses and their owners, professional, high-net worth individuals, and non-profit organizations in the communities served by its branch offices. The products and services provided include deposit products such as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits, cash management products, and lending products, including;including commercial, commercial real estate, agricultural and consumer loans.
Competition in our markets remains healthy. The Company continues to be competitive due to its focus on high quality customer service and our experienced relationship bankers who have strong relationships within the communities we serve.
Manufactured Housing
The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved mobile home parks thatthroughout California primarily on or near the coast. The parks must meet specific criteria. We primarily lend in coastal California communities from San Diego to San Francisco. The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), the Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. The FSA loans typically issueissues a 90% guarantee up to $1,399,000$1,776,000 (amount adjusted annually based on inflation) for up to 40 years.
The Company also originates and sells loans to the secondary market through the Federal Agricultural Mortgage Corporation (“Farmer Mac”) program. Farmer Mac provides the Company with access to flexible, low-cost financing and effective risk management tools to help farm, ranch and rural utility customers.
Small Business Administration Lending
CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990. The Company originates SBA loans which can be sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programsprogram that CWB offers areis the basic 7(a) Loan Guaranty (“SBA 7(a)”) and the Certified Development Company (“CDC”), a Section 504 (“504”) program.
CWB also offers Business & Industry ("(“B & I"I”) loans. These loans are similar to the SBA loans,product, except they are guaranteed by the USDA.U.S. Department of Agriculture. The maximum guaranteed amount is 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market.
As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation responsibilitiesresponsibility from the SBA.
Loans to One Borrower
State banking law generally limits the amount of funds that a bank may lend to a single borrower. Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the bank’sBank’s unimpaired capital and unimpaired surplus, and the secured and unsecured obligations of any one borrower. CWB was approved to increase this lending limit under the OCC’s Special Lending Limits Program to 25%. This program ensures that national bank lending limits, such as CWB’s, would remain competitive with state-chartered banks. In addition, California state banking law generally limits the amount of funds that a state-chartered bank may lend to a single borrower to 15% of the bank’s capital for unsecured loans and 25% of the bank’s capital for secured loans, and considers real estate secured loans as “secured” for lending limits purposes.
Foreign Operations
The Company has no foreign operations. The Bank may provide loans, letters of credit and other trade-related services to commercial enterprises that conduct business outside the United States.
Customer Concentration
The Company does not have any customer relationships that individually account for 10% of consolidated or segment revenues, respectively.
COMPETITION
The financial services industry is highly competitive. Many of ourthe Bank’s competitors are much larger in total assets and capitalization, have greater access to capital markets, have higher lending limits, and can offer a broader range of financial services than wethe Bank can offer and may have lower cost structures.
This increasingly competitive environment is primarily a result of long term changes in regulation that made mergers and geographic expansion easier; changes in technology and product delivery systems and web-based tools; the accelerating pace of consolidation among financial services providers; and the flight of deposit customers to perceived increased safety. We compete for customers related to loans and deposits and customers with other banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial services providers. This strong competition for deposit and loan products directly affects the rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive. The competitive environment is also significantly impacted by federal and state legislation that makes it easier for non-bank financial institutions to compete with the Company.
EMPLOYEES
As of December 31, 2017,2019, the Company had 128133 full-time equivalent team members. The Company'sCompany’s employees are not represented by a union or covered by a collective bargaining agreement. Management believes that its employee relations are good.
GOVERNMENT POLICIES
The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory authorities, including those of the states in which it operates and the U.S. government. These laws, regulations and policies include, for example, statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve System which impact interest rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory agencies. Changes in these laws, regulations and policies may greatly affect our operations. See “Item 1A Risk Factors – Curtailment of government guaranteed loan programs could affect a segment of our business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation.”
Additional Available Information
The Company maintains an Internet websitewebsite at http://www.communitywest.com.www.communitywest.com. The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. Other information related to the Company is available freefree of charge through this website as soon as reasonably practicable after it has been electronically filed or furnished to the Securities Exchange Commission (“SEC”). The SEC maintains an Internet site, http://www.sec.gov, in which all forms filed electronically may be accessed. The Company’s internet website and the information contained therein are not intended to be incorporated in this Form 10-K. In addition, copies of the Company’s annual report will be made available, free of charge, upon written request.
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties, are discussed below and elsewhere in this report.Form 10-K. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition. Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business. See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this reportForm 10-K beginning on page 1516 and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section beginning on page 37.38.
Risks Relating to the Bank and to the Business of Banking in General
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.
AWhile real estate values and unemployment rates remain stable, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
| · | loan delinquencies, problem assets and foreclosures may increase; |
loan delinquencies, problem assets and foreclosures may increase;
| · | the sale of foreclosed assets may slow; |
the sale of foreclosed assets may slow;
| · | demand for our products and services may decline possibly resulting in a decrease in our total loans or assets; |
demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;
| · | collateral for loans made may decline further in value, exposing us to increased loan risks, reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans; |
collateral for loans made could decline in value, exposing us to increased risk in our loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;
| · | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and |
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
| · | the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely affected. |
the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely affected.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability wouldcould be adversely affected.
The Company has liquidity risk.
Liquidity risk is the risk that the Company will have insufficient cash A return of recessionary conditions could result in increases in our level of non-performing loans and/or access to cash to satisfy currentreduce demand for our products and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds through deposits, borrowings, the sale of loans and other sourcesservices, which could have a materialan adverse effect on liquidity. Access to funding sources in amounts adequate to finance business activities could be impaired by factors that affect either entity specifically our results of operations.
Economic conditions have remained stable since the end of the economic recession; and the current expansion has continued since June 2009. A return of recessionary conditions and/or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decreasenegative developments in the leveldomestic and international credit markets may significantly affect the markets in which we do business, the value of business activity dueour loans and investments, and our ongoing operations, costs and profitability. Declines in real estate value and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to a market downturn or adverse regulatory action against either entity. The abilityincur losses and may adversely affect our capital, liquidity and financial condition.
Furthermore, the Board of CWB to acquire deposits or borrow could also be impaired by factors that are not specific to CWB, such as a severe disruptionGovernors of the financialFederal Reserve System, in an attempt to help the overall economy, had among other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve Board increased the federal funds rate by 25 basis points in December 2016, 75 basis points in 2017, and 100 basis points in 2018, and decreased the federal funds rate by 75 basis points in 2019 to help stimulate the economy. The potential for further changes in the federal funds rate exist in the near future. Market rates of interest tend to follow the federal funds rate, and decreasing rates tend to enhance borrowing and stimulate housing markets or negative views and expectations about the prospects for the financial services industry as a whole. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits “CD’s” markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.U.S. economic conditions.
Reserve for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our financial condition and/or results of operations. The Company maintains a reserve for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date. Provisions are taken from earnings and applied to the loan loss reserves as the risk of loss in the loan and commitment portfolios increases. Conversely, credits to earnings from the loan loss reserves are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and commitment portfolios. As of December 31, 2017,2019, the Company’s allowance for loan losses was $8.4$8.7 million, or 1.24%1.19% of loans held for investment. In addition, as of December 31, 2017, the Company2019, we had $6.8$2.7 million in loans on nonaccrual, $2.4$0.3 million of which are government guaranteed. In determining the appropriate level of the reserve for loan losses, Management makes various assumptions and judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information known to Management at the time of the analysis. If Management’s assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could have a material adverse effect on the Company’s financial condition and/or results of operations. While the allowance for loan losses was determined to be adequate at December 31, 2017,2019, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, life insurance, and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to repay loans in accordance with their original terms and, if not, the cumulative effect may have an adverse effect on our financial condition and/or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2017,2019, approximately $460.8$479.6 million, or 63%62%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. The real estate securing our loan portfolio is concentrated in California. A decline in the real estate market could materially and adversely affect the business of CWB because a significant portion of its loans are secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and CWB would be more likely to suffer losses on loans. Substantially all of the real property collateral is located in California. If there is an additional decline in real estate values, especially in California, the collateral for their loans would provide less security. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to California.
California’s current drought may impact the economy.
At December 31, 2017, CWB had $35.5 million of agricultural loans which would be most impacted by the drought. The overall economy of California may be negatively impacted by drought as the cost of water and availability of water may increase the operating costs for businesses which could negatively affect the Company’s operating results, loan quality and collateral.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. TheseIntended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that the Company can pay, restrict the ability of institutions to guarantee the Company’s debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”). Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
8CWBC is subject to regulation and supervision by the FRB and CWB is subject to supervision and regulation by the OCC with applicable laws and regulations governing the types, amounts and terms of investments and loans we make, disclosures of products and services we offer to our customers, the levels of capital we must maintain, and the rates of interest we may pay. Those regulations continuously change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. While legislation enacted in 2018 was designed to reduce some of the obligations imposed by the Dodd-Frank Act, no assurances can be given that such modifications will be implemented and that future changes in applicable laws and regulations would not impose regulatory restrictions resulting in a negative impact on CWBC. For further discussion, see “SUPERVISION AND REGULATION” herein.
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to effect the implementation of the Basel III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. For a further discussion of the capital rules, see “SUPERVISION AND REGULATION” herein.
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s results of operations and financial condition may be adversely affected.
If the Company lost a significant portion of its low-cost deposits, it could negatively impact itsCWBC and CWB have liquidity and profitability.risk.
The Company’s profitability dependsLiquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on liquidity. Access to funding sources in part on successfully attracting and retainingamounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a stable base of low-cost deposits. While the Company generally does not believe these core deposits are sensitive to interest rate fluctuations, the competition for these depositsdecrease in the Company’s markets is strong and customers are increasingly seeking investmentslevel of business activity due to a market downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors that are safe, includingnot specific to CWB, such as a severe disruption of the purchasefinancial markets or negative views and expectations about the prospects for the financial services industry as a whole. CWB mitigates liquidity risk by establishing and accessing lines of U.S. Treasury securitiescredit with various financial institutions and other government-guaranteed obligations, as well ashaving back-up access to the establishmentbrokered Certificate of accounts atDeposits “CD’s” markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.
As a legal entity, separate and distinct from the largest, most-well capitalized banks. IfBank, CWBC must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Company wereBank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to lose a significant portion ofCWBC, thereby negatively impacting its low-cost deposits, it would negatively impact its liquidity and profitability.separate liquidity.
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance these programs will be available as needed.
As of December 31, 2017,2019, the Company has borrowings from the FHLB of San Francisco of $50.0$65.0 million and no borrowings from the FRB. The Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs whichprograms. Any change or termination could have an adverse effect on the Company’s liquidity and profitability.
The Company is exposed to risk of environmental liabilities with respect to properties to which we obtain titletitle.
Approximately 48%62% of the Company’s loan portfolio at December 31, 20172019 was secured by commercial real estate. In the course of our business, the Company may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and prospects.
Changes in interest rates could adversely affect the Company’s profitability, business and prospectsprospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates whichand can impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an adverse effect on the Company’s business, asset quality and prospects. The Company’s operating income and net income depend to a great extent on itsit’s net interest margin. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and the interest rates paid on interest-bearing deposits, borrowings and other liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the Federal Reserve. If the rate of interest paid on interest-bearing deposits, borrowings and other liabilities increases more than the rate of interest received on loans, securities and other earning assets increases, the Company’s net interest income, and therefore earnings, would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. The Company cannot guarantee that it will be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business, financial condition, results of operations and cash flows.
The Company’s future success will depend on our ability to compete effectively in a highly competitive marketmarket.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks, and other financial institutions, compete with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we conduct our businesses from many local commercial banks as well as numerous national commercial banks and regionally based commercial banks. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected.
In order to remain competitive in our industry and provide our customers with the latest products and services, we must be able to keep up with the changes in technology. Many of the financial institutions and the financial technology companies with which we compete have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse effect on our customer relations and, in turn, our financial condition and results of operations.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business, andwhich could result in regulatory action and which could require us to restate our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period financial statements. Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period financial statements.
10One recent change is ASU 2016-13, which was released by the Financial Accounting Standards Board in 2016 and must be adopted by the Company by no later than January 1, 2023. Currently, the impairment model used by financial institutions to assess the adequacy of the reserve for loan losses is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the current expected credit loss (“CECL”) model, in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will necessitate significantly greater data requirements and changes to methodologies to accurately account for expected losses over the life of a loan. There can be no assurance that we will not be required to increase reserves and the allowance for loan losses as a result of the implementation of CECL. Increased provisions for loan losses may adversely affect the results of operations and our financial condition.
TerroristNatural disasters, severe weather terrorist attacks and threats of war or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways
In the last few years, California has experienced extensive wildfires that have burned millions of acres, destroyed thousands of homes and commercial properties, and resulted in the United States,loss of life not only in California generally but also directly in our market area. Such natural disasters sometimes were followed by significant rains resulting in further loss of property. Also in recent years, California has experienced a drought and while above average rainfall in early 2019 has improved those conditions, drought conditions could reappear which could negatively affect our customers. As of December 31, 2019, CWB had $69.8 million of agricultural loans. The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty and a substantial portion of our customers businesses and residences are located in areas susceptible to such events as well as futureearthquakes, floods, droughts and wildfires. The occurrence of such events occurring in response or in connection to them including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions, maycould adversely impact our operations. Anycustomers’ and their businesses and ability to repay their loans all of these events could cause consumer confidence and savings to decrease or result in increased volatility in the United States and worldwide financial markets and economy. Any of these occurrenceswhich could have ana material adverse impacteffect on the Company’s operating results, revenues and costs and may result in the volatility of the market price for our securities, including our common stock, and impair their future price.CWBC.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet and telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us and/or our customers that use our internet banking, electronic banking or some other form of our telecommunications systems. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place.place, which losses could adversely affect the Company and its financial condition.
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of the Company’s and our clients’customers’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber attacks and other events that could have an adverse security impact and result in significant losses by us and/or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees, especially seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level. In particular, our relative success to date has been partly the result of our skills of our senior management and management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their communities. These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share. From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer. If the Company is unable to hire or retain qualified employees it may not be able to successfully execute its business strategy. If the Company or its employee is found to have violated any nonsolicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.
We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations.We may need to raise additional capital in the future to achieve and maintain those adequate capital levels. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.
We may face risks related to health epidemics that could impact our results of operations.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases and other adverse public health developments could have a material and adverse effect on our business operations. Although we do not currently expect the coronavirus outbreak to impact our operating results, it is possible. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the U.S. economy and financial markets, resulting in an economic downturn that could impact our business.
Risks Relating to our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends and continue with share repurchases is subject to restrictions.
As a holding company with no significant assets other than the Bank, CWBC is dependent on dividends from the Bank to fund operating expenses and estimated tax payments. The ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions is subject to the restrictions of the National Bank Act. In addition, it is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 7 - Management’s Discussion and Analysis of Operations - Regulatory Matters- Dividends” in this Form 10-K.
In the event the Bank is unable to pay dividends to CWBC, it is likely that CWBC, in turn, would have to discontinue cash dividends and share repurchases and may have difficulty meeting its other financial obligations. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock.
For the year ended December 31, 2019, CWBC paid approximately $2.5 million in dividends to the Bank. No assurances can be given that future performances will justify the payment of dividends in any particular year. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code.
Issuance of additional common stock or other equity securities in the future could dilute the ownership interest of existing shareholders.
In order to maintain capital at desired or regulatory-required levels, or to fund future growth, the board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for, or representing rights to acquire shares of the common stock. The sale of these shares may significantly dilute ownership interests of shareholders. New investors in the future may also have rights, preferences and privileges senior to current shareholders which may adversely impact current shareholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
The Company is headquartered at 445 Pine Avenue in Goleta, California. This facility houses the Company'sCompany’s corporate offices and the manufactured housing loanlending division. The Company operates seveneight domestic branch locations, onetwo of which is owned, and a loan production office in Paso Robles.are owned. All other properties are leased by the Company, including the corporate headquarters.
The Company continually evaluates the suitability and adequacy of its offices. Management believes that the existing facilities are adequate for its present and anticipated future use.
From time to time, wethe Company may be involved in claims that arise duringvarious litigation matters of a routine nature in the ordinary course of the Company’s business. AlthoughIn the resultsopinion of Management, based in part on consultation with legal counsel, the resolution of these litigation and claims cannot be predicted with certainty, we domatters are not currently have any pending litigationexpected to which we are a party or to which our property is subject that we believe would have a material impact on ourthe Company’s financial position or results of operations. Regardless of the outcome, litigation can be costly and time consuming, and it can divert management’s attention from important business matters and initiatives, negatively impacting our overall operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC. The following table sets forth the high and low sales prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:
| | | 2017 Quarters | | 2016 Quarters | | | 2019 Quarters | | | 2018 Quarters | |
| | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | | First | |
| Range of Stock Prices | | | | | | | | | | | | | | | | | | | | | | | | | |
| Range of stock prices: | | | | | | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 11.00 | | | $ | 10.45 | | | $ | 10.40 | | | $ | 10.65 | | | $ | 9.95 | | | $ | 8.62 | | | $ | 7.55 | | | $ | 7.25 | | | $ | 11.86 | | | $ | 9.96 | | | $ | 10.28 | | | $ | 10.65 | | | $ | 12.20 | | | $ | 12.95 | | | $ | 11.95 | | | $ | 12.97 | |
| Low | | | 10.25 | | | | 10.05 | | | | 9.95 | | | | 9.12 | | | | 7.85 | | | | 7.35 | | | | 6.80 | | | | 6.79 | | | 9.78 | | | 9.60 | | | 9.54 | | | 9.77 | | | 9.44 | | | 11.75 | | | 11.05 | | | 10.45 | |
| Cash Dividends Declared | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.04 | | | $ | 0.035 | | | $ | 0.035 | | | $ | 0.035 | | | $ | 0.035 | | | $ | 0.03 | | |
| Cash Dividends Declared: | | | $ | 0.055 | | | $ | 0.055 | | | $ | 0.055 | | | $ | 0.050 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.05 | | | $ | 0.04 | |
Holders
As of February 23, 201728, 2020 the closing price of our common stock on NASDAQ was $11.20$10.85 per share. As of that date the Company had approximately 219204 holders of record of its common stock. The Company has a greater number of beneficial owners of our common stock who own their shares through brokerage firms and institutional accounts.
Common Stock Dividends
It is the Company’s intention to review its dividend policy on a quarterly basis. As a holding company with limited significant assets other than the capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB. CWB’s ability to pay dividends to the Company is limited by California law and federal law.the National Bank Act. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation – CWBC – Limitations on Dividend Payments.”
Repurchases of Securities
Common
On August 24, 2017, the Board of Directors extended the common stock repurchase program of up to $3.0 million for two additional years. AsUnder this program, as of December 31, 2017,2019, the Company has repurchased 187,569350,189 common stock shares for $1.4$3.1 million at an average price of $7.25$8.71 per share under this program. There were noshare.
The following is a summary of the Company’s repurchases of its common stock under this program during the threetwelve months ended December 31, 2017.2019.
| | Period | |
| Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs | |
| | January 1 – 31 | | | 1,270 | | | $ | 10.10 | | | | 1,270 | | | $ | 952,776 | |
| | February 1 – 28 | | | 76,326 | | | $ | 10.36 | | | | 76,326 | | | $ | 1,661,719 | |
| | March 1 – 31 | | | 12,164 | | | $ | 10.32 | | | | 12,164 | | | $ | 1,536,165 | |
| | April 1 – 30 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,536,165 | |
| | May 1 – 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,536,165 | |
| | June 1 – 30 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,536,165 | |
| | July 1 – 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,536,165 | |
| | August 1 – 31 | | | 5,108 | | | $ | 9.62 | | | | 5,108 | | | $ | 1,485,969 | |
| | September 1 – 30 | | | 5,115 | | | $ | 9.77 | | | | 5,115 | | | $ | 1,435,784 | |
| | October 1 – 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,435,784 | |
| | November 1 – 30 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,435,784 | |
| | December 1 – 31 | | | 0 | | | $ | 0.00 | | | | 0 | | | $ | 1,435,784 | |
| | Total | | | 99,983 | | | $ | 10.25 | | | | 99,983 | | | $ | 1,435,784 | |
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2017:2019:
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | | | (a) | | (b) | | (c) | |
| Plans approved by shareholders | | 1,200,983 | | | $ | 6.03 | | | | 258,000 | | | | 731,300 | | $ | 8.74 | | | 55,100 | |
| Plans not approved by shareholders | | - | | | | - | | | | - | | | | — | | | — | | | — | |
| Total | | 1,200,983 | | | $ | 6.03 | | | | 258,000 | | | | 731,300 | | $ | 8.74 | | | 55,100 | |
For material features of the plans, see “Item 8. Financial Statements and Supplementary Data - Note 11. Stockholder’sStockholders’ Equity-Stock Option Plans.”
The following summary presents selected financial data as of and for the periods indicated. You should read the selected financial data presented below in conjunction with “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
| | | | Year Ended December 31, | |
| | | Year Ended December 31, | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | (in thousands, except ratios and per share amounts) | |
| Results of Operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 37,391 | | | $ | 32,216 | | | $ | 30,222 | | | $ | 28,004 | | | | 27,866 | | | $ | 45,739 | | | $ | 42,631 | | | $ | 37,391 | | | $ | 32,216 | | | $ | 30,222 | |
| Interest expense | | | 4,729 | | | | 3,127 | | | | 2,516 | | | | 3,275 | | | | 4,332 | | | | 11,382 | | | | 8,988 | | | | 4,729 | | | | 3,127 | | | | 2,516 | |
| Net interest income | | | 32,662 | | | | 29,089 | | | | 27,706 | | | | 24,729 | | | | 23,534 | | | 34,357 | | | 33,643 | | | 32,662 | | | 29,089 | | | 27,706 | |
| Provision (credit) for loan losses | | | 411 | | | | (48 | ) | | | (2,274 | ) | | | (5,135 | ) | | | (1,944 | ) | | | (165 | ) | | | 14 | | | | 411 | | | | (48 | ) | | | (2,274 | ) |
| Net interest income after provision for loan losses | | | 32,251 | | | | 29,137 | | | | 29,980 | | | | 29,864 | | | | 25,478 | | | 34,522 | | | 33,629 | | | 32,251 | | | 29,137 | | | 29,980 | |
| Non-interest income | | | 2,950 | | | | 2,253 | | | | 2,309 | | | | 2,197 | | | | 2,831 | | | 3,607 | | | 2,628 | | | 2,757 | | | 2,253 | | | 2,309 | |
| Non-interest expenses | | | 24,738 | | | | 22,548 | | | | 27,281 | | | | 20,081 | | | | 22,135 | | | | 26,755 | | | | 26,039 | | | | 24,545 | | | | 22,548 | | | | 27,281 | |
| Income before income taxes | | | 10,463 | | | | 8,842 | | | | 5,008 | | | | 11,980 | | | | 6,174 | | | 11,374 | | | 10,218 | | | 10,463 | | | 8,842 | | | 5,008 | |
| Provision (benefit) for income taxes | | | 5,548 | | | | 3,613 | | | | 2,138 | | | | 4,934 | | | | (2,812 | ) | |
| Provision for income taxes | | | | 3,411 | | | | 2,809 | | | | 5,548 | | | | 3,613 | | | | 2,138 | |
| Net income | | | 4,915 | | | | 5,229 | | | | 2,870 | | | | 7,046 | | | | 8,986 | | | 7,963 | | | 7,409 | | | 4,915 | | | 5,229 | | | 2,870 | |
| Dividends and accretion on preferred stock | | | - | | | | - | | | | 445 | | | | 937 | | | | 1,039 | | | — | | | — | | | — | | | — | | | 445 | |
| Discount on partial redemption of preferred stock | | | - | | | | - | | | | (129 | ) | | | (159 | ) | | | - | | | | — | | | | — | | | | — | | | | — | | | | (129 | ) |
| Net income available to common stockholders | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | | | $ | 6,268 | | | | 7,947 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | |
| Per Share Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income per common share - basic | | $ | 0.60 | | | $ | 0.64 | | | $ | 0.31 | | | $ | 0.77 | | | | 1.13 | | | $ | 0.94 | | | $ | 0.89 | | | $ | 0.60 | | | $ | 0.64 | | | $ | 0.31 | |
| Income per common share - diluted | | $ | 0.57 | | | $ | 0.62 | | | $ | 0.30 | | | $ | 0.75 | | | | 0.98 | | | $ | 0.93 | | | $ | 0.88 | | | $ | 0.57 | | | $ | 0.62 | | | $ | 0.30 | |
| Weighted average shares outstanding - basic | | | 8,146 | | | | 8,114 | | | | 8,203 | | | | 8,141 | | | | 7,017 | | | 8,470 | | | 8,288 | | | 8,146 | | | 8,114 | | | 8,203 | |
| Weighted average shares outstanding - diluted | | | 8,589 | | | | 8,444 | | | | 8,491 | | | | 8,505 | | | | 8,390 | | | 8,579 | | | 8,451 | | | 8,589 | | | 8,444 | | | 8,491 | |
| Shares outstanding at period end | | | 8,193 | | | | 8,096 | | | | 8,206 | | | | 8,203 | | | | 7,867 | | | 8,472 | | | 8,533 | | | 8,193 | | | 8,096 | | | 8,206 | |
| Dividends declared per common share | | $ | 0.155 | | | $ | 0.135 | | | $ | 0.110 | | | | 0.040 | | | | - | | | $ | 0.215 | | | $ | 0.190 | | | $ | 0.155 | | | $ | 0.135 | | | $ | 0.110 | |
| Dividend payout ratio | | | 22.87 | % | | 21.35 | % | | 25.83 | % | | 21.09 | % | | 35.48 | % |
| Book value per common share | | $ | 8.55 | | | $ | 8.07 | | | $ | 7.55 | | | $ | 7.31 | | | $ | 6.60 | | | $ | 9.68 | | | $ | 8.92 | | | $ | 8.55 | | | $ | 8.07 | | | $ | 7.55 | |
| Selected Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loans | | | 726,189 | | | | 623,355 | | | | 536,546 | | | | 487,256 | | | | 462,005 | | | 766,846 | | | 759,552 | | | 726,189 | | | 623,355 | | | 536,546 | |
| Allowance for loan losses | | | 8,420 | | | | 7,464 | | | | 6,916 | | | | 7,887 | | | | 12,208 | | | 8,717 | | | 8,691 | | | 8,420 | | | 7,464 | | | 6,916 | |
| Total assets | | | 833,315 | | | | 710,572 | | | | 621,213 | | | | 557,318 | | | | 539,000 | | | 913,870 | | | 877,291 | | | 833,315 | | | 710,572 | | | 621,213 | |
| Total deposits | | | 699,684 | | | | 612,236 | | | | 544,338 | | | | 477,084 | | | | 436,135 | | | 750,934 | | | 716,006 | | | 699,684 | | | 612,236 | | | 544,338 | |
| Total liabilities | | | 763,245 | | | | 645,236 | | | | 559,269 | | | | 490,311 | | | | 471,444 | | | 831,892 | | | 801,140 | | | 763,245 | | | 645,236 | | | 559,269 | |
| Total stockholders' equity | | | 70,070 | | | | 65,336 | | | | 61,944 | | | | 67,007 | | | | 67,556 | | |
| Total stockholders’ equity | | | 81,978 | | | 76,151 | | | 70,070 | | | 65,336 | | | 61,944 | |
| Selected Financial and Liquidity Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin | | | 4.34 | % | | | 4.60 | % | | | 4.80 | % | | | 4.50 | % | | | 4.51 | % | | 4.06 | % | | 4.07 | % | | 4.34 | % | | 4.60 | % | | 4.80 | % |
| Return on average assets | | | 0.64 | % | | | 0.81 | % | | | 0.49 | % | | | 1.25 | % | | | 1.69 | % | | 0.91 | % | | 0.88 | % | | 0.64 | % | | 0.81 | % | | 0.49 | % |
| Return on average stockholders' equity | | | 7.16 | % | | | 8.19 | % | | | 4.34 | % | | | 10.42 | % | | | 15.15 | % | |
| Return on average stockholders’ equity | | | 10.15 | % | | 10.02 | % | | 7.16 | % | | 8.19 | % | | 4.34 | % |
| Equity to assets ratio | | | 8.96 | % | | | 9.91 | % | | | 11.23 | % | | | 12.02 | % | | | 11.16 | % | | 8.97 | % | | 8.68 | % | | 8.41 | % | | 9.19 | % | | 11.23 | % |
| Loan to deposit ratio | | | 104.99 | % | | | 103.04 | % | | | 99.84 | % | | | 103.79 | % | | | 108.73 | % | | 103.30 | % | | 106.08 | % | | 104.99 | % | | 103.04 | % | | 99.84 | % |
| Capital Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier 1 leverage ratio (1) | | | 8.72 | % | | | 9.64 | % | | | 10.11 | % | | | 11.86 | % | | | 12.68 | % | | 9.33 | % | | 8.96 | % | | 8.72 | % | | 9.64 | % | | 10.11 | % |
| Common Equity Tier 1 ratio (1) | | | 9.96 | % | | | 10.57 | % | | | 12.12 | % | | | - | | | | - | | | 10.60 | % | | 10.10 | % | | 9.96 | % | | 10.57 | % | | 12.12 | % |
| Tier 1 risk-based capital ratio (1) | | | 9.96 | % | | | 10.57 | % | | | 12.12 | % | | | 14.94 | % | | | 15.65 | % | | 10.60 | % | | 10.10 | % | | 9.96 | % | | 10.57 | % | | 12.12 | % |
| Total risk-based capital ratio (1) | | | 11.17 | % | | | 11.80 | % | | | 13.37 | % | | | 16.19 | % | | | 17.26 | % | | 11.73 | % | | 11.26 | % | | 11.17 | % | | 11.80 | % | | 13.37 | % |
| Selected Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs (recoveries) to average loans | | | -0.08 | % | | | -0.10 | % | | | -0.26 | % | | | -0.16 | % | | | 0.70 | % | | (0.02 | )% | | (0.03 | )% | | (0.08 | )% | | (0.10 | )% | | (0.26 | )% |
| Allowance for loan losses to total loans | | | 1.15 | % | | | 1.18 | % | | | 1.27 | % | | | 1.59 | % | | | 2.57 | % | | 1.12 | % | | 1.13 | % | | 1.15 | % | | 1.18 | % | | 1.27 | % |
| Allowance for loan losses to nonaccrual loans | | | 123.03 | % | | | 239.46 | % | | | 99.42 | % | | | 71.52 | % | | | 72.51 | % | | 325.38 | % | | 139.59 | % | | 123.03 | % | | 239.46 | % | | 99.42 | % |
| Nonaccrual loans to gross loans | | | 0.93 | % | | | 0.49 | % | | | 1.28 | % | | | 2.23 | % | | | 3.55 | % | | 0.35 | % | | 0.81 | % | | 0.93 | % | | 0.49 | % | | 1.28 | % |
| Nonaccrual loans and repossessed assets to total loans | | | 0.98 | % | | | 0.52 | % | | | 1.32 | % | | | 2.25 | % | | | 4.35 | % | | 0.67 | % | | 0.81 | % | | 0.98 | % | | 0.52 | % | | 1.32 | % |
| Loans past due 90 days or more and still accruing interest to total loans | | | - | | | | - | | | | - | | | | - | | | | 0.01 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % |
| (1) | Effective 2015, CWB was subject to Basel III regulatory capital guidelines. CWBC as a small bank holding company is not subject to the Basel III capital reporting requirements. The 2019, 2018, 2017, 2016 and 2015 ratios were the estimated consolidated capital ratios under Basel III. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with “Item 8–Financial Statements and Supplementary Data.” This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “ Forward-Looking Statements,” on page 4 of this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements.
Financial Overview and Highlights
Community West Bancshares is a financial services company headquartered in Goleta, California that provides full service banking and lending through its wholly-owned subsidiary Community West Bank (“CWB”), which has seveneight California branch banking offices located in Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, Paso Robles and Westlake Village, and one loan production office in Paso Robles.Village.
Financial Result Highlights of 20172019
Net income available to common stockholders ofwas $8.0 million, or $0.93 per diluted share for 2019, compared to $7.4 million, or $0.88 per diluted share for 2018 and $4.9 million or $0.57 per diluted share for 2017, compared to $5.2 million, or $0.62 per diluted share for 2016 and $2.6 million or $0.30 per diluted share for 2015.2017.
The significant factors impacting the Company during 20172019 were:
| · | Net income of $4.9 million for 2017 compared to a net income of $5.2 million for 2016. |
Net income was $8.0 million, or $0.93 per diluted share for the year ended 2019, compared to $7.4 million, or $0.88 per diluted share in 2018.
| · | Total loans increased 16.5% to $734.6 million at December 31, 2017 compared to $630.8 million at December 31, 2016. |
Net interest margin of 4.06% at December 31, 2019 compared to 4.07% for the year ended 2018.
| · | Total deposits increased 14.3% to $699.7 million at December 31, 2017 compared to $612.2 million at December 31, 2016. |
Total deposits were $750.9 million at December 31, 2019 and increased by 4.9% compared to $716.0 million at December 31, 2018.
| · | Non-interest-bearing deposits increased 8.1% to $108.5 million at December 31, 2017, compared to $100.4 million at December 31, 2016. |
Total demand deposits represented 56.6% of total deposits at December 31, 2019 compared to 52.9% at December 31, 2018.
| · | The provision (credit) for loan losses was $0.4 million for 2017 compared to ($48,000) for 2016. Net loan loss recoveries were ($0.5 million) for 2017 compared to ($0.6 million) in 2016. |
Book value per common share increased to $9.68 at December 31, 2019, compared to $8.92 at December 31, 2018.
| · | Net nonaccrual loans increased to $4.5 million at December 31, 2017, compared to $2.4 million at December 31, 2016. |
Provision (credit) for loan losses was ($165,000) for the year, compared to a provision for loan losses of $14,000 for 2018.
| · | Allowance for loan losses was $8.4 million at December 31, 2017, or 1.24% of total loans held for investment compared to $7.5 million, or 1.31% at December 31, 2016. |
Net recoveries were $0.2 million for the year ended 2019 compared to $0.3 million for 2018.
| · | Net interest margin for the year ended December 31, 2017 decreased to 4.34% compared to 4.60% for the year ended December 31, 2016. |
Total risk based capital improved to 11.73% at December 31, 2019 from 11.26% at December 31, 2018.
| · | Full service branch office location opened in Oxnard, California. |
Net nonaccrual loans improved to $2.4 million at December 31, 2019 compared to $3.4 million at December 31, 2018.
| · | Net DTA revaluation to write down $1.3 million due to the Tax Cuts and Job Act law change enacted in December 2017. |
Other assets acquired through foreclosure, net was $2.5 million at December 31, 2019, compared to zero at December 31, 2018.
The impact to the Company from these factors,items, and others of both a positive and negative nature, arewill be discussed in more detail below as they pertain to the Company’s overall comparative performance for the year ended December 31, 2017.2019 throughout the analysis sections of this Form 10-K.
A summary of our results of operations and financial condition and select metrics is included in the following table:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
| | | | | | | | | | | | | | | | | | | |
| Net income available to common stockholders | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Basic earnings per share | | | 0.60 | | | | 0.64 | | | | 0.31 | | | 0.94 | | | 0.89 | | | 0.60 | |
| Diluted earnings per share | | | 0.57 | | | | 0.62 | | | | 0.30 | | | 0.93 | | | 0.88 | | | 0.57 | |
| Total assets | | | 833,315 | | | | 710,572 | | | | 621,213 | | | 913,870 | | | 877,291 | | | 833,315 | |
| Gross loans | | | 734,609 | | | | 630,819 | | | | 543,462 | | | 775,563 | | | 768,243 | | | 734,609 | |
| Total deposits | | | 699,684 | | | | 612,236 | | | | 544,338 | | | 750,934 | | | 716,006 | | | 699,684 | |
| Net interest margin | | | 4.34 | % | | | 4.60 | % | | | 4.80 | % | | 4.06 | % | | 4.07 | % | | 4.34 | % |
| Return on average assets | | | 0.64 | % | | | 0.81 | % | | | 0.49 | % | | 0.91 | % | | 0.88 | % | | 0.64 | % |
| Return on average stockholders' equity | | | 7.16 | % | | | 8.19 | % | | | 4.34 | % | |
| Return on average stockholders’ equity | | | 10.15 | % | | 10.02 | % | | 7.16 | % |
| Dividend payout ratio | | | 22.87 | % | | 21.35 | % | | 25.83 | % |
| Equity to assets ratio | | | 8.97 | % | | 8.68 | % | | 8.41 | % |
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and its results of operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes these asset quality metrics:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Non-accrual loans (net of guaranteed portion) | | $ | 4,472 | | | $ | 2,375 | | | $ | 5,013 | | | $ | 2,389 | | | $ | 3,378 | | | $ | 4,472 | |
| Non-accrual loans to gross loans | | | 0.61 | % | | | 0.38 | % | | | 0.92 | % | | 0.31 | % | | 0.44 | % | | 0.61 | % |
| Net charge-offs (recoveries) to average loans | | | -0.08 | % | | | -0.10 | % | | | -0.26 | % | | (0.02 | )% | | (0.03 | )% | | (0.08 | )% |
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits respectively.deposits. The ability to originate new loans and attract new deposits is fundamental to the Company’s asset growth. Total assets increased to $833.3$913.9 million at December 31, 20172019 from $710.6$877.3 million at December 31, 2016.2018. Total loans including net deferred fees and unearned income increased by $103.8$7.3 million, or 16.5%1.0%, to $734.6$775.6 million as of December 31, 20172019 compared to December 31, 2016. Total deposits increased by 14.3% to $699.7$768.2 million as of December 31, 2017 from $612.22018. Total deposits increased by 4.9% to $750.9 million as of December 31, 2016.2019 from $716.0 million as of December 31, 2018.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
| | | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | |
| | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | | | 2019 | | | 2018 | | | (Decrease) | | | 2018 | | | 2017 | | | (Decrease) | |
| | | 2017 | | | 2016 | | | (Decrease) | | | 2016 | | | 2015 | | | (Decrease) | | | (in thousands, except per share amounts) | |
| Consolidated Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 37,391 | | | $ | 32,216 | | | $ | 5,175 | | | $ | 32,216 | | | $ | 30,222 | | | $ | 1,994 | | | $ | 45,739 | | | $ | 42,631 | | | $ | 3,108 | | | $ | 42,631 | | | $ | 37,391 | | | $ | 5,240 | |
| Interest expense | | | 4,729 | | | | 3,127 | | | | 1,602 | | | | 3,127 | | | | 2,516 | | | | 611 | | | | 11,382 | | | | 8,988 | | | | 2,394 | | | | 8,988 | | | | 4,729 | | | | 4,259 | |
| Net interest income | | | 32,662 | | | | 29,089 | | | | 3,573 | | | | 29,089 | | | | 27,706 | | | | 1,383 | | | 34,357 | | | 33,643 | | | 714 | | | 33,643 | | | 32,662 | | | 981 | |
| Provision (credit) for losses | | | 411 | | | | (48 | ) | | | 459 | | | | (48 | ) | | | (2,274 | ) | | | 2,226 | | |
| Provision (credit) for loan losses | | | | (165 | ) | | | 14 | | | | (179 | ) | | | 14 | | | | 411 | | | | (397 | ) |
| Net interest income after provision for loan losses | | | 32,251 | | | | 29,137 | | | | 3,114 | | | | 29,137 | | | | 29,980 | | | | (843 | ) | | 34,522 | | | 33,629 | | | 893 | | | 33,629 | | | 32,251 | | | 1,378 | |
| Non-interest income | | | 2,950 | | | | 2,253 | | | | 697 | | | | 2,253 | | | | 2,309 | | | | (56 | ) | | 3,607 | | | 2,628 | | | 979 | | | 2,628 | | | 2,757 | | | (129 | ) |
| Non-interest expenses | | | 24,738 | | | | 22,548 | | | | 2,190 | | | | 22,548 | | | | 27,281 | | | | (4,733 | ) | | | 26,755 | | | | 26,039 | | | | 716 | | | | 26,039 | | | | 24,545 | | | | 1,494 | |
| Income before provision for income taxes | | | 10,463 | | | | 8,842 | | | | 1,621 | | | | 8,842 | | | | 5,008 | | | | 3,834 | | | 11,374 | | | 10,218 | | | 1,156 | | | 10,218 | | | 10,463 | | | (245 | ) |
| Provision for income taxes | | | 5,548 | | | | 3,613 | | | | 1,935 | | | | 3,613 | | | | 2,138 | | | | 1,475 | | | | 3,411 | | | | 2,809 | | | | 602 | | | | 2,809 | | | | 5,548 | | | | (2,739 | ) |
| Net income | | $ | 4,915 | | | $ | 5,229 | | | $ | (314 | ) | | $ | 5,229 | | | $ | 2,870 | | | $ | 2,359 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 554 | | | $ | 7,409 | | | $ | 4,915 | | | $ | 2,494 | |
| Dividends and accretion on preferred stock | | | - | | | | - | | | | - | | | | - | | | | 445 | | | | (445 | ) | |
| Discount on partial redemption of preferred stock | | | - | | | | - | | | | - | | | | - | | | | (129 | ) | | | 129 | | |
| Net income available to common stockholders | | $ | 4,915 | | | $ | 5,229 | | | $ | (314 | ) | | $ | 5,229 | | | $ | 2,554 | | | $ | 2,675 | | |
| Earnings per share - basic | | $ | 0.60 | | | $ | 0.64 | | | $ | (0.04 | ) | | $ | 0.64 | | | $ | 0.31 | | | $ | 0.33 | | | $ | 0.94 | | | $ | 0.89 | | | $ | 0.05 | | | $ | 0.89 | | | $ | 0.60 | | | $ | 0.29 | |
| Earnings per share - diluted | | $ | 0.57 | | | $ | 0.62 | | | $ | (0.05 | ) | | $ | 0.62 | | | $ | 0.30 | | | $ | 0.32 | | | $ | 0.93 | | | $ | 0.88 | | | $ | 0.05 | | | $ | 0.88 | | | $ | 0.57 | | | $ | 0.30 | |
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:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | |
| Interest-Earning Assets | | (in thousands) | | | (in thousands) | |
| Federal funds sold and interest-earning deposits | | $ | 22,378 | | | $ | 204 | | | | 0.91 | % | | $ | 25,103 | | | $ | 121 | | | | 0.48 | % | | $ | 33,587 | | | $ | 648 | | | 1.93 | % | | $ | 36,275 | | | $ | 641 | | | 1.77 | % |
| Investment securities | | | 40,084 | | | | 995 | | | | 2.48 | % | | | 34,867 | | | | 998 | | | | 2.86 | % | | 34,341 | | | 1,201 | | | 3.50 | % | | 38,242 | | | 1,125 | | | 2.94 | % |
Loans (1) | | | 690,658 | | | | 36,192 | | | | 5.24 | % | | | 573,084 | | | | 31,097 | | | | 5.43 | % | | | 778,745 | | | | 43,890 | | | | 5.64 | % | | | 751,775 | | | | 40,865 | | | | 5.44 | % |
| Total earnings assets | | | 753,120 | | | | 37,391 | | | | 4.96 | % | | | 633,054 | | | | 32,216 | | | | 5.09 | % | | 846,673 | | | 45,739 | | | 5.40 | % | | 826,292 | | | 42,631 | | | 5.16 | % |
| Nonearning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 2,550 | | | | | | | | | | | | 2,660 | | | | | | | | | | | 2,431 | | | | | | | | | 3,201 | | | | | | | |
| Allowance for loan losses | | | (7,997 | ) | | | | | | | | | | | (7,095 | ) | | | | | | | | | | (8,787 | ) | | | | | | | | (8,535 | ) | | | | | | |
| Other assets | | | 19,161 | | | | | | | | | | | | 15,930 | | | | | | | | | | | | 32,192 | | | | | | | | | | 21,510 | | | | | | | |
| Total assets | | $ | 766,834 | | | | | | | | | | | $ | 644,549 | | | | | | | | | | | $ | 872,509 | | | | | | | | | $ | 842,468 | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | | 260,868 | | | | 1,105 | | | | 0.42 | % | | | 251,644 | | | | 934 | | | | 0.37 | % | | 289,798 | | | 3,531 | | | 1.22 | % | | 265,974 | | | 2,100 | | | 0.79 | % |
| Savings deposits | | | 14,197 | | | | 113 | | | | 0.80 | % | | | 14,138 | | | | 109 | | | | 0.77 | % | | 15,650 | | | 125 | | | 0.80 | % | | 14,458 | | | 124 | | | 0.86 | % |
| Time deposits | | | 282,224 | | | | 3,065 | | | | 1.09 | % | | | 219,653 | | | | 1,808 | | | | 0.82 | % | | | 303,687 | | | | 6,399 | | | | 2.11 | % | | | 322,972 | | | | 5,478 | | | | 1.70 | % |
| Total interest-bearing deposits | | | 557,289 | | | | 4,283 | | | | 0.77 | % | | | 485,435 | | | | 2,851 | | | | 0.59 | % | | 609,135 | | | 10,055 | | | 1.65 | % | | 603,404 | | | 7,702 | | | 1.28 | % |
| Other borrowings | | | 28,114 | | | | 446 | | | | 1.59 | % | | | 10,699 | | | | 276 | | | | 2.58 | % | | | 51,045 | | | | 1,327 | | | | 2.60 | % | | | 46,014 | | | | 1,286 | | | | 2.79 | % |
| Total interest-bearing liabilities | | | 585,403 | | | | 4,729 | | | | 0.81 | % | | | 496,134 | | | | 3,127 | | | | 0.63 | % | | 660,180 | | | 11,382 | | | 1.72 | % | | 649,418 | | | 8,988 | | | 1.38 | % |
| Noninterest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | | 107,589 | | | | | | | | | | | | 80,611 | | | | | | | | | | | 116,887 | | | | | | | | | 111,246 | | | | | | | |
| Other liabilities | | | 5,158 | | | | | | | | | | | | 3,947 | | | | | | | | | | | 17,005 | | | | | | | | | 7,898 | | | | | | | |
| Stockholders' equity | | | 68,684 | | | | | | | | | | | | 63,857 | | | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 766,834 | | | | | | | | | | | $ | 644,549 | | | | | | | | | | |
| Stockholders’ equity | | | | 78,437 | | | | | | | | | | 73,906 | | | | | | | |
| Total Liabilities and Stockholders’ Equity | | | $ | 872,509 | | | | | | | | | $ | 842,468 | | | | | | | |
Net interest income and margin (2) | | | | | | $ | 32,662 | | | | 4.34 | % | | | | | | $ | 29,089 | | | | 4.60 | % | | | | | $ | 34,357 | | | 4.06 | % | | | | | $ | 33,643 | | | 4.07 | % |
Net interest spread (3) | | | | | | | | | | | 4.15 | % | | | | | | | | | | | 4.46 | % | | | | | | | | 3.68 | % | | | | | | | | 3.78 | % |
| (1) | Includes nonaccrual loans. |
| (2) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (3) | Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. |
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2016 | | | 2015 | | | 2018 | | | 2017 | |
| | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | |
| Interest-Earning Assets | | (in thousands) | | | (in thousands) | |
| Federal funds sold and interest-earning deposits | | $ | 25,103 | | | $ | 121 | | | | 0.48 | % | | $ | 29,612 | | | $ | 93 | | | | 0.31 | % | | $ | 36,275 | | | $ | 641 | | | 1.77 | % | | $ | 22,378 | | | $ | 204 | | | 0.91 | % |
| Investment securities | | | 34,867 | | | | 998 | | | | 2.86 | % | | | 34,317 | | | | 990 | | | | 2.88 | % | | 38,242 | | | 1,125 | | | 2.94 | % | | 40,084 | | | 995 | | | 2.48 | % |
Loans (1) | | | 573,084 | | | | 31,097 | | | | 5.43 | % | | | 513,826 | | | | 29,139 | | | | 5.67 | % | | | 751,775 | | | | 40,865 | | | | 5.44 | % | | | 690,658 | | | | 36,192 | | | | 5.24 | % |
| Total earnings assets | | | 633,054 | | | | 32,216 | | | | 5.09 | % | | | 577,755 | | | | 30,222 | | | | 5.23 | % | | 826,292 | | | 42,631 | | | 5.16 | % | | 753,120 | | | 37,391 | | | 4.96 | % |
| Nonearning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 2,660 | | | | | | | | | | | | 1,763 | | | | | | | | | | | 3,201 | | | | | | | | | 2,550 | | | | | | | |
| Allowance for loan losses | | | (7,095 | ) | | | | | | | | | | | (7,459 | ) | | | | | | | | | | (8,535 | ) | | | | | | | | (7,997 | ) | | | | | | |
| Other assets | | | 15,930 | | | | | | | | | | | | 16,310 | | | | | | | | | | | | 21,510 | | | | | | | | | | 19,161 | | | | | | | |
| Total assets | | $ | 644,549 | | | | | | | | | | | $ | 588,369 | | | | | | | | | | | $ | 842,468 | | | | | | | | | $ | 766,834 | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | | 251,644 | | | | 934 | | | | 0.37 | % | | | 257,785 | | | | 902 | | | | 0.35 | % | | 265,974 | | | 2,100 | | | 0.79 | % | | 260,868 | | | 1,105 | | | 0.42 | % |
| Savings deposits | | | 14,138 | | | | 109 | | | | 0.77 | % | | | 14,479 | | | | 123 | | | | 0.85 | % | | 14,458 | | | 124 | | | 0.86 | % | | 14,197 | | | 113 | | | 0.80 | % |
| Time deposits | | | 219,653 | | | | 1,808 | | | | 0.82 | % | | | 165,894 | | | | 1,358 | | | | 0.82 | % | | | 322,972 | | | | 5,478 | | | | 1.70 | % | | | 282,224 | | | | 3,065 | | | | 1.09 | % |
| Total interest-bearing deposits | | | 485,435 | | | | 2,851 | | | | 0.59 | % | | | 438,158 | | | | 2,383 | | | | 0.54 | % | | 603,404 | | | 7,702 | | | 1.28 | % | | 557,289 | | | 4,283 | | | 0.77 | % |
| Other borrowings | | | 10,699 | | | | 276 | | | | 2.58 | % | | | 9,415 | | | | 133 | | | | 1.41 | % | | | 46,014 | | | | 1,286 | | | | 2.79 | % | | | 28,114 | | | | 446 | | | | 1.59 | % |
| Total interest-bearing liabilities | | | 496,134 | | | | 3,127 | | | | 0.63 | % | | | 447,573 | | | | 2,516 | | | | 0.56 | % | | 649,418 | | | 8,988 | | | 1.38 | % | | 585,403 | | | 4,729 | | | 0.81 | % |
| Noninterest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | | 80,611 | | | | | | | | | | | | 70,864 | | | | | | | | | | | 111,246 | | | | | | | | | 107,589 | | | | | | | |
| Other liabilities | | | 3,947 | | | | | | | | | | | | 3,856 | | | | | | | | | | | 7,898 | | | | | | | | | 5,158 | | | | | | | |
| Stockholders' equity | | | 63,857 | | | | | | | | | | | | 66,076 | | | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 644,549 | | | | | | | | | | | $ | 588,369 | | | | | | | | | | |
| Stockholders’ equity | | | | 73,906 | | | | | | | | | | 68,684 | | | | | | | |
| Total Liabilities and Stockholders’ Equity | | | $ | 842,468 | | | | | | | | | $ | 766,834 | | | | | | | |
Net interest income and margin (2) | | | | | | $ | 29,089 | | | | 4.60 | % | | | | | | $ | 27,706 | | | | 4.80 | % | | | | | $ | 33,643 | | | 4.07 | % | | | | | $ | 32,662 | | | 4.34 | % |
Net interest spread (3) | | | | | | | | | | | 4.46 | % | | | | | | | | | | | 4.67 | % | | | | | | | | 3.78 | % | | | | | | | | 4.15 | % |
| (1) | Includes nonaccrual loans. |
| (2) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (3) | Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. |
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
| | | Year Ended December 31, 2017 Versus 2016 | | | Year Ended December 31, 2016 Versus 2015 | | | Year Ended December 31, 2019 versus 2018 | | | Year Ended December 31, 2018 versus 2017 | |
| | Increase (Decrease) Due to Changes in (1) | | | Increase (Decrease) Due to Changes in (1) | | | Increase (Decrease) Due to Changes in (1) | | | Increase (Decrease) Due to Changes in (1) | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
| | | (in thousands) | | | (in thousands) | | | (in thousands) | | | (in thousands) | |
| Interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment securities | | $ | 129 | | | $ | (132 | ) | | $ | (3 | ) | | $ | 15 | | | $ | (7 | ) | | $ | 8 | | | $ | (137 | ) | | $ | 214 | | | $ | 77 | | | $ | (54 | ) | | $ | 184 | | | $ | 130 | |
| Federal funds sold and other | | | (25 | ) | | | 108 | | | | 83 | | | | (22 | ) | | | 50 | | | | 28 | | | (52 | ) | | 58 | | | 6 | | | 245 | | | 192 | | | 437 | |
| Loans, net | | | 6,184 | | | | (1,089 | ) | | | 5,095 | | | | 3,191 | | | | (1,233 | ) | | | 1,958 | | | | 1,521 | | | | 1,504 | | | | 3,025 | | | | 3,292 | | | | 1,381 | | | | 4,673 | |
| Total interest income | | | 6,288 | | | | (1,113 | ) | | | 5,175 | | | | 3,184 | | | | (1,190 | ) | | | 1,994 | | | 1,332 | | | 1,776 | | | 3,108 | | | 3,483 | | | 1,757 | | | 5,240 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest checking | | | 39 | | | | 132 | | | | 171 | | | | (23 | ) | | | 55 | | | | 32 | | | 291 | | | 1,140 | | | 1,431 | | | 40 | | | 955 | | | 995 | |
| Savings | | | - | | | | 4 | | | | 4 | | | | (3 | ) | | | (11 | ) | | | (14 | ) | | 10 | | | (9 | ) | | 1 | | | 2 | | | 9 | | | 11 | |
| Time deposits | | | 682 | | | | 575 | | | | 1,257 | | | | 441 | | | | 9 | | | | 450 | | | (407 | ) | | 1,328 | | | 921 | | | 693 | | | 1,720 | | | 2,413 | |
| Other borrowings | | | 277 | | | | (107 | ) | | | 170 | | | | 33 | | | | 110 | | | | 143 | | | | 131 | | | | (90 | ) | | | 41 | | | | 499 | | | | 341 | | | | 840 | |
| Total interest expense | | | 998 | | | | 604 | | | | 1,602 | | | | 448 | | | | 163 | | | | 611 | | | | 25 | | | | 2,369 | | | | 2,394 | | | | 1,234 | | | | 3,025 | | | | 4,259 | |
| Net increase | | $ | 5,290 | | | $ | (1,717 | ) | | $ | 3,573 | | | $ | 2,736 | | | $ | (1,353 | ) | | $ | 1,383 | | | $ | 1,307 | | | $ | (593 | ) | | $ | 714 | | | $ | 2,249 | | | $ | (1,268 | ) | | $ | 981 | |
| (1) | Changes due to both volume and rate have been allocated to volume changes. |
Comparison of interest income, interest expense and net interest margin
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term. The Company’s primary sourcecollateral for these loans typically are by Uniform Commercial Code (“UCC-1”) lien filings, real estate and personal guarantees. The Company does not extend material loans of revenue is interest income. Interest income for the year ended December 31, 2017 was $37.4 million, an increase from $32.2 million and $30.2 million, respectively, for the years ended December 31, 2016 and 2015. The interest income was positively impacted by increased average earning assets, primarily loans,this type in 2017. Average loans for the year increased 20.5% over 2016 and 34.4% over 2015. Average earning asset yields declined for 2017 as competition for new quality loans continued to further compress the interest rates and the margin. In 2016 the margin benefited by 8 basis points from the payoffexcess of one large nonaccrual loan relationship.five years.
Interest expense for the year ended December 31, 20172019 increased by $1.6 million compared to 20162018 by $2.4 million and increased by $2.2 million compared to 2015,2017 by $6.7 million, respectively, to $4.7$11.4 million. The increase for 20172019 compared to 20162018 was mostly the result of the increased volumeincrease of deposits and increased rates. Averagerates paid on interest-bearing demand deposits increased 3.7% in 2017 compared to 2016.and time deposits. The average cost on interest-bearing deposits also increased to 42165 basis points in 20172019 compared to 37128 basis points in 2016.2018. Total cost of funds increased by 28 basis points for 2019 compared to 2018 and by 78 basis points compared to 2017.
The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was to decrease the margin for 20172019 compared to 2016.2018. The net interest margin was 4.34%4.06% for 20172019 compared to 4.60%4.07% for 20162018 and 4.80%4.34% in 2015.2017.
Net interest income increased by $3.6$0.7 million for 20172019 compared to 20162018 and $5.0$1.7 million, compared to 2015.2017.
Total interest income increased by $3.6$5.2 million to $32.2$42.6 million in 20162018 compared to 2015.2017. The interest income was negatively impacted by decreasedincreased yields on earning assets in 20162018 which decreasedincreased to 5.09%5.16% compared to 5.23%4.96% for 2015.2017. The average yield on loans decreasedincreased to 5.43%5.44% for 20162018 compared to 5.67%5.24% for 2015 as the Company benefited from 22 basis points from the payoff of two large nonaccrual loan relationships in 2015.2017. Total interest expense increased by $0.6$4.3 million in 20162018 compared to 2015.2017. This increase was primarily due to increased total cost of funds which include non-interest bearing deposits from 4968 basis points for 20152017 to 54118 basis points for 2016.2018. Net interest income increased by $1.4$1.0 million for 20162018 compared to 2015.2017.
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 $0.4 million$(165,000) in 20172019 compared to ($48,000)$14,000 in 20162018 and ($2.3) million$411,000 in 2015.2017. The provision (credit) for loan losses for 20172019 resulted primarily from net recoveries and change in the loan portfolio mix. The provision for 2018 resulted primarily from loan growth and change in loan portfolio mix. The credit to provision for 2016 resulted from $0.6 million net recoveries, reduced historical loss factors partially offset by loan growth. As a result of improvements in credit quality, decreased historical loss rates, and net recoveries for the year, the ratio of the allowance for loan losses to loans held for investment decreased to 1.24%1.19% at December 31, 20172019 from 1.31%1.21% at December 31, 2016.2018. Additional information regarding improved credit quality can be found beginning on page 27.26.
The following table summarizes the provision (credit), charge-offs (recoveries) by loan category for the year ended December 31, 2017, 20162019, 2018 and 2015:2017:
| | | For the Year Ended December 31, | | | For the Year Ended December 31, | |
| | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total | |
| 2019 | | | (in thousands) | |
| Beginning balance | | | $ | 2,196 | | | $ | 5,028 | | | $ | 1,210 | | | $ | 79 | | | $ | 90 | | | $ | 88 | | | $ | — | | | $ | 8,691 | |
| Charge-offs | | | — | | | — | | | (31 | ) | | — | | | — | | | — | | | — | | | (31 | ) |
| Recoveries | | | | 54 | | | | 52 | | | | 60 | | | | 50 | | | | 5 | | | | 1 | | | | — | | | | 222 | |
| Net (charge-offs) recoveries | | | 54 | | | 52 | | | 29 | | | 50 | | | 5 | | | 1 | | | — | | | 191 | |
| Provision (credit) | | | | (66 | ) | | | 137 | | | | (77 | ) | | | (97 | ) | | | (68 | ) | | | 3 | | | | 3 | | | | (165 | ) |
| Ending balance | | | $ | 2,184 | | | $ | 5,217 | | | $ | 1,162 | | | $ | 32 | | | $ | 27 | | | $ | 92 | | | $ | 3 | | | $ | 8,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | | | |
| Beginning balance | | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | — | | | $ | 8,420 | |
| Charge-offs | | | (6 | ) | | — | | | (127 | ) | | — | | | — | | | — | | | — | | | (133 | ) |
| Recoveries | | | | 120 | | | | 15 | | | | 66 | | | | 133 | | | | 55 | | | | 1 | | | | — | | | | 390 | |
| Net (charge-offs) recoveries | | | 114 | | | 15 | | | (61 | ) | | 133 | | | 55 | | | 1 | | | — | | | 257 | |
| Provision (credit) | | | | (98 | ) | | | 169 | | | | 138 | | | | (127 | ) | | | (57 | ) | | | (11 | ) | | | — | | | | 14 | |
| Ending balance | | | $ | 2,196 | | | $ | 5,028 | | | $ | 1,210 | | | $ | 79 | | | $ | 90 | | | $ | 88 | | | $ | — | | | $ | 8,691 | |
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | - | | | $ | 7,464 | | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | — | | | $ | 7,464 | |
| Charge-offs | | | (119 | ) | | | - | | | | - | | | | (30 | ) | | | - | | | | (54 | ) | | | - | | | | (203 | ) | | (119 | ) | | — | | | — | | | (30 | ) | | — | | | (54 | ) | | — | | | (203 | ) |
| Recoveries | | | 142 | | | | 249 | | | | 161 | | | | 177 | | | | 18 | | | | 1 | | | | - | | | | 748 | | | | 142 | | | | 249 | | | | 161 | | | | 177 | | | | 18 | | | | 1 | | | | — | | | | 748 | |
| Net (charge-offs) recoveries | | | 23 | | | | 249 | | | | 161 | | | | 147 | | | | 18 | | | | (53 | ) | | | - | | | | 545 | | | 23 | | | 249 | | | 161 | | | 147 | | | 18 | | | (53 | ) | | — | | | 545 | |
| Provision (credit) | | | (44 | ) | | | 888 | | | | (269 | ) | | | (180 | ) | | | (26 | ) | | | 42 | | | | - | | | | 411 | | | | (44 | ) | | | 888 | | | | (269 | ) | | | (180 | ) | | | (26 | ) | | | 42 | | | | — | | | | 411 | |
| Ending balance | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | - | | | $ | 8,420 | | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | — | | | $ | 8,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2016 | | | | |
| Beginning balance | | $ | 3,525 | | | $ | 1,853 | | | $ | 939 | | | $ | 451 | | | $ | 43 | | | $ | 103 | | | $ | 2 | | | $ | 6,916 | | |
| Charge-offs | | | (123 | ) | | | - | | | | - | | | | (121 | ) | | | - | | | | - | | | | (1 | ) | | | (245 | ) | |
| Recoveries | | | 128 | | | | 132 | | | | 136 | | | | 266 | | | | 86 | | | | 93 | | | | - | | | | 841 | | |
| Net (charge-offs) recoveries | | | 5 | | | | 132 | | | | 136 | | | | 145 | | | | 86 | | | | 93 | | | | (1 | ) | | | 596 | | |
| Provision (credit) | | | (1,329 | ) | | | 1,722 | | | | 166 | | | | (490 | ) | | | (29 | ) | | | (87 | ) | | | (1 | ) | | | (48 | ) | |
| Ending balance | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | - | | | $ | 7,464 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | | | |
| Beginning balance | | $ | 4,032 | | | $ | 1,459 | | | $ | 986 | | | $ | 1,066 | | | $ | 140 | | | $ | 192 | | | $ | 2 | | | $ | 7,877 | | |
| Charge-offs | | | (297 | ) | | | - | | | | - | | | | - | | | | - | | | | (29 | ) | | | - | | | | (326 | ) | |
| Recoveries | | | 205 | | | | 545 | | | | 422 | | | | 454 | | | | 10 | | | | 3 | | | | - | | | | 1,639 | | |
| Net (charge-offs) recoveries | | | (92 | ) | | | 545 | | | | 422 | | | | 454 | | | | 10 | | | | (26 | ) | | | - | | | | 1,313 | | |
| Provision (credit) | | | (415 | ) | | | (151 | ) | | | (469 | ) | | | (1,069 | ) | | | (107 | ) | | | (63 | ) | | | - | | | | (2,274 | ) | |
| Ending balance | | $ | 3,525 | | | $ | 1,853 | | | $ | 939 | | | $ | 451 | | | $ | 43 | | | $ | 103 | | | $ | 2 | | | $ | 6,916 | | |
The percentage of net non-accrual loans (net of government guarantees) to the total loan portfolio increasedhas decreased to 0.61%0.31% as of December 31, 20172019 from 0.38%0.44% at December 31, 20162018 primarily due to the addition of one large commercial loan relationship.repayments.
The allowance for loan losses compared to net non-accrual loans decreasedhas increased to 188%365% as of December 31, 20172019 from 314%257% as of December 31, 2016.2018. Total past due loans remained at $0.2were $1.9 million as of December 31, 20172019 compared to $3.7 million as of December 31, 2016.2018.
Non-interest Income
The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers.
The following tables present a summary of non-interest income for the periods presented:
| | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | |
| | | 2017 | | | 2016 | | | (Decrease) | | | 2016 | | | 2015 | | | (Decrease) | | | 2019 | | | 2018 | | | (Decrease) | | | 2018 | | | 2017 | | | (Decrease) | |
| | | (in thousands) | | | (in thousands) | |
| Other loan fees | | $ | 1,300 | | | $ | 1,042 | | | $ | 258 | | | $ | 1,042 | | | $ | 1,014 | | | $ | 28 | | | $ | 1,383 | | | $ | 1,348 | | | $ | 35 | | | $ | 1,348 | | | $ | 1,300 | | | $ | 48 | |
| Document processing fees | | | 558 | | | | 496 | | | | 62 | | | | 496 | | | | 466 | | | | 30 | | | 423 | | | 489 | | | (66 | ) | | 489 | | | 558 | | | (69 | ) |
| Service charges | | | 458 | | | | 403 | | | | 55 | | | | 403 | | | | 372 | | | | 31 | | | 567 | | | 459 | | | 108 | | | 459 | | | 458 | | | 1 | |
| Gains from loan sales, net | | | 53 | | | | - | | | | 53 | | | | - | | | | 132 | | | | (132 | ) | | 765 | | | — | | | 765 | | | — | | | 53 | | | (53 | ) |
| Other | | | 581 | | | | 312 | | | | 269 | | | | 312 | | | | 325 | | | | (13 | ) | | | 469 | | | | 332 | | | | 137 | | | | 332 | | | | 388 | | | | (56 | ) |
| Total non-interest income | | $ | 2,950 | | | $ | 2,253 | | | $ | 697 | | | $ | 2,253 | | | $ | 2,309 | | | $ | (56 | ) | | $ | 3,607 | | | $ | 2,628 | | | $ | 979 | | | $ | 2,628 | | | $ | 2,757 | | | $ | (129 | ) |
Total non-interest income increased $0.7$1.0 million for 20172019 compared to 2016.2018. The increase was mostly from higher loan originationincreased service charges and document processing fees due to loan growth. Also contributing to thegains from loans sold. The increase was a $0.1 million increase in income from interest only strip fair market adjustments. These increases were partially offset by decreased loan servicinga decrease in document processing fees. Legacy sold loans continued to pay off in 2017 and have not been replaced with new loan sales.
Total non-interest income decreased by slightly$0.1 million for 20162018 compared to 2015.2017. The declinedecrease was mostly from the Company's exit from the wholesale mortgage loan origination and sale business line in 2015 which contributed $0.1 million in gains from loan sales. The Company did not sell any loans in 2016. Also contributingreduced document processing fees due to the decline was lower income fromcompetitive loan servicing, net of $0.1 million.growth market. These declinesdecreases were partially offset by increased service charges andother loan fees which are the result of loan and deposit growth in 2016.fees.
Non-Interest Expenses
The following table presentstables present a summary of non-interest expenses for the periods presented:
| | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | | | Year Ended December 31, | | | Increase | |
| | | 2017 | | | 2016 | | | (Decrease) | | | 2016 | | | 2015 | | | (Decrease) | | | 2019 | | | 2018 | | | (Decrease) | | | 2018 | | | 2017 | | | (Decrease) | |
| | | (in thousands) | | | (in thousands) | |
| Salaries and employee benefits | | $ | 15,339 | | | $ | 14,383 | | | $ | 956 | | | $ | 14,383 | | | $ | 12,904 | | | $ | 1,479 | | | $ | 17,094 | | | $ | 16,329 | | | $ | 765 | | | $ | 16,329 | | | $ | 15,339 | | | $ | 990 | |
| Occupancy expense, net | | | 2,862 | | | | 2,264 | | | | 598 | | | | 2,264 | | | | 1,943 | | | | 321 | | | 3,088 | | | 3,132 | | | (44 | ) | | 3,132 | | | 2,862 | | | 270 | |
| Professional services | | | 1,069 | | | | 873 | | | | 196 | | | | 873 | | | | 993 | | | | (120 | ) | | 1,679 | | | 1,356 | | | 323 | | | 1,356 | | | 1,069 | | | 287 | |
| Advertising and marketing | | | 750 | | | | 616 | | | | 134 | | | | 616 | | | | 466 | | | | 150 | | |
| Data processing | | | 725 | | | | 793 | | | | (68 | ) | | | 793 | | | | 533 | | | | 260 | | | 774 | | | 685 | | | 89 | | | 685 | | | 750 | | | (65 | ) |
| Depreciation | | | 685 | | | | 678 | | | | 7 | | | | 678 | | | | 399 | | | | 279 | | | 876 | | | 852 | | | 24 | | | 852 | | | 725 | | | 127 | |
| Advertising and marketing | | | 864 | | | 764 | | | 100 | | | 764 | | | 685 | | | 79 | |
| FDIC assessment | | | 664 | | | | 376 | | | | 288 | | | | 376 | | | | 342 | | | | 34 | | | 427 | | | 770 | | | (343 | ) | | 770 | | | 664 | | | 106 | |
| Stock compensation expense | | | 537 | | | | 338 | | | | 199 | | | | 338 | | | | 412 | | | | (74 | ) | |
| Loan servicing and collection | | | 253 | | | | 209 | | | | 44 | | | | 209 | | | | 395 | | | | (186 | ) | |
| Loan litigation settlement, net | | | - | | | | - | | | | - | | | | - | | | | 7,095 | | | | (7,095 | ) | |
| Stock based compensation expense | | | 382 | | | 478 | | | (96 | ) | | 478 | | | 537 | | | (59 | ) |
| Other | | | 1,854 | | | | 2,018 | | | | (164 | ) | | | 2,018 | | | | 1,799 | | | | 219 | | | | 1,571 | | | | 1,673 | | | | (102 | ) | | | 1,673 | | | | 1,914 | | | | (241 | ) |
| Total non-interest expenses | | $ | 24,738 | | | $ | 22,548 | | | $ | 2,190 | | | $ | 22,548 | | | $ | 27,281 | | | $ | (4,733 | ) | | $ | 26,755 | | | $ | 26,039 | | | $ | 716 | | | $ | 26,039 | | | $ | 24,545 | | | $ | 1,494 | |
Total non-interest expenses for the year ended December 31, 20172019 compared to 20162018 increased by $2.2$0.7 million primarily due to additional salaries and employee benefits, professional services, and advertising as a result of the Company’s expansions in the Northern and Southern regions, and addition of customer relationship and support positions. FDIC assessment decreased $0.3 million in 2019 compared to 2018 due to a small bank assessment credit in the third quarter of 2019.
Total non-interest expenses for the year ended December 31, 2018 compared to 2017 increased by $1.5 million primarily due to additional salaries and employee benefits, occupancy, and advertising as a result of the Company'sCompany’s expansions in the Northern and Southern regions, and addition of customer relationship and support positions. Additionally, during the secondfourth quarter 2017,2018, the Company addedopened a loan production officefull-service branch in Paso Robles. FDIC assessment increased $0.3$0.1 million in 20172018 compared to 20162017 due to a higher asset base for assessment and increased assessment factor. Professional services for 20172018 compared to 20162017 increased by $0.2$0.3 million mostly due to increased consulting costs for operational training and project implementation.
Total non-interest expenses for the year ended December 31, 2016 compared to 2015 decreased by $4.7 million primarily due to the loan litigation settlement, net of $7.1 million in 2015. Excluding the loan litigation settlement, net, total non-interest expenses for 2016 compared to 2015 increased by $2.3 million. The majority of this increase was $1.5 million in salaries and benefits as a result of opening a full-service branch in San Luis Obispo and adding other strategic positions throughout the organization. Total occupancy expenses and depreciation expense increased by $0.3 million, respectively, for 2016 compared to 2015 mostly due to the addition of the San Luis Obispo Branch location and the move of the Santa Maria Branch to a new more strategic location. Data processing expenses for 2016 compared to 2015 increased by $0.3 million as a result of a Company-wide initiative to upgrade information technology systems and enhance product lines to meet customer needs. Advertising and marketing expenses increased in 2016 compared to 2015 as a result of additional advertising for the branches and complete redesign of the Company’s website.
Income Taxes
The income tax provision for 20172019 was $5.5$3.4 million compared to $3.6$2.8 million in 20162018 and $2.1$5.5 million in 2015.2017. The effective income tax rate was 53.0%30.0%, 40.9%27.5%, and 42.7%53.0%, respectively for 2019, 2018 and 2017, 2016 and 2015.reflecting the federal corporate tax rate reduction implemented in 2018.
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 $3.2 million at December 31, 20172019 are reported in the consolidated balance sheet as a component of total assets.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 34% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the 21%. rate. The revaluation resulted in a cost of $1.3 million income tax expense and a corresponding reduction in the net deferred tax asset. The other provisions of the Tax Cuts and JobJobs Act did not have a material impact on the fiscal 2017 consolidated financial statements.
Accounting standardsStandards 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 December 31, 20172019 and 2016.2018.
The Company is subject to the provisions of ASC 740 Income Taxes (ASC 740). ASC 740also 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 December 31, 20172019 and 2016.2018.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 7 “Income Taxes” to the consolidated financial statements of this annual report on Form 10-K beginning on page 74.73.
BALANCE SHEET
Total assets increased $122.7$36.6 million to $833.3$913.9 million at December 31, 20172019 compared to $710.6$877.3 million at December 31, 2016.2018. The majority of the increase was $25.7 million in cash and interest bearing deposits in other financial institutions and increase of total loans of $103.8 million, or 16.5%, to $734.6$7.3 million. Total commercial real estate loans increased by 30.3%5.4% to $354.6$385.6 million at December 31, 20172019 compared to 2016,2018, and comprised 48.3%49.7% of the total loan portfolio. Manufactured housing loans increased by 14.9%4.1% to $223.1$257.2 million at December 31, 20172019 compared to 2016,2018, and represented 30.4%33.2% of the total loan portfolio. Total commercial loans including commercial agriculture loans increased 15.2%decreased 14.4% to $111.5$101.5 million at December 31, 20172019 compared to 2016,2018, and represented 15.2%13.1% of the total loan portfolio.
Total liabilities increased $118.0$30.8 million, or 18.3%3.8% to $763.2$831.9 million at December 31, 20172019 from $645.2$801.1 million at December 31, 2016.2018. The majority of this increase was due to deposit growth. Total deposits increased by $87.4$34.9 million, or 14.3%4.9% to $699.7$750.9 million at December 31, 20172019 from $612.2$716.0 million at December 31, 2016.2018. Non-interest bearing demand deposits increased by $8.1$2.7 million to $108.5$110.8 million at December 31, 20172019 from $100.4$108.2 million at December 31, 2016.2018. Certificates of deposit increaseddecreased by $75.5$12.6 million to $320.4$310.1 million at December 31, 20172019 compared to $244.8$322.8 million at December 31, 2016.2018. Interest-bearing demand deposits increased by $3.7$43.8 million to $256.7$314.3 million at December 31, 20172019 compared to 2016.$270.4 million at 2018. Savings deposits increased slightly to $14.1$15.7 million at December 31, 20172019 compared to $14.0$14.6 million at December 31, 2016.2018. Other borrowings increaseddecreased by $27.8$10.0 million to $56.8$65.0 million at December 31, 20172019 compared to 2016 due to increased FHLB advances which were $50.0$75.0 million at December 31, 2017 compared2018 due to $25.0 million at December 31, 2016.decreased FHLB advances.
Total stockholders’ equity increased to $70.1$82.0 million at December 31, 20172019 from $65.3$76.2 million at December 31, 2016.2018. This increase was primarily from 20172019 net income of $4.9$8.0 million reduced by quarterly common stock dividends of $1.3$1.8 million.
The following tables present the Company’s average balances as of the dates indicated:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| ASSETS: | | (dollars in thousands) | | | (dollars in thousands) | |
| Cash and due from banks | | $ | 2,550 | | | | 0.3 | % | | $ | 2,660 | | | | 0.4 | % | | $ | 1,763 | | | | 0.3 | % | | $ | 2,431 | | | 0.3 | % | | $ | 3,201 | | | 0.4 | % | | $ | 2,550 | | | 0.3 | % |
| Interest-earning deposits in other institutions | | | 22,364 | | | | 2.9 | % | | | 25,087 | | | | 3.9 | % | | | 29,590 | | | | 5.0 | % | | 33,582 | | | 3.8 | % | | 36,265 | | | 4.3 | % | | 22,364 | | | 2.9 | % |
| Federal funds sold | | | 14 | | | | 0.0 | % | | | 16 | | | | 0.0 | % | | | 22 | | | | 0.0 | % | | 5 | | | 0.0 | % | | 10 | | | 0.0 | % | | 14 | | | 0.0 | % |
| Investment securities available-for-sale | | | 28,082 | | | | 3.7 | % | | | 23,809 | | | | 3.7 | % | | | 23,516 | | | | 4.0 | % | | 23,426 | | | 2.7 | % | | 26,961 | | | 3.2 | % | | 28,082 | | | 3.7 | % |
| Investment securities held-to-maturity | | | 8,365 | | | | 1.1 | % | | | 7,672 | | | | 1.2 | % | | | 7,595 | | | | 1.3 | % | | 6,827 | | | 0.8 | % | | 7,304 | | | 0.9 | % | | 8,365 | | | 1.1 | % |
| FRB and FHLB stock | | | 3,637 | | | | 0.5 | % | | | 3,387 | | | | 0.5 | % | | | 3,206 | | | | 0.5 | % | | 4,087 | | | 0.5 | % | | 3,637 | | | 0.4 | % | | 3,637 | | | 0.5 | % |
| Loans - held for sale, net | | | 59,199 | | | | 7.7 | % | | | 61,792 | | | | 9.6 | % | | | 65,266 | | | | 11.1 | % | | 59,199 | | | 6.8 | % | | 59,199 | | | 7.0 | % | | 59,199 | | | 7.7 | % |
| Loans - held for investment, net | | | 631,459 | | | | 82.4 | % | | | 504,197 | | | | 78.2 | % | | | 441,101 | | | | 75.0 | % | | 719,546 | | | 82.5 | % | | 692,576 | | | 82.3 | % | | 631,459 | | | 82.4 | % |
| Servicing assets | | | 228 | | | | 0.0 | % | | | 289 | | | | 0.1 | % | | | 349 | | | | 0.1 | % | | 92 | | | 0.0 | % | | 136 | | | 0.0 | % | | 228 | | | 0.0 | % |
| Other assets acquired through foreclosure, net | | | 289 | | | | 0.0 | % | | | 123 | | | | 0.0 | % | | | 236 | | | | 0.0 | % | | 378 | | | 0.0 | % | | 170 | | | 0.0 | % | | 289 | | | 0.0 | % |
| Premises and equipment, net | | | 4,889 | | | | 0.6 | % | | | 3,122 | | | | 0.5 | % | | | 2,994 | | | | 0.5 | % | | 7,267 | | | 0.8 | % | | 6,006 | | | 0.7 | % | | 4,889 | | | 0.6 | % |
| Other assets | | | 5,758 | | | | 0.8 | % | | | 12,395 | | | | 1.9 | % | | | 12,731 | | | | 2.2 | % | | | 15,669 | | | | 1.8 | % | | | 7,003 | | | | 0.8 | % | | | 5,758 | | | | 0.8 | % |
| TOTAL ASSETS | | $ | 766,834 | | | | 100.0 | % | | $ | 644,549 | | | | 100.0 | % | | $ | 588,369 | | | | 100.0 | % | | $ | 872,509 | | | | 100.0 | % | | $ | 842,468 | | | | 100.0 | % | | $ | 766,834 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest bearing demand | | $ | 107,589 | | | | 14.0 | % | | $ | 80,611 | | | | 12.5 | % | | $ | 70,864 | | | | 12.0 | % | | $ | 116,887 | | | 13.4 | % | | $ | 111,246 | | | 13.2 | % | | $ | 107,589 | | | 14.0 | % |
| Interest-bearing demand | | | 260,868 | | | | 34.0 | % | | | 251,644 | | | | 39.0 | % | | | 257,785 | | | | 43.8 | % | | 289,798 | | | 33.2 | % | | 265,974 | | | 31.6 | % | | 260,868 | | | 34.0 | % |
| Savings | | | 14,197 | | | | 1.9 | % | | | 14,138 | | | | 2.2 | % | | | 14,479 | | | | 2.5 | % | | 15,650 | | | 1.8 | % | | 14,458 | | | 1.7 | % | | 14,197 | | | 1.9 | % |
| Time certificates of $100,000 or more | | | 200,729 | | | | 26.2 | % | | | 177,122 | | | | 27.5 | % | | | 153,388 | | | | 26.1 | % | | 144,711 | | | 16.6 | % | | 181,472 | | | 21.5 | % | | 200,729 | | | 26.2 | % |
| Other time certificates | | | 81,495 | | | | 10.6 | % | | | 42,531 | | | | 6.6 | % | | | 12,506 | | | | 2.1 | % | | | 158,976 | | | | 18.2 | % | | | 141,501 | | | | 16.8 | % | | | 81,495 | | | | 10.6 | % |
| Total deposits | | | 664,878 | | | | 86.7 | % | | | 566,046 | | | | 87.8 | % | | | 509,022 | | | | 86.5 | % | | 726,022 | | | 83.2 | % | | 714,651 | | | 84.8 | % | | 664,878 | | | 86.7 | % |
| Other borrowings | | | 28,114 | | | | 3.7 | % | | | 10,699 | | | | 1.7 | % | | | 9,415 | | | | 1.6 | % | | 51,045 | | | 5.9 | % | | 46,014 | | | 5.5 | % | | 28,114 | | | 3.7 | % |
| Other liabilities | | | 5,158 | | | | 0.7 | % | | | 3,947 | | | | 0.6 | % | | | 3,856 | | | | 0.7 | % | | | 17,005 | | | | 1.9 | % | | | 7,898 | | | | 0.9 | % | | | 5,158 | | | | 0.7 | % |
| Total liabilities | | | 698,150 | | | | 91.1 | % | | | 580,692 | | | | 90.1 | % | | | 522,293 | | | | 88.8 | % | | | 794,072 | | | | 91.0 | % | | | 768,563 | | | | 91.2 | % | | | 698,150 | | | | 91.1 | % |
| STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | |
| STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 4,936 | | | | 0.8 | % | | — | | | 0.0 | % | | — | | | 0.0 | % | | — | | | 0.0 | % |
| Common stock | | | 42,023 | | | | 5.5 | % | | | 41,716 | | | | 6.5 | % | | | 42,162 | | | | 7.2 | % | | 42,426 | | | 4.9 | % | | 42,996 | | | 5.1 | % | | 42,023 | | | 5.5 | % |
| Retained earnings | | | 26,637 | | | | 3.4 | % | | | 22,131 | | | | 3.4 | % | | | 19,006 | | | | 3.2 | % | | 36,113 | | | 4.1 | % | | 31,013 | | | 3.7 | % | | 26,637 | | | 3.4 | % |
| Accumulated other comprehensive (loss) income | | | 24 | | | | 0.0 | % | | | 10 | | | | 0.0 | % | | | (28 | ) | | | 0.0 | % | |
| Total stockholders' equity | | | 68,684 | | | | 8.9 | % | | | 63,857 | | | | 9.9 | % | | | 66,076 | | | | 11.2 | % | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 766,834 | | | | 100.0 | % | | $ | 644,549 | | | | 100.0 | % | | $ | 588,369 | | | | 100.0 | % | |
| Accumulated other comprehensive income (loss) | | | | (102 | ) | | | 0.0 | % | | | (104 | ) | | | 0.0 | % | | | 24 | | | | 0.0 | % |
| Total stockholders’ equity | | | | 78,437 | | | | 9.0 | % | | | 73,905 | | | | 8.8 | % | | | 68,684 | | | | 8.9 | % |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | $ | 872,509 | | | | 100.0 | % | | $ | 842,468 | | | | 100.0 | % | | $ | 766,834 | | | | 100.0 | % |
Loan Portfolio
Market Summary
Total loans increased by $103.8$7.3 million during 20172019 to $734.6$775.6 million. The majority of this increase was driven by $38.0$19.8 million of organic growth asin the Company expanded into the San Luis Obispo County market starting in 2016. Total commercial real estate loans increased by $82.5 million andportfolio. Total manufactured housing loans increased by $28.9 million. Total$10.1 million and total commercial loans including commercial agriculture loans increaseddecreased by $6.2$17.0 million. SBA and single family real estateloans declined by $2.7$1.1 million and $2.4 million, respectively as the Company no longer originates SBA 7(a) loans outside of California and did not focus on this product in 2017. The Company exited from the single2019. Single family real estate origination business in 2015 and the remaining portfolio balance will continue to decrease.loans increased by $0.6 million. With the recent risedecrease in interest rates andthe competition for quality loans has increased in our expansion into the San Luis Obispo, Oxnard, and Paso Robles markets we believe the Company is positioned for continued growth.markets.
The table below summarizes the distribution of the Company’s loans (including loans held for sale) at the year-end:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 223,115 | | | $ | 194,222 | | | $ | 177,891 | | | $ | 169,662 | | | $ | 172,055 | | | $ | 257,247 | | | $ | 247,114 | | | $ | 223,115 | | | $ | 194,222 | | | $ | 177,891 | |
| Commercial real estate | | | 354,617 | | | | 272,142 | | | | 179,491 | | | | 159,432 | | | | 142,678 | | | 385,642 | | | 365,809 | | | 354,617 | | | 272,142 | | | 179,491 | |
| Commercial | | | 111,459 | | | | 105,290 | | | | 107,510 | | | | 74,792 | | | | 62,420 | | | 101,485 | | | 118,518 | | | 111,459 | | | 105,290 | | | 107,510 | |
| SBA | | | 26,341 | | | | 36,659 | | | | 48,071 | | | | 62,201 | | | | 71,692 | | | 14,833 | | | �� | 19,148 | | | 26,341 | | | 36,659 | | | 48,071 | |
| HELOC | | | 9,422 | | | | 10,292 | | | | 10,934 | | | | 13,481 | | | | 15,418 | | | 4,531 | | | 6,756 | | | 9,422 | | | 10,292 | | | 10,934 | |
| Single family real estate | | | 10,346 | | | | 12,750 | | | | 19,073 | | | | 14,957 | | | | 10,150 | | | 11,845 | | | 11,261 | | | 10,346 | | | 12,750 | | | 19,073 | |
| Consumer | | | 83 | | | | 87 | | | | 123 | | | | 178 | | | | 184 | | | | 94 | | | | 46 | | | | 83 | | | | 87 | | | | 123 | |
| Mortgage loans held for sale | | | - | | | | - | | | | - | | | | 785 | | | | - | | |
| Total loans | | | 735,383 | | | | 631,442 | | | | 543,093 | | | | 495,488 | | | | 474,597 | | | 775,677 | | | 768,651 | | | 735,383 | | | 631,442 | | | 543,093 | |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | 8,420 | | | | 7,464 | | | | 6,916 | | �� | | 7,877 | | | | 12,208 | | | 8,717 | | | 8,691 | | | 8,420 | | | 7,464 | | | 6,916 | |
| Deferred costs, net | | | 652 | | | | 453 | | | | (560 | ) | | | 118 | | | | 45 | | |
| Deferred fees (costs), net | | | 58 | | | 337 | | | 652 | | | 453 | | | (560 | ) |
| Discount on SBA loans | | | 122 | | | | 170 | | | | 191 | | | | 237 | | | | 339 | | | | 56 | | | | 71 | | | | 122 | | | | 170 | | | | 191 | |
| Total loans, net | | $ | 726,189 | | | $ | 623,355 | | | $ | 536,546 | | | $ | 487,256 | | | $ | 462,005 | | | $ | 766,846 | | | $ | 759,552 | | | $ | 726,189 | | | $ | 623,355 | | | $ | 536,546 | |
| Percentage to Total Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | | 30.3 | % | | | 30.8 | % | | | 32.8 | % | | | 34.2 | % | | | 36.3 | % | | 33.2 | % | | 32.1 | % | | 30.3 | % | | 30.8 | % | | 32.8 | % |
| Commercial real estate | | | 48.2 | % | | | 43.1 | % | | | 33.0 | % | | | 32.2 | % | | | 30.1 | % | | 49.7 | % | | 47.6 | % | | 48.2 | % | | 43.1 | % | | 33.0 | % |
| Commercial | | | 15.2 | % | | | 16.7 | % | | | 19.8 | % | | | 15.1 | % | | | 13.2 | % | | 13.1 | % | | 15.4 | % | | 15.2 | % | | 16.7 | % | | 19.8 | % |
| SBA | | | 3.6 | % | | | 5.8 | % | | | 8.9 | % | | | 12.6 | % | | | 15.1 | % | | 1.9 | % | | 2.5 | % | | 3.6 | % | | 5.8 | % | | 8.9 | % |
| HELOC | | | 1.3 | % | | | 1.6 | % | | | 2.0 | % | | | 2.7 | % | | | 3.2 | % | | 0.6 | % | | 0.9 | % | | 1.3 | % | | 1.6 | % | | 2.0 | % |
| Single family real estate | | | 1.4 | % | | | 2.0 | % | | | 3.5 | % | | | 3.0 | % | | | 2.2 | % | | 1.5 | % | | 1.5 | % | | 1.4 | % | | 2.0 | % | | 3.5 | % |
| Consumer | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| Mortgage loans held for sale | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.2 | % | | | 0.0 | % | |
| | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | |
| Total | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Commercial Loans
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term. The collateral for these loans typically are secured by Uniform Commercial Code (“UCC-1”) lien filings, real estate and personal guarantees. The Company does not extend material loans of this type in excess of twofive years.
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing, commercial and industrial properties. This loan category also includes SBA 504 loans and land loans.
Commercial and industrial real estate loans are primarily secured by nonresidential property. Office buildings or other commercial property primarily secure these types of loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 70% of appraised value of the underlying real property.
The Company makes real estate construction loans on commercial properties and single family dwellings.dwellings for speculative purposes. These loans are collateralized by first and second trust deeds on real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 80%75%.
SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or acquire machinery and equipment. The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture. Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%. Conventional and investor loans are sometimes funded by our secondary-market partners and CWB receives a premium for these transactions.
SBA Loans
SBA loans consist of SBA 7(a) and Business and Industry loans (“B&I”). The SBA 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing. At present, the SBA guarantees as much as 85% on loans up to $150,000 and 75% on loans more than $150,000. The SBA’s maximum exposure amount is $3,750,000.$3,750,000. The Company may sell a portion of the loans, however, under the SBA 7(a) loan program; the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
B&I loans are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 60% to 80% for loansdepending on the size of $5 million or less.the loan. B&I loans are similar to the SBA 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.
Agricultural Loans for real estate and operating lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA B&I loan program. The FSA loans typically have a 90% guarantee up to $1,399,000$1,776,000 (amount adjusted annually based on inflation) for up to 40 years, but not always. The Company had $71.7$69.8 million of thesecommercial agriculture loans at December 31, 2017.2019, of these loans $31.6 million had FSA guarantees.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs. Under the Farmer Mac I program, loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac. CWB does some servicing such as collecting client information, processing payments and performing site visits. CWB receives an origination fee and an ongoing field servicing fee of 25 basis points to 115 basis points for maintaining the relationship with the borrower and performing certain loan compliance monitoring, and other duties as directed by the Central Servicer. CWB underwrites loans under the Farmer Mac 1 program which are funded by Farmer Mac and do not have a guarantee. Eligible loans include FSA and B&I loans.
Manufactured Housing Loans
CWB originates loans secured by manufactured homes located in approved rental, co-operative ownership, condominium and planned unit development mobile home parks in Santa Barbara, Ventura and San Luis Obispo Counties as well as along the California coast from San Diego to San Francisco. The loans are made to borrowers for purchasing or refinancing new or existing manufactured homes. The loans are made under either fixed rate programs for terms of 10 to 20 years or adjustable rate programs with terms of 25 to 30 years. The adjustable rate loans have an initial fixed rate period of five years and then adjust annually subject to interest rate caps.
HELOC
CWB holds a portfolioHome equity lines of credit (“HELOC”) held at the Bank are lines of credit collateralized by residential real estate, home equity lines of credit (“HELOC”).estate. Typically, HELOCs are collateralized by a second deed of trust. The combined loan-to-value, first trust deed and second trust deed, are not to exceed 75% on all HELOCs. The Bank is not actively originating new HELOCs.
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.
Single Family Real Estate Loans
Until the third quarter of 2015, the Company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-four family homes. These loans were made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction or home improvement.
Loan Maturities and Sensitivity to Interest Rates
The following table sets forth the amount of loans outstanding by type of loan as of December 31, 20172019 that were contractually due in one year or less, more than one year and less than five years, and more than five years based on remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less. The tables also present an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment, refinancing or other factors.
| | | Due in One Year or Less | | | Due After One Year to Five Years | | | Due After Five Years | | | Total | | | Due in One Year or Less | | | Due After One Year to Five Years | | | Due After Five Years | | | Total | |
| December 31, 2017 | | (in thousands) | | |
| | | | (in thousands) | |
| Manufactured housing | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | $ | 5,101 | | | $ | 22,270 | | | $ | 137,424 | | | $ | 164,795 | | | $ | 6,049 | | | $ | 27,613 | | | $ | 161,506 | | | $ | 195,168 | |
| Fixed rate | | | 6,513 | | | | 18,647 | | | | 33,160 | | | | 58,320 | | | 4,889 | | | 19,626 | | | 37,564 | | | 62,079 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 48,054 | | | | 38,753 | | | | 171,283 | | | | 258,090 | | | 49,515 | | | 47,487 | | | 211,586 | | | 308,588 | |
| Fixed rate | | | 24,478 | | | | 54,178 | | | | 17,872 | | | | 96,528 | | | 7,937 | | | 48,679 | | | 20,438 | | | 77,054 | |
| Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 16,123 | | | | 27,094 | | | | 54,908 | | | | 98,125 | | | 27,813 | | | 23,248 | | | 27,044 | | | 78,105 | |
| Fixed rate | | | 2,543 | | | | 8,358 | | | | 2,431 | | | | 13,332 | | | 9,315 | | | 13,586 | | | 479 | | | 23,380 | |
| SBA | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 2,957 | | | | 8,676 | | | | 14,708 | | | | 26,341 | | | 2,699 | | | 5,135 | | | 6,998 | | | 14,832 | |
| Fixed rate | | | - | | | | - | | | | - | | | | - | | | — | | | — | | | — | | | — | |
| HELOC | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | - | | | | 4,735 | | | | 4,687 | | | | 9,422 | | | (7 | ) | | 1,603 | | | 2,936 | | | 4,532 | |
| Fixed rate | | | - | | | | - | | | | - | | | | - | | | — | | | — | | | — | | | — | |
| Single family real estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 529 | | | | 1,417 | | | | 6,965 | | | | 8,911 | | | 344 | | | 1,682 | | | 7,931 | | | 9,957 | |
| Fixed rate | | | 132 | | | | 563 | | | | 741 | | | | 1,436 | | | 113 | | | 537 | | | 1,237 | | | 1,887 | |
| Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | - | | | | - | | | | - | | | | - | | | — | | | — | | | — | | | — | |
| Fixed rate | | | 42 | | | | 12 | | | | 29 | | | | 83 | | | | 41 | | | | 5 | | | | 49 | | | | 95 | |
| Total | | $ | 106,472 | | | $ | 184,703 | | | $ | 444,208 | | | $ | 735,383 | | | $ | 108,708 | | | $ | 189,201 | | | $ | 477,768 | | | $ | 775,677 | |
At December 31, 2017, 76.9% of2019, total loans hadconsisted of 78.8% with floating rates and 23.1% of total loans had21.2% with fixed rates. Manufactured housing loans, which are generally fixed rate for the first five years are included in floating rate loans during the fixed period.
The following table presents total gross loans based on remaining scheduled contractual repayments of principal as of the periods indicated:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | | | (in thousands) | |
| | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | |
| Less than one year | | $ | 33,708 | | | $ | 72,764 | | | $ | 15,861 | | | $ | 58,441 | | | $ | 15,564 | | | $ | 42,274 | | | $ | 14,791 | | | $ | 36,900 | | | $ | 14,625 | | | $ | 40,840 | | | $ | 22,295 | | | $ | 86,413 | | | $ | 48,650 | | | $ | 83,438 | | | $ | 33,708 | | | $ | 72,764 | | | $ | 15,861 | | | $ | 58,441 | | | $ | 15,564 | | | $ | 42,274 | |
| One to five years | | | 81,758 | | | | 102,945 | | | | 48,029 | | | | 95,187 | | | | 36,106 | | | | 95,485 | | | | 46,432 | | | | 92,232 | | | | 59,842 | | | | 78,197 | | | 82,433 | | | 106,768 | | | 62,628 | | | 109,520 | | | 81,758 | | | 102,945 | | | 48,029 | | | 95,187 | | | 36,106 | | | 95,485 | |
| Over five years | | | 54,233 | | | | 389,975 | | | | 44,041 | | | | 369,883 | | | | 28,047 | | | | 325,617 | | | | 33,525 | | | | 271,608 | | | | 30,675 | | | | 250,418 | | | | 59,767 | | | | 418,001 | | | | 56,598 | | | | 407,817 | | | | 54,233 | | | | 389,975 | | | | 44,041 | | | | 369,883 | | | | 28,047 | | | | 325,617 | |
| Total | | $ | 169,699 | | | $ | 565,684 | | | $ | 107,931 | | | $ | 523,511 | | | $ | 79,717 | | | $ | 463,376 | | | $ | 94,748 | | | $ | 400,740 | | | $ | 105,142 | | | $ | 369,455 | | | $ | 164,495 | | | $ | 611,182 | | | $ | 167,876 | | | $ | 600,775 | | | $ | 169,699 | | | $ | 565,684 | | | $ | 107,931 | | | $ | 523,511 | | | $ | 79,717 | | | $ | 463,376 | |
| Percentage of total | | | 23.1 | % | | | 76.9 | % | | | 17.1 | % | | | 82.9 | % | | | 14.7 | % | | | 85.3 | % | | | 19.1 | % | | | 80.9 | % | | | 22.2 | % | | | 77.8 | % | | 21.2 | % | | 78.8 | % | | 21.8 | % | | 78.2 | % | | 23.1 | % | | 76.9 | % | | 17.1 | % | | 82.9 | % | | 14.7 | % | | 85.3 | % |
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, commercial 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 December 31, 20172019 and 2016,2018, manufactured housing loans comprised 30.3%33.2% and 30.8%32.2%, of total loans, respectively. As of December 31, 20172019 and 2016,2018, commercial real estate loans accounted for approximately 48.2%49.7% and 43.1%47.6% of total loans, respectively. Approximately 33.9%31.9% and 32.3%33.8% of these commercial real estate loans were owner occupied at December 31, 20172019 and 2016,2018, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 55.0%54.3% and 54.6%57.9% at December 31, 20172019 and 2016,2018, respectively. The Company was within established policy limits at December 31, 20172019 and 2016.2018.
Interest Reserves
Interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and land development loan. The Company’s practice is to monitor the construction, sales and/or leasing progress to determine the feasibility of ongoing construction and development projects. If, at any time during the life of the loan, the project is determined not to be viable, the Company discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and/or legal action as deemed appropriate. At December 31, 2017,2019, the Company had 18 11 loans with an outstanding balance of $45.7$24.0 million with available interest reserves of $3.9$2.8 million. Total construction and land loans are approximately 8%5% and 5%10% of the Company’s loan portfolio andat December 31, 20172019 and 2016.2018, respectively.
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'sborrower’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 impaired 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 recorded investment in loans that are considered impaired is as follows:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | | | (in thousands) | |
| Impaired loans without specific valuation allowances | | $ | 12,352 | | | $ | 4,463 | | | $ | 7,591 | | | $ | 3,821 | | | $ | 4,980 | | | $ | 6,172 | | | $ | 9,744 | | | $ | 12,352 | | | $ | 4,463 | | | $ | 7,591 | |
| Impaired loans with specific valuation allowances | | | 8,275 | | | | 13,080 | | | | 11,940 | | | | 20,108 | | | | 15,140 | | | 6,656 | | | 14,159 | | | 8,275 | | | 13,080 | | | 11,940 | |
| Specific valuation allowance related to impaired loans | | | (524 | ) | | | (759 | ) | | | (573 | ) | | | (854 | ) | | | (1,439 | ) | | | (352 | ) | | | (465 | ) | | | (524 | ) | | | (759 | ) | | | (573 | ) |
| Impaired loans, net | | $ | 20,103 | | | $ | 16,784 | | | $ | 18,958 | | | $ | 23,075 | | | $ | 18,681 | | | $ | 12,476 | | | $ | 23,438 | | | $ | 20,103 | | | $ | 16,784 | | | $ | 18,958 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average investment in impaired loans | | $ | 16,484 | | | $ | 17,285 | | | $ | 16,302 | | | $ | 17,741 | | | $ | 24,435 | | | $ | 18,504 | | | $ | 20,731 | | | $ | 16,484 | | | $ | 17,285 | | | $ | 16,302 | |
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 | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | |
| Impaired Loans as of December 31, 2017: | | (in thousands) | | |
| Impaired Loans as of December 31, 2019: | | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 5,830 | | | $ | 557 | | | $ | 3,551 | | | $ | 281 | | | | - | | | $ | 2,133 | | | $ | - | | | $ | 12,352 | | | $ | 5,702 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 470 | | | $ | — | | | $ | 6,172 | |
| Impaired loans with no allowance recorded | | | 2,163 | | | | - | | | | 5,023 | | | | 699 | | | | 214 | | | | 176 | | | | - | | | | 8,275 | | | | 2,296 | | | | 318 | | | | 1,802 | | | | 382 | | | | — | | | | 1,858 | | | | — | | | | 6,656 | |
| Total loans individually evaluated for impairment | | | 7,993 | | | | 557 | | | | 8,574 | | | | 980 | | | | 214 | | | | 2,309 | | | | - | | | | 20,627 | | | 7,998 | | | 318 | | | 1,802 | | | 382 | | | — | | | 2,328 | | | — | | | 12,828 | |
| Related Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | | 427 | | | | 11 | | | | 50 | | | | 1 | | | | - | | | | 35 | | | | - | | | | 524 | | | 334 | | | — | | | — | | | — | | | — | | | 18 | | | — | | | 352 | |
| Impaired loans with no allowance recorded | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 427 | | | | 11 | | | | 50 | | | | 1 | | | | - | | | | 35 | | | | - | | | | 524 | | | | 334 | | | | — | | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | 352 | |
| Total impaired loans, net | | $ | 7,566 | | | $ | 546 | | | $ | 8,524 | | | $ | 979 | | | $ | 214 | | | $ | 2,274 | | | $ | - | | | $ | 20,103 | | | $ | 7,664 | | | $ | 318 | | | $ | 1,802 | | | $ | 382 | | | $ | — | | | $ | 2,310 | | | $ | — | | | $ | 12,476 | |
$2.60.6 million of the above impaired loans are government guaranteed.
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | |
| Impaired Loans as of December 31, 2016: | | (in thousands) | | |
| Impaired Loans as of December 31, 2018: | | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 6,065 | | | $ | 1,112 | | | $ | 3,749 | | | $ | 70 | | | $ | 45 | | | $ | 2,039 | | | $ | - | | | $ | 13,080 | | | $ | 8,726 | | | $ | 243 | | | $ | — | | | $ | — | | | $ | — | | | $ | 775 | | | $ | — | | | $ | 9,744 | |
| Impaired loans with no allowance recorded | | | 2,846 | | | | - | | | | 31 | | | | 1,067 | | | | 328 | | | | 191 | | | | - | | | | 4,463 | | | | 3,269 | | | | 102 | | | | 7,811 | | | | 815 | | | | 198 | | | | 1,964 | | | | — | | | | 14,159 | |
| Total loans individually evaluated for impairment | | | 8,911 | | | | 1,112 | | | | 3,780 | | | | 1,137 | | | | 373 | | | | 2,230 | | | | - | | | | 17,543 | | | 11,995 | | | 345 | | | 7,811 | | | 815 | | | 198 | | | 2,739 | | | — | | | 23,903 | |
| Related Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | | 548 | | | | 17 | | | | 165 | | | | - | | | | 1 | | | | 28 | | | | - | | | | 759 | | | 432 | | | 9 | | | — | | | — | | | — | | | 24 | | | — | | | 465 | |
| Impaired loans with no allowance recorded | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 548 | | | | 17 | | | | 165 | | | | - | | | | 1 | | | | 28 | | | | - | | | | 759 | | | | 432 | | | | 9 | | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | 465 | |
| Total impaired loans, net | | $ | 8,363 | | | $ | 1,095 | | | $ | 3,615 | | | $ | 1,137 | | | $ | 372 | | | $ | 2,202 | | | $ | - | | | $ | 16,784 | | | $ | 11,563 | | | $ | 336 | | | $ | 7,811 | | | $ | 815 | | | $ | 198 | | | $ | 2,715 | | | $ | — | | | $ | 23,438 | |
$1.03.1 million of the above impaired loans are government guaranteed.
Total impaired loans increaseddecreased by $3.1$11.1 million at December 31, 20172019 compared to December 31, 2016.2018. The manufactured housing impaired loans decreased by $0.9$4.0 million and commercial impaired loans decreased by $6.0 million in 2019 compared to 2018. Both the SBA and single family real estate impaired loans decreased by $0.6 million in 2017 compared to 2016. Both the SBA and HELOC impaired loans decreased by $0.2$0.5 million each in 20172019 compared to 2016. Offsetting these decreases was an increase of $4.8 million in commercial impaired loans.2018. Impaired manufactured housing loans decreased mainly due to pay-offsupgrades and pay-downs. Additionally, $0.2 million in manufactured housing loans were transferred to other foreclosed assets during 2017. The numberpayoffs of impaired manufactured housing loans decreased, with approximately 134 impaired manufactured housing loans at December 31, 2017 compared to 142 at December 31, 2016. Offsetting the decreases, 11 new manufactured housing loans were added in 2017.existing loans. Impaired commercial loans increaseddecreased in 20172019 compared to 20162018 primarily due to the additionloan payoffs and payments paired with a couple of two large loan relationships partially offset by payments on existing loans and one small pay-off. Impaired commercialforeclosed properties transferred into other real estate loans decreased from the pay-off of a $0.5 million loan and pay-downs on existing loans.owned.
The following schedule reflects recorded investment in certain types of loans at the dates indicated:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands) | | | (in thousands) | |
| Total nonaccrual loans | | $ | 6,844 | | | $ | 3,117 | | | $ | 6,956 | | | $ | 17,883 | | | $ | 23,263 | | | $ | 2,679 | | | $ | 6,226 | | | $ | 6,844 | | | $ | 3,117 | | | $ | 6,956 | |
| Government guaranteed portion of loans included above | | | (2,372 | ) | | | (742 | ) | | | (1,943 | ) | | | (6,856 | ) | | | (6,426 | ) | | | (290 | ) | | | (2,848 | ) | | | (2,372 | ) | | | (742 | ) | | | (1,943 | ) |
| Total nonaccrual loans without government guarantees | | $ | 4,472 | | | $ | 2,375 | | | $ | 5,013 | | | $ | 11,027 | | | $ | 16,837 | | | $ | 2,389 | | | $ | 3,378 | | | $ | 4,472 | | | $ | 2,375 | | | $ | 5,013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TDR loans, gross | | $ | 16,603 | | | $ | 14,437 | | | $ | 13,741 | | | $ | 9,685 | | | $ | 12,308 | | | $ | 10,774 | | | $ | 16,749 | | | $ | 16,603 | | | $ | 14,437 | | | $ | 13,741 | |
| Loans 30 through 89 days past due with interest accruing | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 161 | | | $ | 1,947 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Allowance for loan losses to gross loans held for investment | | | 1.24 | % | | | 1.31 | % | | | 1.44 | % | | | 1.84 | % | | | 2.98 | % | | | 1.19 | % | | | 1.21 | % | | | 1.24 | % | | | 1.31 | % | | | 1.44 | % |
| Interest income recognized on impaired loans | | $ | 1,142 | | | $ | 1,148 | | | $ | 933 | | | $ | 825 | | | $ | 876 | | | $ | 1,001 | | | $ | 1,324 | | | $ | 1,142 | | | $ | 1,148 | | | $ | 933 | |
| Interest income that would have been recorded under the original terms of nonaccrual loans | | $ | 379 | | | $ | 412 | | | $ | 761 | | | $ | 1,276 | | | $ | 1,754 | | | $ | 512 | | | $ | 454 | | | $ | 379 | | | $ | 412 | | | $ | 761 | |
The accrual of interest is discontinued when substantial doubt exists as to collectibilitycollectability 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 usually 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.
The following table summarizes the compositecomposition of nonaccrual loans:
| | | At December 31, 2017 | | | At December 31, 2016 | | | At December 31, 2019 | | | At December 31, 2018 | |
| | | Nonaccrual Balance | | | % | | | Percent of Total Loans | | | Nonaccrual Balance | | | % | | | Percent of Total Loans | | | Nonaccrual Balance | | | % | | | Percent of Total Loans | | | Nonaccrual Balance | | | % | | | Percent of Total Loans | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Manufactured housing | | $ | 418 | | | | 6.11 | % | | | 0.06 | % | | $ | 800 | | | | 25.67 | % | | | 0.15 | % | | $ | 594 | | | 22.17 | % | | 0.08 | % | | $ | 229 | | | 6.11 | % | | 0.06 | % |
| Commercial real estate | | | 306 | | | | 4.47 | % | | | 0.04 | % | | | 853 | | | | 27.37 | % | | | 0.16 | % | | 84 | | | 3.14 | % | | 0.01 | % | | 102 | | | 4.47 | % | | 0.04 | % |
| Commercial | | | 4,786 | | | | 69.93 | % | | | 0.65 | % | | | 31 | | | | 0.99 | % | | | 0.01 | % | | 1,619 | | | 60.43 | % | | 0.21 | % | | 4,881 | | | 69.93 | % | | 0.65 | % |
| SBA | | | 944 | | | | 13.79 | % | | | 0.13 | % | | | 868 | | | | 27.84 | % | | | 0.16 | % | | 382 | | | 14.26 | % | | 0.05 | % | | 816 | | | 13.79 | % | | 0.13 | % |
| HELOC | | | 214 | | | | 3.13 | % | | | 0.03 | % | | | 373 | | | | 11.97 | % | | | 0.07 | % | | — | | | 0.00 | % | | 0.00 | % | | 198 | | | 3.13 | % | | 0.03 | % |
| Single family real estate | | | 176 | | | | 2.57 | % | | | 0.02 | % | | | 192 | | | | 6.16 | % | | | 0.04 | % | | — | | | 0.00 | % | | 0.00 | % | | — | | | 2.57 | % | | 0.02 | % |
| Consumer | | | - | | | | 0.00 | % | | | 0.00 | % | | | - | | | | 0.00 | % | | | 0.00 | % | | | — | | | | 0.00 | % | | | 0.00 | % | | | — | | | | 0.00 | % | | | 0.00 | % |
| Total nonaccrual loans | | $ | 6,844 | | | | 100.00 | % | | | 0.93 | % | | $ | 3,117 | | | | 100.00 | % | | | 0.58 | % | | $ | 2,679 | | | | 100.00 | % | | | 0.35 | % | | $ | 6,226 | | | | 100.00 | % | | | 0.93 | % |
Total nonaccrual balances increased $3.7decreased $3.5 million to $6.8$2.7 million at December 31, 2017,2019, from $3.1$6.2 million at December 31, 2016 primarily from the addition of one large commercial loan relationship.2018. Nonaccrual balances include $2.4$0.3 million and $0.7$2.8 million respectively of loans that are government guaranteed at December 31, 20172019 and 2016,2018, respectively. Nonaccrual loans net of government guarantees increased $2.1decreased $1.0 million or 88%29%, from $3.4 million at December 31, 2018 to $2.4 million at December 31, 2016 to $4.5 million at December 31, 2017.2019. The percentage of nonaccrual loans to the total loan portfolio has increaseddecreased to 0.93%0.31% as of December 31, 20172019 from 0.58%0.44% at December 31, 2016.2018.
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 activity in our allowance for loan losses for the periods indicated.
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| Allowance for loan losses: | | (dollars in thousands) | | | (dollars in thousands) | |
| Balance at beginning of period | | $ | 7,464 | | | $ | 6,916 | | | $ | 7,877 | | | $ | 12,208 | | | $ | 14,464 | | | $ | 8,691 | | | $ | 8,420 | | | $ | 7,464 | | | $ | 6,916 | | | $ | 7,877 | |
| Provisions charged to operating expenses: | | | | | | | | | | | | | | | | | | | | | |
| Provision (credit) charged to operating expenses: | | | | | | | | | | | | | | | | |
| Manufactured housing | | | (44 | ) | | | (1,329 | ) | | | (415 | ) | | | (682 | ) | | | 206 | | | (66 | ) | | (98 | ) | | (44 | ) | | (1,329 | ) | | (415 | ) |
| Commercial real estate | | | 888 | | | | 1,722 | | | | (151 | ) | | | (1,934 | ) | | | (969 | ) | | 137 | | | 169 | | | 888 | | | 1,722 | | | (151 | ) |
| Commercial | | | (269 | ) | | | 166 | | | | (469 | ) | | | (1,227 | ) | | | (324 | ) | | (77 | ) | | 138 | | | (269 | ) | | 166 | | | (469 | ) |
| SBA | | | (180 | ) | | | (490 | ) | | | (1,069 | ) | | | (1,107 | ) | | | (794 | ) | | (97 | ) | | (127 | ) | | (180 | ) | | (490 | ) | | (1,069 | ) |
| HELOC | | | (26 | ) | | | (29 | ) | | | (107 | ) | | | (164 | ) | | | (318 | ) | | (68 | ) | | (57 | ) | | (26 | ) | | (29 | ) | | (107 | ) |
| Single family real estate | | | 42 | | | | (87 | ) | | | (63 | ) | | | (21 | ) | | | 218 | | | 3 | | | (11 | ) | | 42 | | | (87 | ) | | (63 | ) |
| Consumer | | | - | | | | (1 | ) | | | - | | | | - | | | | 37 | | | | 3 | | | | — | | | | — | | | | (1 | ) | | | — | |
| Total provision (credit) | | | 411 | | | | (48 | ) | | | (2,274 | ) | | | (5,135 | ) | | | (1,944 | ) | | (165 | ) | | 14 | | | 411 | | | (48 | ) | | (2,274 | ) |
| Recoveries of loans previously charged-off: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | | 142 | | | | 128 | | | | 205 | | | | 143 | | | | 257 | | | 54 | | | 120 | | | 142 | | | 128 | | | 205 | |
| Commercial real estate | | | 249 | | | | 132 | | | | 545 | | | | 857 | | | | 1,243 | | | 52 | | | 15 | | | 249 | | | 132 | | | 545 | |
| Commercial | | | 161 | | | | 136 | | | | 422 | | | | 149 | | | | 212 | | | 60 | | | 66 | | | 161 | | | 136 | | | 422 | |
| SBA | | | 177 | | | | 266 | | | | 454 | | | | 393 | | | | 559 | | | 50 | | | 133 | | | 177 | | | 266 | | | 454 | |
| HELOC | | | 18 | | | | 86 | | | | 10 | | | | 24 | | | | 3 | | | 5 | | | 55 | | | 18 | | | 86 | | | 10 | |
| Single family real estate | | | 1 | | | | 93 | | | | 3 | | | | 4 | | | | 8 | | | 1 | | | 1 | | | 1 | | | 93 | | | 3 | |
| Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total recoveries | | | 748 | | | | 841 | | | | 1,639 | | | | 1,570 | | | | 2,282 | | | 222 | | | 390 | | | 748 | | | 841 | | | 1,639 | |
| Loans charged-off: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | | 119 | | | | 123 | | | | 297 | | | | 543 | | | | 1,294 | | | — | | | 6 | | | 119 | | | 123 | | | 297 | |
| Commercial real estate | | | - | | | | - | | | | - | | | | 16 | | | | 349 | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | | - | | | | - | | | | - | | | | - | | | | 149 | | | 31 | | | 127 | | | — | | | — | | | — | |
| SBA | | | 30 | | | | 121 | | | | - | | | | 171 | | | | 547 | | | — | | | — | | | 30 | | | 121 | | | — | |
| HELOC | | | - | | | | - | | | | - | | | | - | | | | 39 | | | — | | | — | | | — | | | — | | | — | |
| Single family real estate | | | 54 | | | | - | | | | 29 | | | | 36 | | | | 179 | | | — | | | — | | | 54 | | | — | | | 29 | |
| Consumer | | | - | | | | 1 | | | | - | | | | - | | | | 37 | | | | — | | | | — | | | | — | | | | 1 | | | | — | |
| Total charged-off | | | 203 | | | | 245 | | | | 326 | | | | 766 | | | | 2,594 | | | 31 | | | 133 | | | 203 | | | 245 | | | 326 | |
| Net charge-offs (recoveries) | | | (545 | ) | | | (596 | ) | | | (1,313 | ) | | | (804 | ) | | | 312 | | | | (191 | ) | | | (257 | ) | | | (545 | ) | | | (596 | ) | | | (1,313 | ) |
| Balance at end of period | | $ | 8,420 | | | $ | 7,464 | | | $ | 6,916 | | | $ | 7,877 | | | $ | 12,208 | | | $ | 8,717 | | | $ | 8,691 | | | $ | 8,420 | | | $ | 7,464 | | | $ | 6,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs (recoveries) to average loans outstanding | | | -0.08 | % | | | -0.10 | % | | | -0.26 | % | | | -0.16 | % | | | 0.07 | % | | (0.02 | )% | | (0.03 | )% | | (0.08 | )% | | (0.10 | )% | | (0.26 | )% |
| Allowance for loan losses to gross loans including held for sale loans | | | 1.15 | % | | | 1.18 | % | | | 1.18 | % | | | 1.27 | % | | | 1.59 | % | | 1.12 | % | | 1.13 | % | | 1.15 | % | | 1.18 | % | | 1.18 | % |
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:
| | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (dollars in thousands) | |
| | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | |
| Manufactured housing | | $ | 2,180 | | | | 25.8 | % | | $ | 2,201 | | | | 29.5 | % | | $ | 3,525 | | | | 51.0 | % | | $ | 4,032 | | | | 51.2 | % | | $ | 5,114 | | | | 41.9 | % |
| Manufactured estate | | | 4,844 | | | | 57.5 | % | | | 3,707 | | | | 49.7 | % | | | 1,853 | | | | 26.8 | % | | | 1,459 | | | | 18.5 | % | | | 2,552 | | | | 20.9 | % |
| Commercial | | | 1,133 | | | | 13.5 | % | | | 1,241 | | | | 16.6 | % | | | 939 | | | | 13.6 | % | | | 986 | | | | 12.5 | % | | | 2,064 | | | | 16.9 | % |
| SBA | | | 73 | | | | 0.9 | % | | | 106 | | | | 1.4 | % | | | 451 | | | | 6.5 | % | | | 1,066 | | | | 13.6 | % | | | 1,951 | | | | 16.0 | % |
| HELOC | | | 92 | | | | 1.1 | % | | | 100 | | | | 1.3 | % | | | 43 | | | | 0.6 | % | | | 140 | | | | 1.8 | % | | | 280 | | | | 2.3 | % |
| Single family real estate | | | 98 | | | | 1.2 | % | | | 109 | | | | 1.5 | % | | | 103 | | | | 1.5 | % | | | 192 | | | | 2.4 | % | | | 245 | | | | 2.0 | % |
| Consumer | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 2 | | | | 0.0 | % | | | 2 | | | | 0.0 | % | | | 2 | | | | 0.0 | % |
| Total | | $ | 8,420 | | | | 100.0 | % | | $ | 7,464 | | | | 100.0 | % | | $ | 6,916 | | | | 100.0 | % | | $ | 7,877 | | | | 100.0 | % | | $ | 12,208 | | | | 100.0 | % |
| | | December 31, | |
| | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each
Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | $ | 2,184 | | | | 33.2 | % | | $ | 2,196 | | | | 32.1 | % | | $ | 2,180 | | | | 30.3 | % | | $ | 2,201 | | | | 30.8 | % | | $ | 3,525 | | | | 32.8 | % |
| Commercial real estate | | | 5,217 | | | | 49.7 | % | | | 5,028 | | | | 47.6 | % | | | 4,844 | | | | 48.2 | % | | | 3,707 | | | | 43.1 | % | | | 1,853 | | | | 33.0 | % |
| Commercial | | | 1,162 | | | | 13.1 | % | | | 1,210 | | | | 15.4 | % | | | 1,133 | | | | 15.2 | % | | | 1,241 | | | | 16.7 | % | | | 939 | | | | 19.8 | % |
| SBA | | | 32 | | | | 1.9 | % | | | 79 | | | | 2.5 | % | | | 73 | | | | 3.6 | % | | | 106 | | | | 5.8 | % | | | 451 | | | | 8.9 | % |
| HELOC | | | 27 | | | | 0.6 | % | | | 90 | | | | 0.9 | % | | | 92 | | | | 1.3 | % | | | 100 | | | | 1.6 | % | | | 43 | | | | 2.0 | % |
| Single family real estate | | | 92 | | | | 1.5 | % | | | 88 | | | | 1.5 | % | | | 98 | | | | 1.4 | % | | | 109 | | | | 2.0 | % | | | 103 | | | | 3.5 | % |
| Consumer | | | 3 | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 2 | | | | 0.0 | % |
| Total | | $ | 8,717 | | | | 100.0 | % | | $ | 8,691 | | | | 100.0 | % | | $ | 8,420 | | | | 100.0 | % | | $ | 7,464 | | | | 100.0 | % | | $ | 6,916 | | | | 100.0 | % |
Total allowance for loan losses increased by $0.9 million from $7.5remained relatively flat at $8.7 million at December 31, 20162019 compared to $8.4 million at December 31, 2017 mostly the result of loan growth and change in loan portfolio mix.prior year. In addition, the Company had net recoveries of $0.5$0.2 million in 20172019 compared to net recoveries of $0.6$0.3 million in 2016.2018.
Potential Problem Loans
The Company classifies loans consistent with federal banking regulations. These loan grades are described in further detail in “Item 8. Note 1, “SummarySummary of Significant Accounting Policies” of this Form 10-K. The following table presents information regarding potential problem loans consisting of loans graded watchSpecial Mention or worse, but still performing:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Number of Loans | | | Loan Balance (1) | | | Percent | | | Percent of Total Loans | | | Number of Loans | | | Loan Balance (1) | | | Percent | | | Percent of Total Loans | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | | - | | | $ | - | | | | 0.00 | % | | | 0.00 | % | | 2 | | | $ | 163 | | | 1.92 | % | | 0.02 | % |
| Commercial real estate | | | 6 | | | | 8,118 | | | | 79.40 | % | | | 1.11 | % | | 5 | | | 5,824 | | | 68.60 | % | | 0.75 | % |
| Commercial | | | 3 | | | | 374 | | | | 3.66 | % | | | 0.05 | % | | 2 | | | 1,699 | | | 20.01 | % | | 0.22 | % |
| SBA | | | 8 | | | | 1,727 | | | | 16.89 | % | | | 0.24 | % | | 5 | | | 799 | | | 9.41 | % | | 0.10 | % |
| HELOC | | | - | | | | - | | | | 0.00 | % | | | 0.00 | % | | — | | | — | | | 0.00 | % | | 0.00 | % |
| Single family real estate | | | 1 | | | | 5 | | | | 0.05 | % | | | 0.00 | % | | 1 | | | 5 | | | 0.06 | % | | 0.00 | % |
| Consumer | | | - | | | | - | | | | 0.00 | % | | | 0.00 | % | | | — | | | | — | | | | 0.00 | % | | | 0.00 | % |
| Total | | | 18 | | | $ | 10,224 | | | | 100.00 | % | | | 1.40 | % | | | 15 | | | $ | 8,490 | | | | 100.00 | % | | | 1.09 | % |
| (1) | Loan balance includes $1.5$2.1 million guaranteed by government agencies. |
| | | December 31, 2016 | | | December 31, 2018 | |
| | | Number of Loans | | | Loan Balance (1) | | | Percent | | | Percent of Total Loans | | | Number of Loans | | | Loan Balance (1) | | | Percent | | | Percent of Total Loans | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | | 5 | | | $ | 417 | | | | 3.04 | % | | | 0.07 | % | | — | | | $ | — | | | 0.00 | % | | 0.00 | % |
| Commercial real estate | | | 5 | | | | 3,331 | | | | 24.29 | % | | | 0.53 | % | | 4 | | | 2,435 | | | 67.88 | % | | 0.32 | % |
| Commercial | | | 7 | | | | 7,778 | | | | 56.71 | % | | | 1.23 | % | | 1 | | | 278 | | | 7.75 | % | | 0.04 | % |
| SBA | | | 10 | | | | 1,935 | | | | 14.11 | % | | | 0.31 | % | | 5 | | | 869 | | | 24.23 | % | | 0.11 | % |
| HELOC | | | 1 | | | | 248 | | | | 1.81 | % | | | 0.04 | % | | — | | | — | | | 0.00 | % | | 0.00 | % |
| Single family real estate | | | 1 | | | | 5 | | | | 0.04 | % | | | 0.00 | % | | 1 | | | 5 | | | 0.14 | % | | 0.00 | % |
| Consumer | | | - | | | | - | | | | 0.00 | % | | | 0.00 | % | | | — | | | | — | | | | 0.00 | % | | | 0.00 | % |
| Total | | | 29 | | | $ | 13,714 | | | | 100.00 | % | | | 2.18 | % | | | 11 | | | $ | 3,587 | | | | 100.00 | % | | | 0.47 | % |
| (1) | Loan balance includes $2.9$1.5 million 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 for the years indicated was as follows:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| U.S. government agency notes | | $ | 13,978 | | | $ | 5,572 | | | $ | 11,147 | | | $ | 8,048 | | | $ | 12,070 | | | $ | 13,978 | |
| U.S. government agency mortgage backed securities ("MBS") | | | 7,565 | | | | 9,002 | | | | 7,025 | | |
| U.S. government agency collateralized mortgage obligations ("CMO") | | | 14,649 | | | | 16,994 | | | | 12,231 | | |
| U.S. government agency mortgage backed securities (“MBS”) | | | 6,132 | | | 7,301 | | | 7,565 | |
| U.S. government agency collateralized mortgage obligations (“CMO”) | | | 11,216 | | | 12,861 | | | 14,649 | |
| Equity securities: Farmer Mac class A stock | | | 156 | | | | 115 | | | | 63 | | | | 167 | | | | 121 | | | | 156 | |
| | | $ | 36,348 | | | $ | 31,683 | | | $ | 30,466 | | | $ | 25,563 | | | $ | 32,353 | | | $ | 36,348 | |
The weighted average yields of investment securities by maturity period were as follows at December 31, 2017:2019:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Less than One Year | | | One to Five Years | | | Five to Ten Years | | | Over Ten Years | | | Total | | | 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 | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | (dollars in thousands) | | | (dollars in thousands) | |
| U.S. government agency notes | | $ | 1,967 | | | | 2.6 | % | | $ | 1,833 | | | | 1.6 | % | | $ | 10,178 | | | | 2.0 | % | | $ | - | | | | 0.0 | % | | $ | 13,978 | | | | 2.0 | % | | $ | — | | | — | | | $ | 1,094 | | | 2.3 | % | | $ | 6,955 | | | 2.8 | % | | $ | — | | | — | | | $ | 8,049 | | | 2.8 | % |
| U.S. government agency CMO | | | - | | | | 0.0 | % | | | 3,362 | | | | 1.9 | % | | | 8,361 | | | | 1.9 | % | | | 2,926 | | | | 2.3 | % | | | 14,649 | | | | 1.9 | % | | — | | | — | | | 3,766 | | | 2.1 | % | | 6,120 | | | 2.3 | % | | 1,329 | | | 2.4 | % | | 11,215 | | | 2.3 | % |
| Farmer Mac class A stock | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 156 | | | | 0.0 | % | |
| Total | | $ | 1,967 | | | | 2.6 | % | | $ | 5,195 | | | | 1.8 | % | | $ | 18,539 | | | | 1.9 | % | | $ | 2,926 | | | | 2.3 | % | | $ | 28,783 | | | | 2.0 | % | | $ | — | | | — | | | $ | 4,860 | | | 2.2 | % | | $ | 13,075 | | | 2.6 | % | | $ | 1,329 | | | 2.4 | % | | $ | 19,264 | | | 2.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency MBS | | $ | - | | | | 0.0 | % | | $ | 2,802 | | | | 3.6 | % | | $ | 4,763 | | | | 3.1 | % | | $ | - | | | | 0.0 | % | | $ | 7,565 | | | | 3.3 | % | | $ | — | | | — | | | $ | 2,465 | | | 4.2 | % | | $ | 2,887 | | | 2.9 | % | | $ | 780 | | | 3.6 | % | | $ | 6,132 | | | 3.5 | % |
| Total | | $ | - | | | | 0.0 | % | | $ | 2,802 | | | | 3.6 | % | | $ | 4,763 | | | | 3.1 | % | | $ | - | | | | 0.0 | % | | $ | 7,565 | | | | 3.3 | % | | $ | — | | | — | | | $ | 2,465 | | | 4.2 | % | | $ | 2,887 | | | 2.9 | % | | $ | 780 | | | 3.6 | % | | $ | 6,132 | | | 3.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Farmer Mac class A stock | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | 167 | | | — | |
| Total | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | — | | | $ | 167 | | | — | |
Expected maturities may differ from contractual maturities because borrowers or issuers have the right to call or prepay certain investment securities. Changes in interest rates may also impact prepayment or call options.
The Company does not own any subprime mortgage backed securities (“MBS”) in its investment portfolio. Gross unrealized losses at December 31, 20172019 are primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has reviewed all securities on which there was an unrealized loss in accordance with its accounting policy for other than temporary impaired (“OTTI”) described in “Item 8. Note 2 in this Form 10-K, “Investment Securities” and determined no impairment was required. At December 31, 2017,2019, the Company had the intent and the ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Balance, beginning of period | | $ | 137 | | | $ | 198 | | | $ | 137 | | | $ | — | | | $ | 372 | | | $ | 137 | |
| Additions | | | 501 | | | | 350 | | | | 609 | | | 3,401 | | | 174 | | | 501 | |
| Proceeds from dispositions | | | (416 | ) | | | (395 | ) | | | (538 | ) | | (844 | ) | | (484 | ) | | (416 | ) |
| Gains (losses) on sales, net | | | 150 | | | | (16 | ) | | | (10 | ) | | | (33 | ) | | | (62 | ) | | | 150 | |
| Balance, end of period | | $ | 372 | | | $ | 137 | | | $ | 198 | | | $ | 2,524 | | | $ | — | | | $ | 372 | |
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 December 31, 2015,2019, the Company had a$0.2 million valuation allowance on foreclosed assets of $35,000assets. At December 31, 2018 and 2017, the Company had no valuation allowance on foreclosed assets at December 31, 2016 and 2017. At December 31, 2017, the Company had two manufactured housing and two commercial agriculture loans in the process of foreclosure.assets.
Deposits
The average balances by deposit type as of the dates presented below:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Non-interest bearing demand deposits | | $ | 107,589 | | | | 16.2 | % | | $ | 80,611 | | | | 14.2 | % | | $ | 70,864 | | | | 13.9 | % | | $ | 116,887 | | | 16.1 | % | | $ | 111,246 | | | 15.6 | % | | $ | 107,589 | | | 16.2 | % |
| Interest-bearing demand deposits | | | 260,868 | | | | 39.2 | % | | | 251,644 | | | | 44.6 | % | | | 257,785 | | | | 50.6 | % | | 289,798 | | | 39.9 | % | | 265,974 | | | 37.2 | % | | 260,868 | | | 39.2 | % |
| Savings | | | 14,197 | | | | 2.1 | % | | | 14,138 | | | | 2.5 | % | | | 14,479 | | | | 2.8 | % | | 15,650 | | | 2.2 | % | | 14,458 | | | 2.0 | % | | 14,197 | | | 2.1 | % |
| Time deposits of $100,000 or more | | | 200,729 | | | | 30.2 | % | | | 177,122 | | | | 31.3 | % | | | 153,388 | | | | 30.1 | % | | 144,711 | | | 19.9 | % | | 181,472 | | | 25.4 | % | | 200,729 | | | 30.2 | % |
| Other time deposits | | | 81,495 | | | | 12.3 | % | | | 42,531 | | | | 7.5 | % | | | 12,506 | | | | 2.5 | % | | | 158,976 | | | | 21.9 | % | | | 141,501 | | | | 19.8 | % | | | 81,495 | | | | 12.3 | % |
| Total deposits | | $ | 664,878 | | | | 100.0 | % | | $ | 566,046 | | | | 100.0 | % | | $ | 509,022 | | | | 100.0 | % | | $ | 726,022 | | | | 100.0 | % | | $ | 714,651 | | | | 100.0 | % | | $ | 664,878 | | | | 100.0 | % |
Total deposits increased to $699.7$750.9 million at December 31, 20172019 from $612.2$716.0 million at December 31, 2016,2018, an increase of $87.4$34.9 million. This increase was primarily from certificates of deposit and non-interest bearinginterest-bearing demand deposits. Certificates of deposits increaseddecreased by $75.5$12.6 million to $320.4$310.1 million at December 31, 20172019 compared to $244.8$322.8 million at December 31, 2016. Non-interest bearing2018. Interest-bearing demand deposits increased by $8.1$43.8 million to $108.5$314.3 million at December 31, 20172019 compared to $100.4$270.4 million at December 31, 2016.2018. Deposits have been the primary source of funding the Company’s asset growth. In addition the bank is a member of Certificate of Deposit Account Registry Service (“CDARS”). and Insured Cash Sweep (“ICS”) services. Both CDARS providesand ICS provide a mechanism for obtaining FDIC insurance for large deposits. At December 31, 20172019 and 2016,2018, the Company had $32.1$28.7 million and $46.7$35.2 million, respectively of CDARS deposits. At December 31, 2019 and 2018, the Company had $54.5 million and $9.5 million, respectively of ICS deposits.
Time Certificates of Deposits
The following table presents TCD maturities:
| | | | December 31, | |
| | | December 31, | | | 2019 | | | 2018 | |
| | | 2017 | | | 2016 | | | TCDs Over $ 100,000 | | | Other TCDs | | | TCDs Over $ 100,000 | | | Other TCDs | |
| | | TCDs Over $ 100,000 | | | Other TCDs | | | TCDs Over $ 100,000 | | | Other TCDs | | | | |
| Less than three months | | $ | 90,799 | | | $ | 33,048 | | | $ | 64,945 | | | $ | 12,827 | | | $ | 62,802 | | | $ | 12,623 | | | $ | 78,935 | | | $ | 42,976 | |
| Three to six months | | | 24,876 | | | | 40,293 | | | | 54,126 | | | | 1,867 | | | 70,761 | | | 46,010 | | | 50,964 | | | 50,478 | |
| Six to twelve months | | | 32,340 | | | | 30,578 | | | | 23,698 | | | | 2,080 | | | 33,630 | | | 46,698 | | | 39,892 | | | 14,141 | |
| Over twelve months | | | 63,591 | | | | 4,857 | | | | 78,276 | | | | 7,015 | | | | 21,831 | | | | 15,769 | | | | 39,143 | | | | 6,244 | |
| Total deposits | | $ | 211,606 | | | $ | 108,776 | | | $ | 221,045 | | | $ | 23,789 | | |
| Total TCDs | | | $ | 189,024 | | | $ | 121,100 | | | $ | 208,934 | | | $ | 113,839 | |
The Company’s deposits may fluctuate as a result of local and national economic conditions. Management does not believe that deposit levels are influenced by seasonal factors.
The Company utilizes money desk and brokered deposits in accordance with strategic and liquidity planning.
Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| FHLB Advances | | (in thousands) | | | (in thousands) | |
| Maximum month-end balance | | $ | 50,000 | | | $ | 25,000 | | | $ | 20,000 | | | $ | 65,000 | | | $ | 75,000 | | | $ | 50,000 | |
| Balance at year end | | | 50,000 | | | | 25,000 | | | | 5,000 | | | 65,000 | | | 70,000 | | | 50,000 | |
| Average balance | | | 24,704 | | | | 5,453 | | | | 8,466 | | | 49,414 | | | 40,551 | | | 24,704 | |
| Other Borrowings | | | | | | | | | | | | | | | | | | | | | |
| Maximum month-end balance | | | 6,843 | | | | 5,500 | | | | 5,500 | | | 5,750 | | | 6,843 | | | 6,843 | |
| Balance at year end | | | 6,843 | | | | 4,000 | | | | 5,500 | | | — | | | 5,000 | | | 6,843 | |
| Average balance | | | 3,410 | | | | 5,246 | | | | 949 | | | 1,631 | | | 5,463 | | | 3,410 | |
| Total borrowed funds | | $ | 56,843 | | | $ | 29,000 | | | $ | 10,500 | | | $ | 65,000 | | | $ | 75,000 | | | $ | 56,843 | |
| Weighted average interest rate at end of year | | | 1.87 | % | | | 1.13 | % | | | 2.35 | % | | 2.29 | % | | 2.77 | % | | 1.87 | % |
| Weighted average interest rate during the year | | | 1.56 | % | | | 2.35 | % | | | 1.34 | % | | 2.48 | % | | 2.41 | % | | 1.56 | % |
FHLB and FRB Advances
The Company utilizes borrowed funds to support liquidity needs. The Company’s borrowing capacity at FHLB and FRB is determined based on collateral pledged, generally consisting of securities and loans. At December 31, 2017,2019, no advances were outstanding from the FRB.
Other Borrowing
In July of 2017, theThe Company entered intohas a one-year revolving line of credit agreement for up to $15.0$10.0 million. The new line of credit was used to pay off the October 2015 line of credit that had converted to a five-year term loan on October 31, 2016.matures July 30, 2022. 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 $1.7 million at December, 2017.account. 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%. At December 31, 2017,2019, the line of credit balance was $6.8 million at a rate of 5.32%.zero.
Preferred Stock
The Company’s Series A Preferred Stock paid cumulative dividends at a rate of 5% per year until February 15, 2014 then increased to a rate of 9% per year. The Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.
During 2015 and 2014 the Company redeemed the 15,600 shares of Series A Preferred Stock for $15.4 million and recognized discounts on the redemptions of $0.3 million. Total preferred dividends for both years was $1.4 million.
There are no shares issued andof the Company’s preferred stock outstanding as of December 31, 20172019 and 2016.2018.
Capital Resources
The Federal Reserve hasfederal banking agencies have adopted risk-based capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company.companies and banks. 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 amendamended the regulatory risk-based capital rules applicable to the Company. Basel III redefinesredefined the regulatory capital elements and minimum capital ratios, introducesintroduced regulatory capital buffers above those minimums, revisesrevised rules for calculating risk-weighted assets and addsadded 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 December 31, 20172019 and 2016.2018. The Federal Reserve’s fully phased-infully-phased in guidelines applicable on January 1, 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) | |
| December 31, 2017 | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 11.31 | % | | | 10.10 | % | | | 10.10 | % | | | 8.83 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % |
| Minimum capital requirements including fully-phased in capital conservation buffer (2019) | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
| | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 12.27 | % | | | 11.04 | % | | | 11.04 | % | | | 10.08 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % |
| Minimum capital requirements including fully-phased in capital conservation buffer (2019) | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
| | | Total Capital (To Risk- Weighted Assets) | | | Tier 1 Capital (To Risk- Weighted Assets) | | | Common Equity Tier 1 (To Risk- Weighted Assets) | | | Leverage Ratio/Tier 1 Capital (To Average Assets) | |
| December 31, 2019 | | | | | | | | | | | | |
| CWB’s actual regulatory ratios | | | 11.41 | % | | | 10.28 | % | | | 10.28 | % | | | 9.06 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | N/A | |
| Minimum capital requirements including fully-phased in capital conservation buffer | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
| | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | | | | | |
| CWB’s actual regulatory ratios | | | 10.83 | % | | | 9.68 | % | | | 9.68 | % | | | 8.57 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % |
| Minimum capital requirements including fully-phased in capital conservation buffer | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
Contractual Obligations and Off-Balance Sheet Arrangements
The Company enters into contracts for services in the ordinary course of business that may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. To meet the financing needs of customers, the Company has financial instruments with off-balance sheet risk, including commitments to extend credit and standby letters of credit. The Company does not believe that these off-balance sheet arrangements have or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have a future effect.
The following table sets forth our significant contractual obligations as of December 31, 2017.2019.
| | | Payments Due by Period | | | Payments Due by Period | |
| | | Total | | | Less Than 1 Year | | | 1 to 3 Years | | | 3 to 5 Years | | | After 5 Years | | | Total | | | Less Than 1 Year | | | 1 to 3 Years | | | 3 to 5 Years | | | After 5 Years | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Time deposit maturities | | $ | 320,382 | | | $ | 251,934 | | | $ | 64,927 | | | $ | 3,521 | | | $ | - | | | $ | 310,124 | | | $ | 272,257 | | | $ | 33,403 | | | $ | 4,464 | | | $ | — | |
| FHLB advances | | | 50,000 | | | | 50,000 | | | | - | | | | - | | | | - | | | 65,000 | | | 50,000 | | | 15,000 | | | — | | | — | |
| Other borrowings | | | 6,843 | | | | 684 | | | | 2,737 | | | | 2,737 | | | | 684 | | | — | | | — | | | — | | | — | | | — | |
| Purchase obligations | | | 6,651 | | | | 3,276 | | | | 1,570 | | | | 1,210 | | | | 595 | | | 8,495 | | | 3,571 | | | 2,907 | | | 2,017 | | | — | |
| Operating lease obligations | | | 8,845 | | | | 1,258 | | | | 2,366 | | | | 2,048 | | | | 3,173 | | | | 7,216 | | | | 1,361 | | | | 2,253 | | | | 1,807 | | | | 1,795 | |
| Total | | $ | 392,721 | | | $ | 307,152 | | | $ | 71,600 | | | $ | 9,516 | | | $ | 4,452 | | | $ | 390,835 | | | $ | 327,189 | | | $ | 53,563 | | | $ | 8,288 | | | $ | 1,795 | |
Purchase obligations primarily related to contracts for software licensing and maintenance and outsourced service providers. Off-balance sheet commitments associated with outstanding letters of credit, commitments to extend credit, and overdraft lines as of December 31, 20172019 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
| | | | | | Amount of Commitment By Period of Expiration | | | | | | Amount of Commitment By Period of Expiration | |
| | | Total Commitments | | | Less Than 1 Year | | | 1 to 3 Years | | | 3 to 5 Years | | | After 5 Years | | | Total Commitments | | | Less Than 1 Year | | | 1 to 3 Years | | | 3 to 5 Years | | | After 5 Years | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Commitments to extend credit | | $ | 68,812 | | | $ | 49,912 | | | $ | 14,017 | | | $ | 734 | | | $ | 4,149 | | | $ | 67,538 | | | $ | 37,470 | | | $ | 21,907 | | | $ | 5,216 | | | $ | 2,945 | |
| Standby letters of credit | | | - | | | | - | | | | - | | | | - | | | | - | | | | 655 | | | | 51 | | | | 604 | | | | — | | | | — | |
| Total | | $ | 68,812 | | | $ | 49,912 | | | $ | 14,017 | | | $ | 734 | | | $ | 4,149 | | | $ | 68,193 | | | $ | 37,521 | | | $ | 22,511 | | | $ | 5,216 | | | $ | 2,945 | |
Critical Accounting Policies
The Notes to Consolidated Financial Statements contain a discussion of our significant accounting policies, including information regarding recently issued accounting pronouncements, our adoption of such policies and the related impact of their adoption. We believe that certain of these policies, along with various estimates that we are required to make in recording our financial transactions, are important to have a complete understanding of our financial position. In addition, these estimates require us to make complex and subjective judgments, many of which include matters with a high degree of uncertainty. See “Item 8. Financial Statements and Supplementary Data - Note 1. Summary of Significant Accounting Policies for a discussion of these critical accounting policies and significant estimates.
Liquidity
Liquidity for a bank is the ongoing ability to fund asset growth and business operations, to accommodate liability maturities and deposit withdrawals 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. OurCWB’s available liquidity, represented by cash and amounts due from banks, federal funds sold and non-pledged marketable securities, is a result of oursecurities. CWB manages its liquidity risk through operating, investing and financing activities and related cash flows.activities. In order to ensure funds are available when necessary, on at least a quarterly basis, we projectCWB projects 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 federal funds borrowing lines at correspondent banks totaling $20.0 million. In addition, loans and securities are pledged to the FHLB providing $63.9$60.5 million in available borrowing capacity as of December 31, 2017.2019. Loans pledged to the FRB discount window provided $104.3$108.6 million in borrowing capacity. As of December 31, 2017,2019, there were no outstanding borrowings from the FRB.
The CompanyBank 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’sCWB’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 CompanyBank has asset/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues.
The Company through CWB has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. Total FHLB advances were $50.0$65.0 million and $25.0$70.0 million at December 31, 20172019 and 2016,2018, respectively, borrowed at fixed rates. At December 31, 2017,2019, CWB had pledged to FHLB, securities of $36.2$25.6 million at carrying value and loans of $235.4 million and had $63.9 million available for additional borrowing.$324.2 million. At December 31, 2016,2018, the Company had pledged to FHLB, securities of $31.7$32.2 million at carrying value and loans of $161.3$269.4 million, and had $56.8$35.9 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. There were no advances outstanding as of December 31, 20172019 and unused borrowing capacity was $104.3$108.6 million.
The Company also maintains federal funds purchased lines with a total borrowing capacity of $20.0 million. There was no amount outstanding as of December 31, 20172019 and 2016.2018.
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits. The liquidity ratio of the CompanyBank was 16%14% and 17%15%, at December 31, 20172019 and December 31, 2016,2018, respectively. The Company’sBank’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.
As a legal entity, separate and distinct from the Bank, CWCB must rely on its own resources for its liquidity. CWBC’s routine funding requirements primarily consisted of certain operating expenses, preferred and common stock dividends and interest payments on the other borrowings. CWBC obtains funding to meet its obligations from dividends collected from CWB and fees charged for services provided to CWB, and has the capability to issue equity and debt securities. Federal banking laws and regulatory requirements regulate the amount of dividends that may be paid by a banking subsidiary without prior approval.
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include: lag, repricing, basis and prepayment risk.
Lag risk results from the inherent timing difference between the repricing of the Company’s adjustable rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. However, at a community bank such as CWB, when rates are rising, funding sources tend to reprice more slowly than the loans. Therefore, for CWB, the effect of this timing difference is generally favorable during a period of rising interest rates and unfavorable during a period of declining interest rates. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.
Repricing risk is caused by the mismatch in the maturities or repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This happens because loans tend to reprice more quickly than funding sources.
Basis risk is due to item pricing tied to different indices which tend to react differently. CWB’s variable products are mainly priced off the treasury and prime rates.
Prepayment risk results from borrowers paying down or paying off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. A majority of CWB’s loans have adjustable rates and are reset based on changes in the treasury and prime rates.
The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. In addition, increases in interest rates may reduce the amount of loan and commitment fees received by CWB.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as funding sources. CWB can sell a portion of its FSA and SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. The Company has not used derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.
For further discussion regarding the impact to the Company of interest rate changes, see “Item 7A. Quantitative and Qualitative Disclosure about Market Risk.”
Litigation
See “Part 1. Item 3: Legal Proceedings” beginning on page 1213 of this Form 10-K.
SUPERVISION AND REGULATION
Introduction
CWBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by the Board of Governors of the Federal Reserve System (the “FRB”). In addition to the regulation of the Company by the FRB, CWB is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency (“OCC”). The Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain prescribed limits. The Company is also subject to jurisdiction of the Securities and Exchange Commission ("SEC"(“SEC”) and to the disclosure and regulatory requirements of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), and through the listing of the common stock on the NASDAQ Capital Select Market, the Company is subject to the rules of NASDAQ.
Banking is a complex, highly regulated industry. The primary goals of the rules and regulations are to maintain a safe and sound banking system, protect depositors and the FDIC’s 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 statues, regulations and the policies of various governmental regulatory authorities.
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 polices that impact CWBC and CWB cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.
Securities Registration and Listing
CWBC’s common stock is registered with the SEC under the Exchange Act and, therefore, is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act of 1933 (the “Securities Act”), both administered by the SEC. CWBC is required to file annual, quarterly and other current reports with the SEC. The SEC maintains an Internet site, http://www.sec.gov, at which CWBC’s filings with the SEC may be accessed. CWBC’s SEC filings are also available on its website at www.communitywest.com.
CWBC’s common stock is listed on the NASDAQ Capital Market and trade under the symbol “CWBC.” As a company listed on the NASDAQ Capital Market, CWBC is subject to NASDAQ standards for listed companies. CWBC is also subject to certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”), the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and other federal and state laws and regulations that govern financial presentations, corporate governance requirements for board audit and compensation committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, theThe Dodd-Frank Act was signed into law in 2010 to effect a fundamental restructuring of federal banking regulation. Among the provisions ofother things, the Dodd-Frank Act that affect CWBC arecreated the following:
| · | Holding Company Capital Requirements. The Dodd-Frank Act required the FRB to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
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| · | Deposit Insurance. The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
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| · | Corporate Governance. The Dodd-Frank Act required publicly traded companies, such as CWBC, to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders and requires that national securities exchanges prohibit brokers from voting on this proposal. The SEC has also adopted regulations under the Dodd-Frank Act that require public companies to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management if such shareholder owned at least 3 percent of the company's shares continuously for at least the prior three years. Additionally, the Dodd-Frank Act directed the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether CWBC is publicly traded or not.
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| · | Interstate Branching. The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
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| · | Transactions with Affiliates and Insiders. The Dodd-Frank Act expanded the definition of "affiliate" for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act also prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.
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| · | Consumer Financial Protection Bureau. The Dodd-Frank Act created an independent federal agency called the Consumer Financial Protection Bureau (the "CFPB"), which has been granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but are still examined and supervised by their federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by the CFPB. The Dodd- Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
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| · | Final Volcker Rule. In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of the Dodd-Frank Act commonly referred to as the "Volcker Rule." Under these rules and subject to certain exceptions, banking entities, including CWBC and CWB, will be restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered "covered funds." These rules were originally scheduled to become effective on April 1, 2014; however certain provisions are subject to delayed effectiveness under rules promulgated by the FRB. At December 31, 2017, neither CWBC nor CWB held any investment positions which were subject to the Volcker Rule. Therefore, while these new rules may require CWBC and/or CWB to conduct certain internal analyses and reporting, we believe that the rules will not require any material changes in their respective operations or business.
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Financial Stability Oversight Council to identify systemic risks in the financial system and oversee and coordinate the actions of the U.S. financial regulatory agencies.
The Dodd-Frank Act was enactedand the regulations promulgated thereunder require, among other things, that: (i) the consolidated capital requirements of depository holding companies must be not less stringent than those applied to depository institutions; (ii) the reserve ratio of the Deposit Insurance Fund must increase from 1.15% to 1.35%; (iii) publicly traded companies, such as CWBC, must provide their stockholders with a non-binding vote on executive compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (iv) the deposit insurance amounts for banks, savings institutions and credit unions be permanently increased to $250,000 per qualified depositor; (v) authority is given to the federal banking regulators to prohibit extensive compensation to executives of depository institutions and their holding companies with assets in excess of $1.0 billion; (vi) Section 23A of the Federal Reserve Act is broadened and prohibits a depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and if representing more than 10% of capital, is approved by the disinterested directors; (vii) interstate branching rights are expanded; and (viii) bank entities, under the administration of former President Barack Obama and many of the rules and regulations implementing the provisions of the Dodd-Frank Act were enacted during(“Volker Rule”), are prohibited from conducting certain investment activities that administration. The current administration under President Trump has sought to roll-back key pieces of the Dodd-Frank Act in an effort to loosen regulatory restrictions on financial institutions including, but not limited to, easing the “Volker Rule,” stress tests and other constraints on financial institutions. Federal banking regulators are currently seeking public input on revisions to key provisions of the Dodd-Frank Act and its implementing regulations in order to effectuate the current Administration’s initiatives of continued financial deregulation. In light the current Administration’s continuing efforts in this regard, CWBC cannot predict which provisions of the Dodd-Frank Act will be repealed, put in to effect, delayed or enforced under the current Administration and, therefore, cannot predict the effect, if any, that the Dodd-Frank Act will have on CWBC's future operations and financial condition.considered proprietary trading with their own accounts.
2018 Regulatory Reform - The EGRRCPA
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as CWB, and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as CWB.
The EGRRCPA, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8-10%. Any qualifying depository institution or its holding company that exceeds the “Community Bank Leverage Ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. The EGRRCPA also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the EGRRCPA includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
The EGRRCPA requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate impact of the law. It is difficult at this time to predict when or how any new standards under the EGRRCPA will ultimately be applied to us or what specific impact the EGRRCPA, and the yet-to-be-written implementing rules and regulations, will have on community banks.
Financial Institutions Capital Rules
Federal regulations require FDIC-insured depository institutions, including CWB,In addition to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio; a Tier 1 capital to risk-based assets ratio; a total capital to risk-based assets; and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendationsDodd-Frank Act, the international oversight body of the Basel Committee on Banking Supervision, or Basel III, reached agreements that introduced a minimum common equity tier 1 capital requirement of 4.50 percent, along with a capital conservation buffer of 2.50 percent to bring total common equity capital requirements to 7.00 percent. The federal banking agencies issued final rules that implemented Basel III and certain other revisions to the Basel capital framework, as well as the minimum leverage and risk-based capital requirements of Dodd Frank Act. Federal regulators periodically propose amendments to the Dodd-Frank Act.
Therisk-based capital guidelines and the related regulatory framework and consider changes to the capital standards requirethat could significantly increase the maintenanceamount of capital needed to meet applicable standards. The timing of adoption, ultimate form and effect of any such proposed amendments cannot be determined at this time.
Basel III, among other things: (i) implemented increased capital levels for CWBC and CWB; (ii) introduced a new capital measure of common equity Tier 1 capital known as “ CET1” and related regulatory capital ratio of CET1 to risk-weighted assets; (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iv) mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (v) expanded the scope of the deductions from and adjustments to capital. Under Basel III, for most banking organizations the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to Basel III specific requirements.
Under Basel III, the minimum capital ratios are as follows: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; (iii) 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and (iv) 4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage ratio”). The Basel III new capital conservation buffer is designed to absorb losses and protect the financial institution during periods of economic difficulties. Banking institutions with a ratio of CET1 to risk-weighted assets, Tier 1 to risk-weighted assets or total capital to risk-weighted assets above the minimum but below the capital conservation buffer will face limitations on their ability to pay dividends, repurchase shares or pay discretionary bonuses based on the amount of the shortfall and the institution’s “eligible retained income. As of January 1, 2019, the capital conservation buffer is fully phased-in and CWBC and CWB are required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 4.5%8.5%, 6% and 8%, respectively. The regulations also establish a minimum required leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income ("AOCI"), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution's assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on the risk deemed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1(iii) total capital to risk-weighted assets aboveof at least 10.5%.
Basel III provides for a number of deductions from and adjustments to CET1. These include the amount necessaryrequirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phasedthe extent that any one such category exceeds 10% of CET1 or all such items, in beginning January 1, 2016 at 0.625%the aggregate, exceed 15% of risk-weighted assetsCET1.
Basel III provides a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and increasing each year until fully implemented at 2.5% on January 1, 2019. Institutions that do not maintain the required capital buffer will become subject100%) to progressively most stringent limitationsa larger and more risk-sensitive number of categories, depending on the percentagenature of earnings that can be paid outthe assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, resulting in dividends or usedhigher risk weights for stock repurchases and on the paymenta variety of discretionary bonuses to executive management.asset classes.
CWBC
General.As a bank holding company, CWBC is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"(“BHCA”), and is subject to regulation by the FRB. According to FRB Policy, CWBC is expected to act as a source of financial strength for CWB, to commit resources to support it in circumstances where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to periodic examination by the FRB. CWBC is also required to file periodic reports of its operations and any additional information regarding its activities and those of its subsidiaries as may be required by the FRB.
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct from CWB. CWBC has the ability to raise capital on its own behalf or borrow from external sources, CWBC may also obtain additional funds from dividends paid by, and fees charged for services provided to, CWB. However, regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC.
Transactions with Affiliates and Insiders. CWBC and any subsidiaries it may purchase or organize are deemed to be affiliates of CWB within the meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans by CWB to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of CWB’s capital, in the case of any one affiliate, and is limited to 20% of CWB’s capital, in the case of all affiliates. In addition, transactions between CWB and other affiliates must be on terms and conditions that are consistent with safe and sound banking practices, inpractices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. CWBC and CWB are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s executive officers, directors and principal shareholders; any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits; require prior full board approval when aggregate extensions of credit to the person exceed specified amounts; must be made on substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; must not involve more than the normal risk of repayment or present other unfavorable features; and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities. Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; or (iii) or merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” CWBC, therefore, is permitted to engage in a variety of banking-related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities and merchant banking. CWBC has not elected to qualify for these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, CWB may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:
| · | the customer must obtain or provide some additional credit, property or services from or to CWB other than a loan, discount, deposit or trust services; |
the customer must obtain or provide some additional credit, property or services from or to CWB other than a loan, discount, deposit or trust services;
| · | the customer must obtain or provide some additional credit, property or service from or to CWBC or any subsidiaries; or |
| · | the customer must not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended. |
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the customer must obtain or provide some additional credit, property or service from or to CWBC or any subsidiaries; or
the customer must not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended.
Capital Adequacy. Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “Supervision and Regulation – CWB – Regulatory Capital Guidelines,” assign various risk percentages to different categories of assets and capital is measured as a percentage of risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers under the Gramm-Leach-Bliley Act, would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500 allows CWBC to pay a dividend to its shareholders only to the extent that CWBC has retained earnings and, after the dividend, CWBC’s:
| · | assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and |
| · | current assets would be at least equal to current liabilities. |
40current assets would be at least equal to current liabilities.
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
The Sarbanes-Oxley Act of 2002 (“SOX”). SOX became effective on July 30, 2002, and represents the most far reaching corporate and accounting reform legislation since the enactment of the Securities Act and the Exchange Act. SOX is intended to provideprovides a permanent framework that improves the quality of independent audits and accounting services, improves the quality of financial reporting, strengthens the independence of accounting firms and increases the responsibility of management for corporate disclosures and financial statements.
SOX provisions are significant to all companies that have a class of securities registered under Section 12 of the Exchange Act, or are otherwise reporting to the SEC (or the appropriate federal banking agency) pursuant to Section 15(d) of the Exchange Act, including CWBC (collectively, “public companies”).CWBC. In addition to SEC rulemaking to implement SOX, NASDAQ has adopted corporate governance rules intended to allow shareholders to more easily and effectively monitor the performance of companies and directors.
As a result of SOX, and its regulations, CWBC has incurred substantial cost to interpret and ensure compliance with the law and its regulations including, without limitation, increased expenditures by CWBC in auditors’ fees, attorneys’ fees, outside advisors fees, and increased errors and omissions insurance premium costs. Future changes in the laws, regulation, or policies that impact CWBC cannot necessarily be predicted and may have a material effect on the business and earnings of CWBC.
CWB
General.CWB, as a national banking association which is a member of the Federal Reserve System, is subject to regulation, supervision and regular examination by the OCC and FDIC. CWB’s deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of CWB'sCWB’s business and establish a comprehensive framework governing its operations.
Regulatory Capital Guidelines.The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 150%.
The following table sets forth the regulatory capital for CWB and CWBC (on a consolidated basis) at December 31, 2017.2019.
| | | Adequately Capitalized | | | Well Capitalized | | | CWB | | | CWBC (consolidated) | | | Adequately Capitalized | | | Well Capitalized | | | Capital Conservation Buffer Fully Phased-In | | | CWB | | | CWBC (consolidated) | |
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| Total risk-based capital | | | 8.00 | % | | | 10.00 | % | | | 11.31 | % | | | 11.17 | % | | 8.00 | % | | 10.00 | % | | 10.50 | % | | 11.41 | % | | 11.73 | % |
| Tier 1 risk-based capital ratio | | | 6.00 | % | | | 8.00 | % | | | 10.10 | % | | | 9.96 | % | | 6.00 | % | | 8.00 | % | | 8.50 | % | | 10.28 | % | | 10.60 | % |
| Common Equity Tier 1 | | | 4.50 | % | | | 6.50 | % | | | 10.10 | % | | | 9.96 | % | | 4.50 | % | | 6.50 | % | | 7.00 | % | | 10.28 | % | | 10.60 | % |
| Tier 1 leverage capital ratio | | | 4.00 | % | | | 5.00 | % | | | 8.83 | % | | | 8.72 | % | | 4.00 | % | | N/A | | | N/A | | | 9.06 | % | | 9.33 | % |
Prompt Corrective Action Authority. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
| · | “well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; |
| · | “adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized”; |
| · | “undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances) |
| · | “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and |
| · | “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2% |
41“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized”;
Index“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances)
“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital levels to be categorized as “well capitalized,” will be deemed to be “adequately capitalized,” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
The OCC, as the primary regulator for national banks, also has a broad range of enforcement measures, from cease and desist powers and the imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Limitations on Dividend Payments. CWB is a national bank, governed by the National Bank Act and the rules and regulations of the OCC. National banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent the approval of the OCC, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. A dividend in excess of that amount constitutes a reduction in permanent capital and requires the prior approval of the OCC and the approval of two-thirds of the bank’s shareholders.
Brokered Deposit Restrictions.Well-capitalized banks are not subject to limitations on brokered deposits, while an adequately capitalized bank is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized banks are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2016,2019, CWB is deemed to be “well capitalized” and, therefore, is eligible to accept brokered deposits.
FDIC Insurance and Insurance Assessments. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.
As previously noted, the Dodd-Frank Act requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by September 30, 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadensbroadened the base for FDIC insurance assessments so that assessments will beare based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adoptedDeposit Insurance Fund reserve ratio actually reached 1.36% on September 30, 2018, ahead of the September 30, 2020 deadline. As a new restoration planresult small banks received assessment credits for the portion of their assessment that contributed to increasethe growth in the reserve ratio tobetween 1.15% and 1.35% by September 30, 2020 and will issue additional rules regarding the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with assets less than $10 billion in assets..
The FDIC may terminate its insurance of deposits if it finds that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Anti-Money Laundering and OFAC RegulationRegulation.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations requires CWB to take steps to prevent the use of it or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing.
CWB must provide BSA/AML training to employees, designate an AMLa BSA compliance officer and annually audit the BSA/AML program to assess its effectiveness. The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e. g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
Failure of CWB to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. CWB has augmented its systems and procedures to accomplish this. CWB believes that the ongoing cost of compliance with the BSA, AML and OFAC programs is not likely to be material to CWB
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial institution'sinstitution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.”
CWB had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Safeguarding of Customer Information and Privacy. The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. CWB has adopted a customer information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibitsare prohibited from disclosing such information except as provided in CWB’s policies and procedures.information. CWB has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of CWB.
Consumer Compliance and Fair Lending Laws. CWB is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax Compliance Act, (effective 2013), CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of Dodd-Frank.the Dodd-Frank Act. The enforcement of Fair Lending laws has been an increasing area of focus for regulators, including the FDIC and CFPB.the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the GLBGramm-Leach-Bliley Act and certain state laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.
Other Aspects of Banking Law. CWB is also subject to federal statutory and regulatory provisions covering, among other things, security procedures, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject bank holding companies and banks to increased supervision and disclosure, compliance costs and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, BSA compliance, as well as other safety and soundness concerns.
It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which CWB’s businesses would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in CWB’s operations and increased compliance costs.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Company'sCompany’s primary market risk is interest rate risk (“IRR”). To minimize the volatility of net interest income at risk (“NII”) and the impact on economic value of equity (“EVE”), the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by the Board’s Asset Liability Committee (“ALCO”). ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies, including IRR exposure.
To mitigate the impact of changes in interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the Company actively manages the amounts and maturities. While the Company has some assets and liabilities in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.
The Company uses a simulation model, combined with downloaded detailed information from various application programs, and assumptions regarding interest rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates. The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase and decrease in interest rates compared to a flat interest rate scenario. The prior rate environment precluded a decrease in rates for the analysis. The model assumes that the rate change shock occurs immediately.
The following table presents the impact of that analysis in dollars and percentages at December 31, 2017.2019.
| | | Sensitivity of Net Interest Income | | | Sensitivity of Net Interest Income | |
| | | | | | | |
| | | Interest Rate Scenario (change in basis point from Base) | | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Interest income | | $ | 37,719 | | | $ | 40,270 | | | $ | 42,869 | | | $ | 45,465 | | | $ | 48,096 | | | $ | 50,721 | | | $ | 53,243 | | | $ | 42,602 | | | $ | 45,015 | | | $ | 47,538 | | | $ | 50,328 | | | $ | 53,176 | | | $ | 55,978 | | | $ | 58,673 | |
| Interest expense | | | 4,089 | | | | 6,910 | | | | 10,681 | | | | 14,452 | | | | 18,223 | | | | 21,994 | | | | 25,766 | | | | 7,549 | | | | 10,267 | | | | 14,159 | | | | 18,039 | | | | 21,903 | | | | 25,767 | | | | 29,632 | |
| Net interest income | | $ | 33,630 | | | $ | 33,360 | | | $ | 32,188 | | | $ | 31,013 | | | $ | 29,873 | | | $ | 28,727 | | | $ | 27,477 | | | $ | 35,053 | | | $ | 34,748 | | | $ | 33,379 | | | $ | 32,289 | | | $ | 31,273 | | | $ | 30,211 | | | $ | 29,042 | |
| % change | | | 0.8 | % | | | | | | | -3.5 | % | | | -7.0 | % | | | -10.5 | % | | | -13.9 | % | | | -17.6 | % | | 0.9 | % | | | | | (3.9 | )% | | (7.1 | )% | | (10.0 | )% | | (13.1 | )% | | (16.4 | )% |
At December 31, 2016,2018, the following table presents the impact of that analysis in dollars and percentages:
| | | Sensitivity of Net Interest Income | | | Sensitivity of Net Interest Income | |
| | | | | | | |
| | | Interest Rate Scenario (change in basis point from Base) | | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Interest income | | $ | 31,115 | | | $ | 33,188 | | | $ | 35,485 | | | $ | 37,749 | | | $ | 40,074 | | | $ | 42,411 | | | $ | 44,584 | | | $ | 42,761 | | | $ | 45,290 | | | $ | 48,039 | | | $ | 50,797 | | | $ | 53,571 | | | $ | 56,210 | | | $ | 58,826 | |
| Interest expense | | | 1,993 | | | | 3,318 | | | | 5,826 | | | | 8,334 | | | | 10,842 | | | | 13,350 | | | | 15,858 | | | | 9,280 | | | | 12,258 | | | | 16,154 | | | | 19,981 | | | | 23,808 | | | | 27,636 | | | | 31,463 | |
| Net interest income | | $ | 29,122 | | | $ | 29,870 | | | $ | 29,659 | | | $ | 29,415 | | | $ | 29,232 | | | $ | 29,061 | | | $ | 28,726 | | | $ | 33,481 | | | $ | 33,032 | | | $ | 31,885 | | | $ | 30,816 | | | $ | 29,762 | | | $ | 28,575 | | | $ | 27,363 | |
| % change | | | -2.5 | % | | | | | | | -0.7 | % | | | -1.5 | % | | | -2.1 | % | | | -2.7 | % | | | -3.8 | % | | 1.4 | % | | | | | (3.5 | )% | | (6.7 | )% | | (9.9 | )% | | (13.5 | )% | | (17.2 | )% |
As of December 31, 20172019 the Fed Funds target rate was a range of 01.25%1.75% to 1.50%2.00% and the prime rate was 4.50%4.75%. As of December 31, 2016,2018, the Fed Funds target rate was a range of 0.50%2.25% to 0.75%2.50% and the prime rate was 3.75%5.25%.
Economic Value of Equity. We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off-balance sheet items, defined as economic value of equity, using a simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At December 31, 20172019 and 2016,2018, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. The following tables show projected change in economic value of equity for this set of rate shocks.
| | | Economic Value of Equity | | | Economic Value of Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2019 | |
| | | Interest Rate Scenario (change in basis point from Base) | | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Assets | | $ | 847,537 | | | $ | 824,808 | | | $ | 807,810 | | | $ | 790,955 | | | $ | 775,754 | | | $ | 760,912 | | | $ | 744,936 | | | $ | 933,368 | | | $ | 908,364 | | | $ | 888,642 | | | $ | 870,519 | | | $ | 853,961 | | | $ | 837,636 | | | $ | 819,847 | |
| Liabilities | | | 754,397 | | | | 740,293 | | | | 731,860 | | | | 723,909 | | | | 716,402 | | | | 709,304 | | | | 702,584 | | | | 853,908 | | | | 836,330 | | | | 824,925 | | | | 814,210 | | | | 804,128 | | | | 794,629 | | | | 785,667 | |
| Net present value | | $ | 93,140 | | | $ | 84,515 | | | $ | 75,950 | | | $ | 67,046 | | | $ | 59,352 | | | $ | 51,608 | | | $ | 42,352 | | | $ | 79,460 | | | $ | 72,034 | | | $ | 63,716 | | | $ | 56,309 | | | $ | 49,832 | | | $ | 43,007 | | | $ | 34,180 | |
| % change | | | 10.2 | % | | | | | | | -10.1 | % | | | -20.7 | % | | | -29.8 | % | | | -38.9 | % | | | -49.9 | % | | 10.3 | % | | | | | (11.5 | )% | | (21.8 | )% | | (30.8 | )% | | (40.3 | )% | | (52.6 | )% |
| | | Economic Value of Equity | | | Economic Value of Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2018 | |
| | | Interest Rate Scenario (change in basis point from Base) | | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | | | (dollars in thousands) | |
| Assets | | $ | 717,826 | | | $ | 698,123 | | | $ | 679,315 | | | $ | 664,298 | | | $ | 652,452 | | | $ | 640,693 | | | $ | 626,206 | | | $ | 878,269 | | | $ | 858,280 | | | $ | 841,547 | | | $ | 824,377 | | | $ | 808,434 | | | $ | 792,496 | | | $ | 774,020 | |
| Liabilities | | | 632,987 | | | | 617,359 | | | | 606,434 | | | | 596,260 | | | | 586,768 | | | | 577,898 | | | | 569,595 | | | | 790,702 | | | | 776,998 | | | | 768,730 | | | | 760,927 | | | | 753,552 | | | | 746,571 | | | | 739,954 | |
| Net present value | | $ | 84,839 | | | $ | 80,764 | | | $ | 72,881 | | | $ | 68,038 | | | $ | 65,684 | | | $ | 62,795 | | | $ | 56,611 | | | $ | 87,567 | | | $ | 81,282 | | | $ | 72,817 | | | $ | 63,450 | | | $ | 54,882 | | | $ | 45,925 | | | $ | 34,067 | |
| % change | | | 5.0 | % | | | | | | | -9.8 | % | | | -15.8 | % | | | -18.7 | % | | | -22.2 | % | | | -29.9 | % | | 7.7 | % | | | | | (10.4 | )% | | (21.9 | )% | | (32.5 | )% | | (43.5 | )% | | (58.1 | )% |
For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk.”
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and supplementary data included in this Form 10-K begin on page 4950 immediately following the index to consolidated financial statements page to this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Community West Bancshares
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community West Bancshares (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated income statements, of income, comprehensive income, stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company'sCompany’s auditor since 2015.
Las Vegas, Nevada
March 2, 2018
10, 2020
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | PAGE |
| | |
| Report of Independent Registered Public Accounting Firm | 4748 |
| | |
| Consolidated Financial Statements | 4849 |
| | |
| Consolidated Balance Sheets | 4950
|
| | |
| Consolidated Income Statements | 5051
|
| | |
| Consolidated Statements of Comprehensive Income | 5152 |
| | |
| Consolidated Statements of Stockholders’ Equity | 5253 |
| | |
| Consolidated Statements of Cash Flows | 5354 |
| | |
| Notes to Consolidated Financial Statements | 5455 |
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
| | | | December 31, | |
| | | December 31, | | | 2019 | | 2018 | |
| | | 2017 | | | 2016 | | | | | | |
| | | (in thousands, except share amounts) | | | (in thousands, except share amounts) | |
| Assets: | | | | | | | | | | | |
| Cash and due from banks | | $ | 3,639 | | | $ | 2,385 | | | $ | 2,536 | | | $ | 2,975 | |
| Federal funds sold | | | 12 | | | | 16 | | | | 3 | | | | 8 | |
| Interest-earning demand in other financial institutions | | | 42,218 | | | | 31,715 | | | | 80,122 | | | | 53,932 | |
| Cash and cash equivalents | | | 45,869 | | | | 34,116 | | | | 82,661 | | | | 56,915 | |
| Investment securities - available-for-sale, at fair value | | | 28,783 | | | | 22,681 | | |
| Investment securities - held-to-maturity, at amortized cost | | | 7,565 | | | | 9,002 | | |
| Investment securities - available-for-sale, at fair value; amortized cost of $19,382 at December 31, 2019 and $25,156 at December 31, 2018 | | | | 19,264 | | | | 24,931 | |
| Investment securities - held-to-maturity, at amortized cost; fair value of $6,302 at December 31, 2019 and $7,269 at December 31, 2018 | | | | 6,132 | | | | 7,301 | |
| Investment securities - measured at fair value | | | | 167 | | | | 121 | |
| Federal Home Loan Bank stock, at cost | | | 2,347 | | | | 2,070 | | | | 2,714 | | | | 2,714 | |
| Federal Reserve Bank stock, at cost | | | 1,373 | | | | 1,373 | | | | 1,373 | | | | 1,373 | |
| Loans: | | | | | | | | | | | | | | | | |
| Held for sale, at lower of cost or fair value | | | 55,094 | | | | 61,416 | | | | 42,046 | | | | 48,355 | |
| Held for investment, net of allowance for loan losses | | | 671,095 | | | | 561,939 | | |
| Held for investment, net of allowance for loan losses of $8,717 at December 31, 2019 and $8,691 at December 31, 2018 | | | | 724,800 | | | | 711,197 | |
| Total loans | | | 726,189 | | | | 623,355 | | | | 766,846 | | | | 759,552 | |
| Other assets acquired through foreclosure, net | | | 372 | | | | 137 | | | | 2,524 | | | | - | |
| Premises and equipment, net | | | 5,581 | | | | 3,931 | | | | 7,655 | | | | 6,381 | |
| Other assets | | | 15,236 | | | | 13,907 | | | | 24,534 | | | | 18,003 | |
| Total assets | | $ | 833,315 | | | $ | 710,572 | | | $ | 913,870 | | | $ | 877,291 | |
| | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | |
| Non-interest-bearing demand | | $ | 108,500 | | | $ | 100,372 | | | $ | 110,843 | | | $ | 108,161 | |
| Interest-bearing demand | | | 256,717 | | | | 253,023 | | | | 314,278 | | | | 270,431 | |
| Savings | | | 14,085 | | | | 14,007 | | | | 15,689 | | | | 14,641 | |
| Certificates of deposit ($250,000 or more) | | | 81,985 | | | | 77,509 | | | | 96,431 | | | | 93,439 | |
| Other certificates of deposit | | | 238,397 | | | | 167,325 | | | | 213,693 | | | | 229,334 | |
| Total deposits | | | 699,684 | | | | 612,236 | | | | 750,934 | | | | 716,006 | |
| Other borrowings | | | 56,843 | | | | 29,000 | | | | 65,000 | | | | 75,000 | |
| Other liabilities | | | 6,718 | | | | 4,000 | | | | 15,958 | | | | 10,134 | |
| Total liabilities | | | 763,245 | | | | 645,236 | | | | 831,892 | | | | 801,140 | |
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity: | | | | | | | | | | | | | | | | |
| Common stock — no par value | | | 42,604 | | | | 41,575 | | |
| Common stock — no par value, 60,000,000 shares authorized; 8,472,463 shares issued and outstanding at December 31, 2019 and 8,533,346 at December 31, 2018 | | | | 42,586 | | | | 42,964 | |
| Retained earnings | | | 27,441 | | | | 23,790 | | | | 39,470 | | | | 33,328 | |
| Accumulated other comprehensive income (loss) | | | 25 | | | | (29 | ) | |
| Accumulated other comprehensive (loss) | | | | (78 | ) | | | (141 | ) |
| Total stockholders’ equity | | | 70,070 | | | | 65,336 | | | | 81,978 | | | | 76,151 | |
| Total liabilities and stockholders’ equity | | $ | 833,315 | | | $ | 710,572 | | | $ | 913,870 | | | $ | 877,291 | |
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| Interest income: | | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
| Loans, including fees | | $ | 36,192 | | | $ | 31,097 | | | $ | 29,139 | | | $ | 43,890 | | | $ | 40,865 | | | $ | 36,192 | |
| Investment securities and other | | | 1,199 | | | | 1,119 | | | | 1,083 | | | | 1,849 | | | | 1,766 | | | | 1,199 | |
| Total interest income | | | 37,391 | | | | 32,216 | | | | 30,222 | | | | 45,739 | | | | 42,631 | | | | 37,391 | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 4,283 | | | | 2,851 | | | | 2,383 | | | 10,055 | | | 7,702 | | | 4,283 | |
| Other borrowings | | | 446 | | | | 276 | | | | 133 | | | | 1,327 | | | | 1,286 | | | | 446 | |
| Total interest expense | | | 4,729 | | | | 3,127 | | | | 2,516 | | | | 11,382 | | | | 8,988 | | | | 4,729 | |
| Net interest income | | | 32,662 | | | | 29,089 | | | | 27,706 | | | 34,357 | | | 33,643 | | | 32,662 | |
| Provision (credit) for loan losses | | | 411 | | | | (48 | ) | | | (2,274 | ) | | | (165 | ) | | | 14 | | | | 411 | |
| Net interest income after provision for loan losses | | | 32,251 | | | | 29,137 | | | | 29,980 | | | | 34,522 | | | | 33,629 | | | | 32,251 | |
| Non-interest income: | | | | | | | | | | | | | | | | | | | | | |
| Other loan fees | | | 1,300 | | | | 1,042 | | | | 1,014 | | | 1,383 | | | 1,348 | | | 1,300 | |
| Gains from loan sales, net | | | 765 | | | — | | | 53 | |
| Service charges | | | 567 | | | 459 | | | 458 | |
| Document processing fees | | | 558 | | | | 496 | | | | 466 | | | 423 | | | 489 | | | 558 | |
| Service charges | | | 458 | | | | 403 | | | | 372 | | |
| Gains from loan sales, net | | | 53 | | | | - | | | | 132 | | |
| Other | | | 581 | | | | 312 | | | | 325 | | | | 469 | | | | 332 | | | | 388 | |
| Total non-interest income | | | 2,950 | | | | 2,253 | | | | 2,309 | | | | 3,607 | | | | 2,628 | | | | 2,757 | |
| Non-interest expenses: | | | | | | | | | | | | | | | | | | | | | |
| Salaries and employee benefits | | | 15,339 | | | | 14,383 | | | | 12,904 | | | 17,094 | | | 16,329 | | | 15,339 | |
| Occupancy, net | | | 2,862 | | | | 2,264 | | | | 1,943 | | | 3,088 | | | 3,132 | | | 2,862 | |
| Professional services | | | 1,069 | | | | 873 | | | | 993 | | | 1,679 | | | 1,356 | | | 1,069 | |
| Advertising and marketing | | | 750 | | | | 616 | | | | 466 | | | 774 | | | 685 | | | 750 | |
| Data processing | | | 725 | | | | 793 | | | | 533 | | | 876 | | | 852 | | | 725 | |
| Depreciation | | | 685 | | | | 678 | | | | 399 | | | 864 | | | 764 | | | 685 | |
| FDIC assessment | | | 664 | | | | 376 | | | | 342 | | | 427 | | | 770 | | | 664 | |
| Stock based compensation | | | 537 | | | | 338 | | | | 412 | | | 382 | | | 478 | | | 537 | |
| Loan servicing and collection | | | 253 | | | | 209 | | | | 395 | | |
| Loan litigation settlement, net | | | - | | | | - | | | | 7,095 | | |
| Other | | | 1,854 | | | | 2,018 | | | | 1,799 | | | | 1,571 | | | | 1,673 | | | | 1,914 | |
| Total non-interest expenses | | | 24,738 | | | | 22,548 | | | | 27,281 | | | | 26,755 | | | | 26,039 | | | | 24,545 | |
| Income before provision for income taxes | | | 10,463 | | | | 8,842 | | | | 5,008 | | | 11,374 | | | 10,218 | | | 10,463 | |
| Provision for income taxes | | | 5,548 | | | | 3,613 | | | | 2,138 | | | | 3,411 | | | | 2,809 | | | | 5,548 | |
| Net income | | | 4,915 | | | | 5,229 | | | | 2,870 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Dividends and accretion on preferred stock | | | - | | | | - | | | | 445 | | |
| Discount on partial redemption of preferred stock | | | - | | | | - | | | | (129 | ) | |
| Net income available to common stockholders | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.60 | | | $ | 0.64 | | | $ | 0.31 | | | $ | 0.94 | | | $ | 0.89 | | | $ | 0.60 | |
| Diluted | | $ | 0.57 | | | $ | 0.62 | | | $ | 0.30 | | | $ | 0.93 | | | $ | 0.88 | | | $ | 0.57 | |
| Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 8,146 | | | | 8,114 | | | | 8,203 | | | 8,470 | | | 8,288 | | | 8,146 | |
| Diluted | | | 8,589 | | | | 8,444 | | | | 8,491 | | | 8,579 | | | 8,451 | | | 8,589 | |
| Dividends declared per common share | | $ | 0.155 | | | $ | 0.135 | | | $ | 0.110 | | | $ | 0.215 | | | $ | 0.190 | | | $ | 0.155 | |
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Net income | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,870 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Other comprehensive income (loss), net: | | | | | | | | | | | | | | | | | | | | | |
| Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($32), $69, ($212) for each respective period presented) | | | 54 | | | | 39 | | | | (99 | ) | |
| Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($44), $70, ($32) for each respective period presented) | | | | 63 | | | | (107 | ) | | | 54 | |
| Net other comprehensive income (loss) | | | 54 | | | | 39 | | | | (99 | ) | | | 63 | | | | (107 | ) | | | 54 | |
| Comprehensive income | | $ | 4,969 | | | $ | 5,268 | | | $ | 2,771 | | | $ | 8,026 | | | $ | 7,302 | | | $ | 4,969 | |
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | Total | | | Preferred Stock | | | Common Stock | | | Accumulated Other Comprehensive | | | Retained | | | Total Stockholders’ | |
| | | Preferred Stock | | | Common Stock | | | Comprehensive | | | Retained | | | Stockholders' | | | Shares | | | Amount | | | Shares | | | Amount | | | Income (Loss) | | | Earnings | | | Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Income (Loss) | | | Earnings | | | Equity | | | (in thousands) | |
| | | (in thousands) | | |
| Balance, December 31, 2014: | | | 7 | | | $ | 7,014 | | | | 8,203 | | | $ | 41,957 | | | $ | 31 | | | $ | 18,005 | | | $ | 67,007 | | |
| Balance, December 31, 2016: | | | — | | | $ | — | | | 8,096 | | | $ | 41,575 | | | $ | (29 | ) | | $ | 23,790 | | | $ | 65,336 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,870 | | | | 2,870 | | | — | | | — | | | — | | | — | | | — | | | 4,915 | | | 4,915 | |
| Exercise of stock options | | | - | | | | - | | | | 7 | | | | 14 | | | | - | | | | - | | | | 14 | | | — | | | — | | | 97 | | | 492 | | | — | | | — | | | 492 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | 412 | | | | - | | | | - | | | | 412 | | | — | | | — | | | — | | | 537 | | | — | | | — | | | 537 | |
| Preferred stock redemption and discount | | | (7 | ) | | | (7,014 | ) | | | - | | | | - | | | | - | | | | 129 | | | | (6,885 | ) | |
| Common stock repurchase | | | - | | | | - | | | | (4 | ) | | | (28 | ) | | | - | | | | - | | | | (28 | ) | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Dividends on preferred stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (445 | ) | | | (445 | ) | |
| Dividends on common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (902 | ) | | | (902 | ) | | — | | | — | | | — | | | — | | | — | | | (1,264 | ) | | (1,264 | ) |
| Other comprehensive loss, net | | | - | | | | - | | | | - | | | | - | | | | (99 | ) | | | - | | | | (99 | ) | | | — | | | | — | | | | — | | | | — | | | | 54 | | | | — | | | | 54 | |
| Balance, December 31, 2015: | | | - | | | | - | | | | 8,206 | | | | 42,355 | | | | (68 | ) | | | 19,657 | | | | 61,944 | | |
| Balance, December 31, 2017: | | | | — | | | | — | | | | 8,193 | | | | 42,604 | | | | 25 | | | | 27,441 | | | | 70,070 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,229 | | | | 5,229 | | | — | | | — | | | — | | | — | | | — | | | 7,409 | | | 7,409 | |
| Exercise of stock options | | | - | | | | - | | | | 74 | | | | 220 | | | | - | | | | - | | | | 220 | | | — | | | — | | | 102 | | | 551 | | | — | | | — | | | 551 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | 338 | | | | - | | | | - | | | | 338 | | | — | | | — | | | — | | | 478 | | | — | | | — | | | 478 | |
| Common stock repurchase | | | - | | | | - | | | | (184 | ) | | | (1,338 | ) | | | - | | | | - | | | | (1,338 | ) | | — | | | — | | | (63 | ) | | (669 | ) | | — | | | — | | | (669 | ) |
| Dividends on common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,096 | ) | | | (1,096 | ) | | — | | | — | | | — | | | — | | | — | | | (1,581 | ) | | (1,581 | ) |
| Other comprehensive income, net | | | - | | | | - | | | | - | | | | - | | | | 39 | | | | - | | | | 39 | | | — | | | — | | | — | | | — | | | (107 | ) | | — | | | (107 | ) |
| Balance, December 31, 2016: | | | - | | | | - | | | | 8,096 | | | | 41,575 | | | | (29 | ) | | | 23,790 | | | | 65,336 | | |
| Impact of ASU 2016-01 and 2018-02 as of January 1, 2018 | | | — | | | — | | | — | | | — | | | (59 | ) | | 59 | | | — | |
| Conversion of common stock warrants | | | | — | | | | — | | | | 301 | | | | — | | | | — | | | | — | | | | — | |
| Balance, December 31, 2018: | | | | — | | | | — | | | | 8,533 | | | | 42,964 | | | | (141 | ) | | | 33,328 | | | | 76,151 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,915 | | | | 4,915 | | | — | | | — | | | — | | | — | | | — | | | 7,963 | | | 7,963 | |
| Exercise of stock options | | | - | | | | - | | | | 97 | | | | 492 | | | | - | | | | - | | | | 492 | | | — | | | — | | | 39 | | | 270 | | | — | | | — | | | 270 | |
| Stock based compensation | | | - | | | | - | | | | - | | | | 537 | | | | - | | | | - | | | | 537 | | | — | | | — | | | — | | | 382 | | | — | | | — | | | 382 | |
| Common stock repurchase | | | — | | | — | | | (100 | ) | | (1,030 | ) | | — | | | — | | | (1,030 | ) |
| Dividends on common stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,264 | ) | | | (1,264 | ) | | — | | | — | | | — | | | — | | | — | | | (1,821 | ) | | (1,821 | ) |
| Other comprehensive income, net | | | - | | | | - | | | | - | | | | - | | | | 54 | | | | - | | | | 54 | | | | — | | | | — | | | | — | | | | — | | | | 63 | | | | — | | | | 63 | |
| Balance, December 31, 2017: | | | - | | | $ | - | | | | 8,193 | | | $ | 42,604 | | | $ | 25 | | | $ | 27,441 | | | $ | 70,070 | | |
| Balance, December 31, 2019: | | | | — | | | | — | | | | 8,472 | | | | 42,586 | | | | (78 | ) | | | 39,470 | | | | 81,978 | |
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,870 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | |
| Provision (credit) for loan losses | | | 411 | | | | (48 | ) | | | (2,274 | ) | | (165 | ) | | 14 | | | 411 | |
| Depreciation | | | 685 | | | | 678 | | | | 399 | | | 864 | | | 764 | | | 685 | |
| Stock-based compensation | | | 537 | | | | 338 | | | | 412 | | | 382 | | | 478 | | | 537 | |
| Deferred income taxes | | | 528 | | | | (409 | ) | | | (21 | ) | | (328 | ) | | (529 | ) | | 528 | |
| Net (accretion) amortization of discounts and premiums for investment securities | | | 80 | | | | (82 | ) | | | (12 | ) | |
| (Gains) losses on: | | | | | | | | | | | | | |
Net amortization of discounts and premiums for investment securities (Gains) losses on: | | | 107 | | | 100 | | | 80 | |
| Sale of repossessed assets, net | | | (150 | ) | | | 16 | | | | 10 | | | 33 | | | 62 | | | (150 | ) |
| Sale of loans, net | | | (53 | ) | | | - | | | | (132 | ) | | (765 | )
| | — | | | (53 | ) |
| Sale of assets, net | | | - | | | | - | | | | 32 | | | 7 | | | — | | | — | |
| Loans originated for sale and principal collections, net | | | 6,375 | | | | 3,072 | | | | 2,403 | | | 6,309 | | | 6,739 | | | 6,375 | |
| Changes in: | | | | | | | | | | | | | | | | | | | | | |
| Other assets | | | (1,882 | ) | | | (551 | ) | | | 1,986 | | | 1,641 | | | (2,210 | ) | | (1,882 | ) |
| Other liabilities | | | 2,719 | | | | (431 | ) | | | 1,283 | | | (1,366 | ) | | 3,416 | | | 2,719 | |
| Servicing assets, net | | | 78 | | | | 58 | | | | 56 | | | | (745 | ) | | | 78 | | | | 78 | |
| Net cash provided by operating activities | | | 14,243 | | | | 7,870 | | | | 7,012 | | | | 13,937 | | | | 16,321 | | | | 14,243 | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | |
| Principal pay downs and maturities of available-for-sale securities | | | 3,256 | | | | 10,730 | | | | 9,981 | | | 5,686 | | | 3,436 | | | 3,256 | |
| Purchase of available-for-sale securities | | | (9,413 | ) | | | (9,810 | ) | | | (11,370 | ) | | — | | | — | | | (9,413 | ) |
| Principal pay downs and maturities of held-to-maturity securities | | | 1,413 | | | | 709 | | | | 1,407 | | | 1,151 | | | 1,040 | | | 1,413 | |
| Purchase of held-to-maturity securities | | | - | | | | (2,697 | ) | | | - | | |
| Purchases of held-to-maturity securities | | | — | | | (794 | ) | | — | |
| Loan originations and principal collections, net | | | (110,069 | ) | | | (90,183 | ) | | | (49,896 | ) | | (16,074 | ) | | (40,290 | ) | | (110,069 | ) |
| Purchase of bank owned life insurance | | | - | | | | (900 | ) | | | - | | | — | | | — | | | — | |
| Purchase of restricted stock, net | | | (277 | ) | | | (184 | ) | | | (170 | ) | | — | | | (367 | ) | | (277 | ) |
| Net increase in interest-bearing deposits in other financial institutions | | | - | | | | 99 | | | | - | | | — | | | — | | | — | |
| Purchase of premises and equipment, net | | | (2,335 | ) | | | (1,616 | ) | | | (371 | ) | | (2,145 | ) | | (1,564 | ) | | (2,335 | ) |
| Proceeds from sale of other real estate owned and repossessed assets, net | | | 416 | | | | 395 | | | | 538 | | | | 844 | | | | 484 | | | | 416 | |
| Net cash used in investing activities | | | (117,009 | ) | | | (93,457 | ) | | | (49,881 | ) | | | (10,538 | ) | | | (38,055 | ) | | | (117,009 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | |
| Net increase in deposits | | | 87,448 | | | | 67,898 | | | | 67,254 | | | 34,928 | | | 16,322 | | | 87,448 | |
| Net increase in borrowings | | | 27,843 | | | | 18,500 | | | | 500 | | |
Net (decrease) increase in borrowings | | | (10,000 | ) | | 18,157 | | | 27,843 | |
| Exercise of stock options | | | 492 | | | | 220 | | | | 14 | | | 270 | | | 551 | | | 492 | |
| Cash dividends paid on common stock | | | (1,264 | ) | | | (1,096 | ) | | | (902 | ) | | (1,821 | ) | | (1,581 | ) | | (1,264 | ) |
| Common stock repurchase | | | - | | | | (1,338 | ) | | | (28 | ) | | | (1,030 | ) | | | (669 | ) | | | — | |
| Redemption of preferred stock | | | - | | | | - | | | | (6,885 | ) | |
| Cash dividends paid on preferred stock | | | - | | | | - | | | | (524 | ) | |
| Net cash provided by financing activities | | | 114,519 | | | | 84,184 | | | | 59,429 | | | | 22,347 | | | | 32,780 | | | | 114,519 | |
| Net increase (decrease) in cash and cash equivalents | | | 11,753 | | | | (1,403 | ) | | | 16,560 | | |
Net increase in cash and cash equivalents | | | 25,746 | | | 11,046 | | | 11,753 | |
| Cash and cash equivalents at beginning of year | | | 34,116 | | | | 35,519 | | | | 18,959 | | | | 56,915 | | | | 45,869 | | | | 34,116 | |
| Cash and cash equivalents at end of period | | $ | 45,869 | | | $ | 34,116 | | | $ | 35,519 | | |
| Cash and cash equivalents at end of year | | | $ | 82,661 | | | $ | 56,915 | | | $ | 45,869 | |
| Supplemental disclosure: | | | | | | | | | | | | | | | | | | | | | |
| Cash paid during the period for: | | | | | | | | | | | | | | | | | | | | | |
| Interest | | $ | 4,357 | | | $ | 3,072 | | | $ | 2,436 | | | $ | 11,675 | | | $ | 8,321 | | | $ | 4,357 | |
| Income taxes | | | 4,830 | | | | 5,250 | | | | 675 | | | 2,526 | | | 3,360 | | | 4,830 | |
| Non-cash investing and financing activity: | | | | | | | | | | | | | | | | | | | | | |
| Transfers to other assets acquired through foreclosure, net | | | 501 | | | | 350 | | | | 609 | | | 3,401 | | | 174 | | | 501 | |
| Operating lease right-of-use asset | | | 7,190 | | | — | | | — | |
| Operating lease liability | | | 6,316 | | | — | | | — | |
See the accompanying notes.
COMMUNITY WEST BANCSHARES
NOTES TO 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”). These entities are collectively referred to herein 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 fair value of investment securities available for sale. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended December 31, 20162018 and 20152017 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Business Segments
Reportable business segments are determined using the “management approach” and are intended to present reportable segments consistent with how the chief operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of December 31, 2017, 20162019, 2018 and 2015,2017, the Company had only one reportable business segment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of clearing), and federal funds sold. Cash flows from loans originated by the Company and deposits are reported net.
The Company maintains amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash Reserve Requirement
Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in cash or with the Federal Reserve Bank (“FRB”). The amount of the reserve varies by bank as the bank is permitted to meet this requirement by maintaining the specified amount as an average balance over a two-week period. The total reserve balance requirement was approximately $3.6$3.0 million and $1.6$2.9 million as of December 31, 20172019 and 2016.2018.
Investment Securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations. The Company does not currently have any investmenthas its AGM Stock securities classified as trading.measured at fair value. The fair value changes are adjusted through non-interest income monthly.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than amortized cost, 2) the financial condition and near term prospects of the issuer, 3) the impact of changes in market interest rates, and 4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.
Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) market or other factors is recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost.
For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
The Company’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”) system and maintains an investment in capital stock of the FHLB. The bank also maintains an investment in FRB stock. These investments are considered equity securities with no actively traded market. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is reported in interest income. We conduct a periodic review and evaluation of our FHLB stock to determine if any impairment exists. No impairment existed in the years ended December 31, 20172019 or 2016.2018.
Servicing Assets
The guaranteed portion of certain Small Business Administration (“SBA”) loans can be sold into the secondary market. Servicing assets are recognized as separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing asset and resulting gain on sale are calculated based on the difference between the best actual par and premium bids on an individual loan basis.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) seller/servicer. Servicing assets/liabilities are recognized as separate assets/liabilities as certain servicing requirements are retained. Servicing assets are amortized over the period of, estimated net servicing income. CWB uses Farmer Mac prepayment statistics in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based on the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis. The initial servicing asset and resulting gain or calculated based on the contractual net servicing fees.
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 2015, the Company exited from originating single family residential loans for sale. The Company did not incur any lower of cost or fair value provision in the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
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 though 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'sborrower’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.and the Company extended its time horizon for the ALL methodology in 2019. 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.
Substantially Risk Free – These borrowers have virtually no probability of default or loss given default and present no identifiable or potential adverse risk to the Company. Documented repayment is either backed by the full faith and credit of the United States Government, or secured by cash collateral at a ratio of 115% of the principal borrowed. The collateral must be in the possession of the Company and free from potential claim. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.
OutstandingNominal Risk –This rating is the highest quality rating that is assigned to any loan in the portfolio. These loans are made tofor the highest quality borrowers with nominal probability of default or loss given default from the transaction. Typically this is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity and excellent debt service ability. The Borrower’s financial statementsoutlook is stable due to a broad range of operations or products and unquestionable repayment sources. Collateral securingis able to weather an economic downturn without significant impact to liquidity or net worth. Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade. In addition, these types of credits are generally cash depositswill conform in the bank orall aspects to established loan policies and procedures, laws, rules, and regulations. Transaction can include marketable securities held in custody.as collateral, properly margined.
GoodPass/Management Attention Risk – The loans is the three remaining pass categories range from minimal risk to moderate risk to management attention risk. 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 categoryfirst two categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this categorythe minimal and moderate risk categories are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.
Watch – Acceptable An asset in the management attention risk category indicates that although the borrower meets the criteria for a rating of acceptable risk or better, the credit possesses an identified and elevated risk level that requiresshould be resolved in a temporary increaseshort period of time. Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in attention by management. This can be caused by declines in sales, margins, liquiditythe submission of financial reporting or working capital. Generally the primary weakness is lackcovenant violations that are not indicative of current financial statements and industry issues.a protracted trend.
Special Mention - A Special Mention loan has potential weaknesses that require management'smanagement’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution'sinstitution’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. |
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. |
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 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 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. |
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 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'borrowers’ ability to pay and/or the value of the underlying collateral. Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.
Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on changes in any of the following factors:
| · | Concentrations of credit |
| · | Trends in volume, maturity, and composition of loans |
Trends in volume, maturity, and composition of loans
| · | Volume and trend in delinquency, nonaccrual, and classified assets |
Volume and trend in delinquency, nonaccrual, and classified assets
| · | Policy and procedures or underwriting standards |
Policy and procedures or underwriting standards
| · | Staff experience and ability |
Staff experience and ability
| · | Value of underlying collateral |
Value of underlying collateral
| · | Competition, legal, or regulatory environment |
Competition, legal, or regulatory environment
| · | Results of outside exams and quality of loan review and Board oversight |
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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter. Generally, the estimated useful lives of other items of premises and equipment are as follows:
| | | December 31, 2017 | | | December 31, 2016 | |
| Cash Reserve Requirement [Abstract] | | | | | | |
| Total reserve balance | | | 3.6 | | | | 1.6 | |
| Bank Owned Life Insurance [Abstract] | | | | | | | | |
| Cash surrender value of life insurance | | | 4.5 | | | | 4.3 | |
| Premises and Equipment [Abstract] | | | | | | | | |
| Building and improvements | | | 31.5 | | | | | |
| Furniture and equipment | | | 5.0 | | | | 10.0 | |
| Electronic equipment and software | | | 3.0 | | | | 5.0 | |
| Years |
| |
| Building and improvements | 31.5 |
| |
| Furniture and equipment | 5 – 10 |
| |
| Electronic equipment and software | 3 – 5 |
Leases
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding Right of Use (“ROU”) asset and operating lease liability are recorded in separate line items on the Consolidated Balance Sheet. ROU assets represent the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made and is reduced by lease incentive that are paid or are payable to the Company. Variable lease payments that depend on an index are included in lease payments based on the rate in effect at the commencement date of the lease. Lease payments are recognized on a straight-line basis as part of occupancy expense over the lease term.
As the rate implicit in the lease is not readily determinable, the Company’s incremental borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less, therefore, these leases are not recorded on the Company’s Balance Sheet. Lease expense of these leases is recognized over the lease term on a straight-line basis. The Company’s lease agreements may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the option will be exercised.
In addition to the package of practical expedients, the Company also elected the practical expedient that allows lessees to make an accounting policy election to not separate non-lease components from the associated lease component, and instead account for them all together as part of the applicable lease component. The majority of the Company’s non-lease components, such as common area maintenance and taxes, are variable and expensed as incurred. Variable payment amounts are determined in arrears by the landlord depending on actual costs incurred. See ‘‘Note 14. Leases” of these Notes to Consolidated Financial Statements for further disclosures required under the standard.
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.
Bank Owned Life Insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other non-interest income in the consolidated income statements. The cash surrender value of the underlying policies was $4.5$6.9 million and $4.3$6.7 million as of December 31, 20172019 and 2016,2018, respectively. There are no loans offset against cash surrender values, and there are no restrictions as to the use of proceeds.
Fair Value of Financial Instruments
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 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 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. |
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 December 31, 20172019 or 2016.2018. The estimated fair value amounts for December 31, 20172019 and 20162018 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.
The information presented in Note 15,16, “Fair Value Measurement,” 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 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.
FRB and FHLB 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 FRB stock. 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
Fair value for loans is estimated based on exit-pricing 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.
Deposit liabilities
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 other borrowings have been categorized as Level 3 in the fair value hierarchy. 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.
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 (loss) 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. Our revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new guidance, and noninterest income. The contracts that are in scope of the guidance are primarily related to service charges on deposit accounts, cardholder income, and other service charge fees. Based on our overall assessment of revenue streams, the Company believes the adoption will not have a material impact on the Company's Consolidated Financial Statements. The Company adopted this guidance as of January 1, 2018.2018 which did not have a material impact 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 has evaluated the impact of the provisions in this standard on the Company'sCompany’s Consolidated Financial Statements. The Company adoptedCompany’s adoption of this guidance as of January 1, 2018 and believes the adoption willdid not have a material impact on the Company'sCompany’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 impactUpon adoption of the amended guidance on January 1, 2019, the Company recorded a ROU asset and lease liability of $8.4 million and $8.4 million respectively, on the consolidating balance. No cumulative effect adjustment to retained earnings resulted from the adoption of this guidance. The new standard did not have a material impact in the Company’s Consolidated Financial Statements and has not yet determined the effectresult of the standard on our ongoing financial reporting.operations or cash flows.
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 was effective for the Company as of January 1, 2017. The adoption of this standard did not have a material impact 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, 2020.2023. The Company is currently evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.
In March 2017, the FASB issued updated guidance codified within ASU-2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),” which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. The standard is effective for the Company as of January 1, 2019. The Company doesadoption of this standard did not believe the standard will have a material impact on the Company’s financials.
In February 2018, the FASB issued guidance codified within ASU-2018-02, "Income“Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,"” to address the income tax accounting treatment of the standard tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company'sCompany’s income tax rate from 34% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the standardstranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company determined it will early adoptadopted ASU-2018-02 in the first quarter of 2018 and will reclassifyreclassified its standardstranded tax credit of $53,000 within accumulated other comprehensive income to retained earnings at January 1, 2018.
The amortized cost and estimated fair value of investment securities are as follows:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value | |
| Securities available-for-sale | | (in thousands) | | | (in thousands) | |
| U.S. government agency notes | | $ | 14,035 | | | $ | 35 | | | $ | (92 | ) | | $ | 13,978 | | | $ | 8,112 | | | $ | — | | | $ | (64 | ) | | $ | 8,048 | |
| U.S. government agency collateralized mortgage obligations ("CMO") | | | 14,641 | | | | 66 | | | | (58 | ) | | | 14,649 | | |
| Equity securities: Farmer Mac class A stock | | | 66 | | | | 90 | | | | - | | | | 156 | | |
| U.S. government agency collateralized mortgage obligations (“CMO”) | | | | 11,270 | | | | 23 | | | | (77 | ) | | | 11,216 | |
| Total | | $ | 28,742 | | | $ | 191 | | | $ | (150 | ) | | $ | 28,783 | | | $ | 19,382 | | | $ | 23 | | | $ | (141 | ) | | $ | 19,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency mortgage backed securities ("MBS") | | $ | 7,565 | | | $ | 216 | | | $ | (110 | ) | | $ | 7,671 | | |
| U.S. government agency mortgage backed securities (“MBS”) | | | $ | 6,132 | | | $ | 189 | | | $ | (19 | ) | | $ | 6,302 | |
| Total | | $ | 7,565 | | | $ | 216 | | | $ | (110 | ) | | $ | 7,671 | | | $ | 6,132 | | | $ | 189 | | | $ | (19 | ) | | $ | 6,302 | |
| | | | | | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | |
| Equity securities: Farmer Mac class A stock | | | $ | 66 | | | $ | 101 | | | $ | — | | | $ | 167 | |
| Total | | | $ | 66 | | | $ | 101 | | | $ | — | | | $ | 167 | |
| | | December 31, 2016 | | | December 31, 2018 | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized (Losses) | | | Fair Value | |
| Securities available-for-sale | | (in thousands) | | | (in thousands) | |
| U.S. government agency notes | | $ | 5,634 | | | $ | - | | | $ | (62 | ) | | $ | 5,572 | | | $ | 12,225 | | | $ | — | | | $ | (155 | ) | | $ | 12,070 | |
| U.S. government agency collateralized mortgage obligations ("CMO") | | | 17,031 | | | | 48 | | | | (85 | ) | | | 16,994 | | |
| Equity securities: Farmer Mac class A stock | | | 66 | | | | 49 | | | | - | | | | 115 | | |
| U.S. government agency collateralized mortgage obligations (“CMO”) | | | | 12,931 | | | | 9 | | | | (79 | ) | | | 12,861 | |
| Total | | $ | 22,731 | | | $ | 97 | | | $ | (147 | ) | | $ | 22,681 | | | | 25,156 | | | | 9 | | | | (234 | ) | | | 24,931 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency mortgage backed securities ("MBS") | | $ | 9,002 | | | $ | 298 | | | $ | (151 | ) | | $ | 9,149 | | |
| U.S. government agency mortgage backed securities (“MBS”) | | | $ | 7,301 | | | $ | 118 | | | $ | (150 | ) | | $ | 7,269 | |
| Total | | $ | 9,002 | | | $ | 298 | | | $ | (151 | ) | | $ | 9,149 | | | $ | 7,301 | | | $ | 118 | | | $ | (150 | ) | | $ | 7,269 | |
| | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | |
| Equity securities: Farmer Mac class A stock | | | $ | 66 | | | $ | 55 | | | $ | — | | | $ | 121 | |
| Total | | | $ | 66 | | | $ | 55 | | | $ | — | | | $ | 121 | |
At December 31, 20172019 and 2016, $36.22018, $25.6 million and $31.7$32.2 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.
The Company had no investment security sales in 20172019 or 2016.2018.
The maturity periods and weighted average yields of investment securities at December 31, 20172019 and 20162018 were as follows:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Less than One Year | | | One to Five Years | | | Five to Ten Years | | | Over Ten Years | | | Total | | | 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 | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | (dollars in thousands) | | | (dollars in thousands) | |
| U.S. government agency notes | | $ | 1,967 | | | | 2.6 | % | | $ | 1,833 | | | | 1.6 | % | | $ | 10,178 | | | | 2.0 | % | | | | | | 0.0 | % | | $ | 13,978 | | | | 2.0 | % | | $ | — | | | — | | | $ | 1,094 | | | 2.3 | % | | $ | 6,955 | | | 2.8 | % | | $ | — | | | — | | | $ | 8,049 | | | 2.8 | % |
| U.S. government agency CMO | | | - | | | | - | | | | 3,362 | | | | 1.9 | % | | | 8,361 | | | | 1.9 | % | | | 2,926 | | | | 2.3 | % | | | 14,649 | | | | 1.9 | % | | | — | | | | — | | | | 3,766 | | | | 2.1 | % | | | 6,120 | | | | 2.3 | % | | | 1,329 | | | | 2.4 | % | | | 11,215 | | | | 2.3 | % |
| Farmer Mac class A stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 156 | | | | - | | |
| Total | | $ | 1,967 | | | | 2.6 | % | | $ | 5,195 | | | | 1.8 | % | | $ | 18,539 | | | | 1.9 | % | | $ | 2,926 | | | | 2.3 | % | | $ | 28,783 | | | | 2.0 | % | | $ | — | | | | — | | | $ | 4,860 | | | | 2.2 | % | | $ | 13,075 | | | | 2.6 | % | | $ | 1,329 | | | | 2.4 | % | | $ | 19,264 | | | | 2.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency MBS | | $ | - | | | | - | | | $ | 2,802 | | | | 3.6 | % | | $ | 4,763 | | | | 3.1 | % | | $ | - | | | | 0.0 | % | | $ | 7,565 | | | | 3.3 | % | | $ | — | | | | — | | | $ | 2,465 | | | | 4.2 | % | | $ | 2,887 | | | | 2.9 | % | | $ | 780 | | | | 3.6 | % | | $ | 6,132 | | | | 3.5 | % |
| Total | | $ | - | | | | - | | | $ | 2,802 | | | | 3.6 | % | | $ | 4,763 | | | | 3.1 | % | | $ | - | | | | 0.0 | % | | $ | 7,565 | | | | 3.3 | % | | $ | — | | | | — | | | $ | 2,465 | | | | 4.2 | % | | $ | 2,887 | | | | 2.9 | % | | $ | 780 | | | | 3.6 | % | | $ | 6,132 | | | | 3.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Farmer Mac class A stock | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 167 | | | | — | |
| Total | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 167 | | | | — | |
| | | December 31, 2018 | |
| | | Less than One Year | | | One to Five Years | | | Five to Ten Years | | | Over Ten Years | | | Total | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | (dollars in thousands) | |
| U.S. government agency notes | | $ | 1,946 | | | | 2.6 | % | | $ | 1,388 | | | | 2.6 | % | | $ | 8,736 | | | | 3.1 | % | | $ | — | | | | — | | | $ | 12,070 | | | | 2.0 | % |
| U.S. government agency CMO | | | — | | | | — | | | | 2,717 | | | | 2.5 | % | | | 7,284 | | | | 2.8 | % | | | 2,860 | | | | 3.2 | % | | | 12,861 | | | | 1.9 | % |
| Total | | $ | 1,946 | | | | 2.6 | % | | $ | 4,105 | | | | 2.5 | % | | $ | 16,020 | | | | 3.0 | % | | $ | 2,860 | | | | 3.2 | % | | $ | 24,931 | | | | 2.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency MBS | | $ | — | | | | — | | | $ | 2,058 | | | | 4.7 | % | | $ | 4,449 | | | | 3.2 | % | | $ | 794 | | | | 3.6 | % | | $ | 7,301 | | | | 3.3 | % |
| Total | | $ | — | | | | — | | | $ | 2,058 | | | | 4.7 | % | | $ | 4,449 | | | | 3.2 | % | | $ | 794 | | | | 3.6 | % | | $ | 7,301 | | | | 3.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Farmer Mac class A stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 121 | | | | — | |
| Total | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 121 | | | | — | |
| | December 31, 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 | | $ | 1,973 | | | | 2.6 | % | | $ | 1,963 | | | | 0.8 | % | | $ | 1,636 | | | | 1.3 | % | | $ | - | | | | - | | | $ | 5,572 | | | | 1.6 | % |
| U.S. government agency CMO | | | - | | | | - | | | | 2,063 | | | | 1.9 | % | | | 11,827 | | | | 1.1 | % | | | 3,104 | | | | 1.5 | % | | | 16,994 | | | | 1.2 | % |
| Farmer Mac class A stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 115 | | | | - | |
| Total | | $ | 1,973 | | | | 2.6 | % | | $ | 4,026 | | | | 1.4 | % | | $ | 13,463 | | | | 1.1 | % | | $ | 3,104 | | | | 1.5 | % | | $ | 22,681 | | | | 1.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency MBS | | $ | - | | | | - | | | $ | 797 | | | | 5.0 | % | | $ | 5,531 | | | | 3.2 | % | | $ | 2,674 | | | | 2.5 | % | | $ | 9,002 | | | | 3.2 | % |
| Total | | $ | - | | | | - | | | $ | 797 | | | | 5.0 | % | | $ | 5,531 | | | | 3.2 | % | | $ | 2,674 | | | | 2.5 | % | | $ | 9,002 | | | | 3.2 | % |
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | 2018 | |
| | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | | Estimated Fair Value | | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | |
| Securities available for sale | | (in thousands) | | | (in thousands) | |
| Due in one year or less | | $ | 1,997 | | | $ | 1,967 | | | $ | 1,995 | | | $ | 1,973 | | | $ | — | | | $ | — | | | $ | 1,998 | | | $ | 1,946 | |
| After one year through five years | | | 5,220 | | | | 5,195 | | | | 4,027 | | | | 4,026 | | | | 4,884 | | | | 4,860 | | | | 4,138 | | | | 4,105 | |
| After five years through ten years | | | 18,506 | | | | 18,539 | | | | 13,508 | | | | 13,463 | | | | 13,121 | | | | 13,075 | | | | 16,107 | | | | 16,020 | |
| After ten years | | | 2,953 | | | | 2,926 | | | | 3,135 | | | | 3,104 | | | | 1,377 | | | | 1,329 | | | | 2,913 | | | | 2,860 | |
| Farmer Mac class A stock | | | 66 | | | | 156 | | | | 66 | | | | 115 | | | | — | | | | — | | | | — | | | | — | |
| | | $ | 28,742 | | | $ | 28,783 | | | $ | 22,731 | | | $ | 22,681 | | |
| Total | | | $ | 19,382 | | | $ | 19,264 | | | $ | 25,156 | | | $ | 24,931 | |
| Securities held to maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Due in one year or less | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| After one year through five years | | | 2,802 | | | | 2,938 | | | | 797 | | | | 864 | | | | 2,465 | | | | 2,565 | | | | 2,058 | | | | 2,153 | |
| After five years through ten years | | | 4,763 | | | | 4,733 | | | | 5,531 | | | | 5,762 | | | | 2,887 | | | | 2,892 | | | | 4,449 | | | | 4,323 | |
| After ten years | | | - | | | | - | | | | 2,674 | | | | 2,523 | | | | 780 | | | | 845 | | | | 794 | | | | 793 | |
| Total | | | $ | 6,132 | | | $ | 6,302 | | | $ | 7,301 | | | $ | 7,269 | |
| | | $ | 7,565 | | | $ | 7,671 | | | $ | 9,002 | | | $ | 9,149 | | | | | | | | | | | | | | | | | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | |
| Farmer Mac class A stock | | | $ | 66 | | | $ | 167 | | | $ | 66 | | | $ | 121 | |
| Total | | | $ | 66 | | | $ | 167 | | | $ | 66 | | | $ | 121 | |
Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities. Changes in interest rates may also impact prepayments.
The following tables show all securities that are in an unrealized loss position:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Less Than Twelve Months | | | More Than Twelve Months | | | Total | | | Less Than Twelve Months | | | More Than Twelve Months | | | Total | |
| | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | |
| Securities available-for-sale | | (in thousands) | | | (in thousands) | |
| U.S. government agency notes | | $ | 70 | | | $ | 6,324 | | | $ | 22 | | | $ | 3,106 | | | $ | 92 | | | $ | 9,430 | | | $ | 3 | | | $ | 1,126 | | | $ | 61 | | | $ | 6,922 | | | $ | 64 | | | $ | 8,048 | |
| U.S. government agency CMO | | | 8 | | | | 985 | | | | 50 | | | | 3,430 | | | | 58 | | | | 4,415 | | | | 25 | | | | 5,275 | | | | 52 | | | | 2,264 | | | | 77 | | | | 7,539 | |
| Equity securities: Farmer Mac class A stock | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | |
| | | $ | 78 | | | $ | 7,309 | | | $ | 72 | | | $ | 6,536 | | | $ | 150 | | | $ | 13,845 | | |
| Total | | | $ | 28 | | | $ | 6,401 | | | $ | 113 | | | $ | 9,186 | | | $ | 141 | | | $ | 15,587 | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | |
| U.S. Government-agency MBS | | $ | - | | | $ | - | | | $ | 110 | | | $ | 2,496 | | | $ | 110 | | | $ | 2,496 | | | $ | — | | | $ | — | | | $ | 19 | | | $ | 2,139 | | | $ | 19 | | | $ | 2,139 | |
| Total | | $ | - | | | $ | - | | | $ | 110 | | | $ | 2,496 | | | $ | 110 | | | $ | 2,496 | | | $ | — | | | $ | — | | | $ | 19 | | | $ | 2,139 | | | $ | 19 | | | $ | 2,139 | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | | | |
| Equity securities: Farmer Mac class A stock | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Total | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | December 31, 2016 | | | December 31, 2018 | |
| | | Less Than Twelve Months | | | More Than Twelve Months | | | Total | | | Less Than Twelve Months | | | More Than Twelve Months | | | Total | |
| | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | |
| Securities available-for-sale | | (in thousands) | | | (in thousands) | |
| U.S. government agency notes | | $ | 29 | | | $ | 3,936 | | | $ | 33 | | | $ | 1,636 | | | $ | 62 | | | $ | 5,572 | | | $ | 21 | | | $ | 4,001 | | | $ | 134 | | | $ | 8,070 | | | $ | 155 | | | $ | 12,071 | |
| U.S. government agency CMO | | | 35 | | | | 7,930 | | | | 50 | | | | 1,601 | | | | 85 | | | | 9,531 | | | | 2 | | | | 4,749 | | | | 77 | | | | 3,289 | | | | 79 | | | | 8,038 | |
| Equity securities: Farmer Mac class A stock | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | |
| | | $ | 64 | | | $ | 11,866 | | | $ | 83 | | | $ | 3,237 | | | $ | 147 | | | $ | 15,103 | | |
| Total | | | $ | 23 | | | $ | 8,750 | | | $ | 211 | | | $ | 11,359 | | | $ | 234 | | | $ | 20,109 | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | |
| U.S. Government-agency MBS | | $ | 151 | | | $ | 3,312 | | | $ | - | | | $ | - | | | $ | 151 | | | $ | 3,312 | | | $ | 10 | | | $ | 1,706 | | | $ | 140 | | | $ | 2,094 | | | $ | 150 | | | $ | 3,800 | |
| Total | | $ | 151 | | | $ | 3,312 | | | $ | - | | | $ | - | | | $ | 151 | | | $ | 3,312 | | | $ | 10 | | | $ | 1,706 | | | $ | 140 | | | $ | 2,094 | | | $ | 150 | | | $ | 3,800 | |
| Securities measured at fair value | | | | | | | | | | | | | | | | | | | |
| Equity securities: Farmer Mac class A stock | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Total | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
As of December 31, 20172019 and 2016,2018, there were 1420 and 1721 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 December 31, 20172019 and 2016,2018, management believes the impairments detailed in the table above are temporary and no other than temporary impairment loss has been realized in the Company’s consolidated income statements.
| 3. | LOANLOANS HELD FOR SALE |
SBA and Agriculture Loans
As of December 31, 20172019 and 2016,2018, the Company had approximately $18.9$10.4 million and $26.5$13.6 million, respectively, of SBA loans included in loans held for sale. As of December 31, 20172019 and 2016,2018, the principal balance of SBA loans serviced for others was $10.8$5.2 million and $14.2$7.2 million, respectively.
The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.
As of December 31, 20172019 and 2016,2018, the Company had $36.2$31.6 million and $34.9$34.8 million of USDA loans included in loans held for sale, respectively. As of December 31, 20172019 and 2016,2018, the principal balance of USDA loans serviced for others was $2.0$1.9 million and $1.2$2.0 million, respectively.
| 4. | LOANS HELD FOR INVESTMENT |
The composition of the Company’s loans held for investment loan portfolio follows:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 223,115 | | | $ | 194,222 | | | $ | 257,247 | | | $ | 247,114 | |
| Commercial real estate | | | 354,617 | | | | 272,142 | | | 385,642 | | | 365,809 | |
| Commercial | | | 75,282 | | | | 70,369 | | | 69,843 | | | 83,753 | |
| SBA | | | 7,424 | | | | 10,164 | | | 4,429 | | | 5,557 | |
| HELOC | | | 9,422 | | | | 10,292 | | | 4,531 | | | 6,756 | |
| Single family real estate | | | 10,346 | | | | 12,750 | | | 11,845 | | | 11,261 | |
| Consumer | | | 83 | | | | 87 | | | | 94 | | | | 46 | |
| | | | 680,289 | | | | 570,026 | | | 733,631 | | | 720,296 | |
| Allowance for loan losses | | | (8,420 | ) | | | (7,464 | ) | | (8,717 | ) | | (8,691 | ) |
| Deferred fees, net | | | (652 | ) | | | (453 | ) | | (58 | ) | | (337 | ) |
| Discount on SBA loans | | | (122 | ) | | | (170 | ) | | | (56 | ) | | | (71 | ) |
| Total loans held for investment, net | | $ | 671,095 | | | $ | 561,939 | | | $ | 724,800 | | | $ | 711,197 | |
The following tables present the contractual aging of the recorded investment in past due held for investment loans by class of loans:
| | | December 31, 2017 | |
| | | Current | | | 30-59 Days* Past Due | | | 60-89 Days* Past Due | | | Over 90 Days* Past Due | | | Total Past Due | | | Nonaccrual | | | Total | | | Recorded Investment Over 90 Days and Accruing | |
| | | (in thousands) | |
| Manufactured housing | | $ | 222,342 | | | $ | 355 | | | $ | - | | | $ | - | | | $ | 355 | | | $ | 418 | | | $ | 223,115 | | | $ | - | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 271,134 | | | | - | | | | - | | | | - | | | | - | | | | 122 | | | | 271,256 | | | | - | |
| SBA 504 1st trust deed | | | 26,463 | | | | - | | | | - | | | | - | | | | - | | | | 184 | | | | 26,647 | | | | - | |
| Land | | | 5,092 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,092 | | | | - | |
| Construction | | | 51,622 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 51,622 | | | | - | |
| Commercial | | | 70,481 | | | | 15 | | | | - | | | | - | | | | 15 | | | | 4,786 | | | | 75,282 | | | | - | |
| SBA | | | 6,461 | | | | 19 | | | | - | | | | - | | | | 19 | | | | 944 | | | | 7,424 | | | | - | |
| HELOC | | | 9,208 | | | | - | | | | - | | | | - | | | | - | | | | 214 | | | | 9,422 | | | | - | |
| Single family real estate | | | 10,170 | | | | - | | | | - | | | | - | | | | - | | | | 176 | | | | 10,346 | | | | - | |
| Consumer | | | 83 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 83 | | | | - | |
| Total | | $ | 673,056 | | | $ | 389 | | | $ | - | | | $ | - | | | $ | 389 | | | $ | 6,844 | | | $ | 680,289 | | | $ | - | |
| | | December 31, 2016 | | | December 31, 2019 | |
| | | Current | | | 30-59 Days* Past Due | | | 60-89 Days* Past Due | | | Over 90 Days* Past Due | | | Total Past Due | | | Nonaccrual | | | Total | | | Recorded Investment Over 90 Days and Accruing | | | Current | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Over 90 Days Past Due | | | Total Past Due | | | Nonaccrual | | | Total | | | Recorded Investment Over 90 Days and Accruing | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 192,878 | | | $ | 544 | | | $ | - | | | $ | - | | | $ | 544 | | | $ | 800 | | | $ | 194,222 | | | $ | - | | | $ | 256,251 | | | $ | 156 | | | $ | 246 | | | $ | — | | | $ | 402 | | | $ | 594 | | | $ | 257,247 | | | $ | — | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 214,248 | | | | - | | | | - | | | | - | | | | - | | | | 141 | | | | 214,389 | | | | - | | | 327,255 | | | — | | | — | | | — | | | — | | | 84 | | | 327,339 | | | — | |
| SBA 504 1st trust deed | | | 23,167 | | | | - | | | | - | | | | - | | | | - | | | | 712 | | | | 23,879 | | | | - | | | 17,151 | | | 1,401 | | | — | | | — | | | 1,401 | | | — | | | 18,552 | | | — | |
| Land | | | 3,167 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,167 | | | | - | | | 4,457 | | | — | | | — | | | — | | | — | | | — | | | 4,457 | | | — | |
| Construction | | | 30,707 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 30,707 | | | | - | | | 35,294 | | | — | | | — | | | — | | | — | | | — | | | 35,294 | | | — | |
| Commercial | | | 70,332 | | | | 6 | | | | - | | | | - | | | | 6 | | | | 31 | | | | 70,369 | | | | - | | | 68,224 | | | — | | | — | | | — | | | — | | | 1,619 | | | 69,843 | | | — | |
| SBA | | | 9,296 | | | | - | | | | - | | | | - | | | | - | | | | 868 | | | | 10,164 | | | | - | | | 3,935 | | | 112 | | | — | | | — | | | 112 | | | 382 | | | 4,429 | | | — | |
| HELOC | | | 9,919 | | | | - | | | | - | | | | - | | | | - | | | | 373 | | | | 10,292 | | | | - | | | 4,531 | | | — | | | — | | | — | | | — | | | — | | | 4,531 | | | — | |
| Single family real estate | | | 12,558 | | | | - | | | | - | | | | - | | | | - | | | | 192 | | | | 12,750 | | | | - | | | 11,813 | | | 32 | | | — | | | — | | | 32 | | | — | | | 11,845 | | | — | |
| Consumer | | | 87 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 87 | | | | - | | | | 94 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 94 | | | | — | |
| Total | | $ | 566,359 | | | $ | 550 | | | $ | - | | | $ | - | | | $ | 550 | | | $ | 3,117 | | | $ | 570,026 | | | $ | - | | | $ | 729,005 | | | $ | 1,701 | | | $ | 246 | | | $ | — | | | $ | 1,947 | | | $ | 2,679 | | | $ | 733,631 | | | $ | — | |
| | | December 31, 2018 | |
| | | Current | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | Over 90 Days Past Due | | | Total Past Due | | | Nonaccrual | | | Total | | | Recorded Investment Over 90 Days and Accruing | |
| | | (in thousands) | |
| Manufactured housing | | $ | 246,456 | | | $ | 285 | | | $ | 144 | | | $ | — | | | $ | 429 | | | $ | 229 | | | $ | 247,114 | | | $ | — | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 267,377 | | | | 2,478 | | | | — | | | | — | | | | 2,478 | | | | 102 | | | | 269,957 | | | | — | |
| SBA 504 1st trust deed | | | 20,835 | | | | — | | | | 322 | | | | — | | | | 322 | | | | — | | | | 21,157 | | | | — | |
| Land | | | 6,381 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6,381 | | | | — | |
| Construction | | | 67,835 | | | | 479 | | | | — | | | | — | | | | 479 | | | | — | | | | 68,314 | | | | — | |
| Commercial | | | 78,857 | | | | 15 | | | | — | | | | — | | | | 15 | | | | 4,881 | | | | 83,753 | | | | — | |
| SBA | | | 4,741 | | | | — | | | | — | | | | — | | | | — | | | | 816 | | | | 5,557 | | | | — | |
| HELOC | | | 6,558 | | | | — | | | | — | | | | — | | | | — | | | | 198 | | | | 6,756 | | | | — | |
| Single family real estate | | | 11,221 | | | | 16 | | | | — | | | | 24 | | | | 40 | | | | — | | | | 11,261 | | | | — | |
| Consumer | | | 46 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 46 | | | | — | |
| Total | | $ | 710,307 | | | $ | 3,273 | | | $ | 466 | | | $ | 24 | | | $ | 3,763 | | | $ | 6,226 | | | $ | 720,296 | | | $ | — | |
Allowance for Loan Losses
The following table summarizes the changes in the allowance for loan losses:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Beginning balance | | $ | 7,464 | | | $ | 6,916 | | | $ | 7,877 | | | $ | 8,691 | | | $ | 8,420 | | | $ | 7,464 | |
| Charge-offs | | | (203 | ) | | | (245 | ) | | | (326 | ) | | (31 | ) | | (133 | ) | | (203 | ) |
| Recoveries | | | 748 | | | | 841 | | | | 1,639 | | | | 222 | | | | 390 | | | | 748 | |
| Net recoveries | | | 545 | | | | 596 | | | | 1,313 | | | 191 | | | 257 | | | 545 | |
| Provision (credit) | | | 411 | | | | (48 | ) | | | (2,274 | ) | | | (165 | ) | | | 14 | | | | 411 | |
| Ending balance | | $ | 8,420 | | | $ | 7,464 | | | $ | 6,916 | | | $ | 8,717 | | | $ | 8,691 | | | $ | 8,420 | |
As of December 31, 20172019 and 2016,2018, the Company had reserves for credit losses on undisbursed loans of $95,000$85,000 and $125,000$73,000 which were included in Other liabilities.
The following tables summarize the changes in the allowance for loan losses by portfolio type:
| | | For the Year Ended December 31, | | | For the Year Ended December 31, | |
| | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total | |
| 2019 | | | (in thousands) | |
| Beginning balance | | | $ | 2,196 | | | $ | 5,028 | | | $ | 1,210 | | | $ | 79 | | | $ | 90 | | | $ | 88 | | | $ | — | | | $ | 8,691 | |
| Charge-offs | | | — | | | — | | | (31 | ) | | — | | | — | | | — | | | — | | | (31 | ) |
| Recoveries | | | | 54 | | | | 52 | | | | 60 | | | | 50 | | | | 5 | | | | 1 | | | | — | | | | 222 | |
| Net (charge-offs) recoveries | | | 54 | | | 52 | | | 29 | | | 50 | | | 5 | | | 1 | | | — | | | 191 | |
| Provision (credit) | | | | (66 | ) | | | 137 | | | | (77 | ) | | | (97 | ) | | | (68 | ) | | | 3 | | | | 3 | | | | (165 | ) |
| Ending balance | | | $ | 2,184 | | | $ | 5,217 | | | $ | 1,162 | | | $ | 32 | | | $ | 27 | | | $ | 92 | | | $ | 3 | | | $ | 8,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | | | |
| Beginning balance | | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | — | | | $ | 8,420 | |
| Charge-offs | | | (6 | ) | | — | | | (127 | ) | | — | | | — | | | — | | | — | | | (133 | ) |
| Recoveries | | | | 120 | | | | 15 | | | | 66 | | | | 133 | | | | 55 | | | | 1 | | | | — | | | | 390 | |
| Net (charge-offs) recoveries | | | 114 | | | 15 | | | (61 | ) | | 133 | | | 55 | | | 1 | | | — | | | 257 | |
| Provision (credit) | | | | (98 | ) | | | 169 | | | | 138 | | | | (127 | ) | | | (57 | ) | | | (11 | ) | | | — | | | | 14 | |
| Ending balance | | | $ | 2,196 | | | $ | 5,028 | | | $ | 1,210 | | | $ | 79 | | | $ | 90 | | | $ | 88 | | | $ | — | | | $ | 8,691 | |
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning balance | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | �� | | $ | 100 | | | $ | 109 | | | $ | - | | | $ | 7,464 | | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | — | | | $ | 7,464 | |
| Charge-offs | | | (119 | ) | | | - | | | | - | | | | (30 | ) | | | - | | | | (54 | ) | | | - | | | | (203 | ) | | (119 | ) | | — | | | — | | | (30 | ) | | — | | | (54 | ) | | — | | | (203 | ) |
| Recoveries | | | 142 | | | | 249 | | | | 161 | | | | 177 | | | | 18 | | | | 1 | | | | - | | | | 748 | | | | 142 | | | | 249 | | | | 161 | | | | 177 | | | | 18 | | | | 1 | | | | — | | | | 748 | |
| Net (charge-offs) recoveries | | | 23 | | | | 249 | | | | 161 | | | | 147 | | | | 18 | | | | (53 | ) | | | - | | | | 545 | | | 23 | | | 249 | | | 161 | | | 147 | | | 18 | | | (53 | ) | | — | | | 545 | |
| Provision (credit) | | | (44 | ) | | | 888 | | | | (269 | ) | | | (180 | ) | | | (26 | ) | | | 42 | | | | - | | | | 411 | | | | (44 | ) | | | 888 | | | | (269 | ) | | | (180 | ) | | | (26 | ) | | | 42 | | | | — | | | | 411 | |
| Ending balance | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | - | | | $ | 8,420 | | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | — | | | $ | 8,420 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2016 | | | | |
| Beginning balance | | $ | 3,525 | | | $ | 1,853 | | | $ | 939 | | | $ | 451 | | | $ | 43 | | | $ | 103 | | | $ | 2 | | | $ | 6,916 | | |
| Charge-offs | | | (123 | ) | | | - | | | | - | | | | (121 | ) | | | - | | | | - | | | | (1 | ) | | | (245 | ) | |
| Recoveries | | | 128 | | | | 132 | | | | 136 | | | | 266 | | | | 86 | | | | 93 | | | | - | | | | 841 | | |
| Net (charge-offs) recoveries | | | 5 | | | | 132 | | | | 136 | | | | 145 | | | | 86 | | | | 93 | | | | (1 | ) | | | 596 | | |
| Provision (credit) | | | (1,329 | ) | | | 1,722 | | | | 166 | | | | (490 | ) | | | (29 | ) | | | (87 | ) | | | (1 | ) | | | (48 | ) | |
| Ending balance | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | - | | | $ | 7,464 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | | | |
| Beginning balance | | $ | 4,032 | | | $ | 1,459 | | | $ | 986 | | | $ | 1,066 | | | $ | 140 | | | $ | 192 | | | $ | 2 | | | $ | 7,877 | | |
| Charge-offs | | | (297 | ) | | | - | | | | - | | | | - | | | | - | | | | (29 | ) | | | - | | | | (326 | ) | |
| Recoveries | | | 205 | | | | 545 | | | | 422 | | | | 454 | | | | 10 | | | | 3 | | | | - | | | | 1,639 | | |
| Net (charge-offs) recoveries | | | (92 | ) | | | 545 | | | | 422 | | | | 454 | | | | 10 | | | | (26 | ) | | | - | | | | 1,313 | | |
| Provision (credit) | | | (415 | ) | | | (151 | ) | | | (469 | ) | | | (1,069 | ) | | | (107 | ) | | | (63 | ) | | | - | | | | (2,274 | ) | |
| Ending balance | | $ | 3,525 | | | $ | 1,853 | | | $ | 939 | | | $ | 451 | | | $ | 43 | | | $ | 103 | | | $ | 2 | | | $ | 6,916 | | |
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 | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | |
| Loans Held for Investment as of December 31, 2017: | | (in thousands) | | |
| Loans Held for Investment as of December 31, 2019: | | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 5,830 | | | $ | 557 | | | $ | 3,551 | | | $ | 281 | | | $ | - | | | $ | 2,133 | | | $ | - | | | $ | 12,352 | | | $ | 5,702 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 470 | | | $ | — | | | $ | 6,172 | |
| Impaired loans with no allowance recorded | | | 2,163 | | | | - | | | | 5,023 | | | | 699 | | | | 214 | | | | 176 | | | | - | | | | 8,275 | | | | 2,296 | | | | 318 | | | | 1,802 | | | | 382 | | | | — | | | | 1,858 | | | | — | | | | 6,656 | |
| Total loans individually evaluated for impairment | | | 7,993 | | | | 557 | | | | 8,574 | | | | 980 | | | | 214 | | | | 2,309 | | | | - | | | | 20,627 | | | 7,998 | | | 318 | | | 1,802 | | | 382 | | | — | | | 2,328 | | | — | | | 12,828 | |
| Loans collectively evaluated for impairment | | | 215,122 | | | | 354,060 | | | | 66,708 | | | | 6,444 | | | | 9,208 | | | | 8,037 | | | | 83 | | | | 659,662 | | | | 249,249 | | | | 385,324 | | | | 68,041 | | | | 4,047 | | | | 4,531 | | | | 9,517 | | | | 94 | | | | 720,803 | |
| Total loans held for investment | | $ | 223,115 | | | $ | 354,617 | | | $ | 75,282 | | | $ | 7,424 | | | $ | 9,422 | | | $ | 10,346 | | | $ | 83 | | | $ | 680,289 | | | $ | 257,247 | | | $ | 385,642 | | | $ | 69,843 | | | $ | 4,429 | | | $ | 4,531 | | | $ | 11,845 | | | $ | 94 | | | $ | 733,631 | |
| Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 5,836 | | | $ | 661 | | | $ | 3,551 | | | $ | 281 | | | $ | - | | | $ | 2,133 | | | $ | - | | | $ | 12,462 | | | $ | 5,702 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 470 | | | $ | — | | | $ | 6,172 | |
| Impaired loans with no allowance recorded | | | 3,328 | | | | - | | | | 5,042 | | | | 1,026 | | | | 249 | | | | 220 | | | | - | | | | 9,865 | | | | 3,134 | | | | 384 | | | | 2,156 | | | | 736 | | | | — | | | | 1,858 | | | | — | | | | 8,268 | |
| Total loans individually evaluated for impairment | | | 9,164 | | | | 661 | | | | 8,593 | | | | 1,307 | | | | 249 | | | | 2,353 | | | | - | | | | 22,327 | | | 8,836 | | | 384 | | | 2,156 | | | 736 | | | — | | | 2,328 | | | — | | | 14,440 | |
| Loans collectively evaluated for impairment | | | 215,122 | | | | 354,060 | | | | 66,708 | | | | 6,444 | | | | 9,208 | | | | 8,037 | | | | 83 | | | | 659,662 | | | | 249,249 | | | | 385,324 | | | | 68,041 | | | | 4,046 | | | | 4,531 | | | | 9,517 | | | | 95 | | | | 720,803 | |
| Total loans held for investment | | $ | 224,286 | | | $ | 354,721 | | | $ | 75,301 | | | $ | 7,751 | | | $ | 9,457 | | | $ | 10,390 | | | $ | 83 | | | $ | 681,989 | | | $ | 258,085 | | | $ | 385,708 | | | $ | 70,197 | | | $ | 4,782 | | | $ | 4,531 | | | $ | 11,845 | | | $ | 95 | | | $ | 735,243 | |
| Related Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 427 | | | $ | 11 | | | $ | 50 | | | $ | 1 | | | $ | - | | | $ | 35 | | | $ | - | | | $ | 524 | | | $ | 334 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 18 | | | $ | — | | | $ | 352 | |
| Impaired loans with no allowance recorded | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 427 | | | | 11 | | | | 50 | | | | 1 | | | | - | | | | 35 | | | | - | | | | 524 | | | 334 | | | — | | | — | | | — | | | — | | | 18 | | | — | | | 352 | |
| Loans collectively evaluated for impairment | | | 1,753 | | | | 4,833 | | | | 1,083 | | | | 72 | | | | 92 | | | | 63 | | | | - | | | | 7,896 | | | | 1,850 | | | | 5,217 | | | | 1,162 | | | | 32 | | | | 27 | | | | 74 | | | | 3 | | | | 8,365 | |
| Total loans held for investment | | $ | 2,180 | | | $ | 4,844 | | | $ | 1,133 | | | $ | 73 | | | $ | 92 | | | $ | 98 | | | $ | - | | | $ | 8,420 | | | $ | 2,184 | | | $ | 5,217 | | | $ | 1,162 | | | $ | 32 | | | $ | 27
| | | $ | 92 | | | $ | 3 | | | $ | 8,717 | |
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total | | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | |
| Loans Held for Investment as of December 31, 2016: | | (in thousands) | | |
| Loans Held for Investment as of December 31, 2018: | | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 6,065 | | | $ | 1,112 | | | $ | 3,749 | | | $ | 70 | | | $ | 45 | | | $ | 2,039 | | | $ | - | | | $ | 13,080 | | | $ | 8,726 | | | $ | 243 | | | $ | — | | | $ | — | | | $ | — | | | $ | 775 | | | $ | — | | | $ | 9,744 | |
| Impaired loans with no allowance recorded | | | 2,846 | | | | - | | | | 31 | | | | 1,067 | | | | 328 | | | | 191 | | | | - | | | | 4,463 | | | | 3,269 | | | | 102 | | | | 7,811 | | | | 815 | | | | 198 | | | | 1,964 | | | | — | | | | 14,159 | |
| Total loans individually evaluated for impairment | | | 8,911 | | | | 1,112 | | | | 3,780 | | | | 1,137 | | | | 373 | | | | 2,230 | | | | - | | | | 17,543 | | | 11,995 | | | 345 | | | 7,811 | | | 815 | | | 198 | | | 2,739 | | | — | | | 23,903 | |
| Loans collectively evaluated for impairment | | | 185,311 | | | | 271,030 | | | | 66,589 | | | | 9,027 | | | | 9,919 | | | | 10,520 | | | | 87 | | | | 552,483 | | | | 235,119 | | | | 365,464 | | | | 75,942 | | | | 4,742 | | | | 6,558 | | | | 8,522 | | | | 46 | | | | 696,393 | |
| Total loans held for investment | | $ | 194,222 | | | $ | 272,142 | | | $ | 70,369 | | | $ | 10,164 | | | $ | 10,292 | | | $ | 12,750 | | | $ | 87 | | | $ | 570,026 | | | $ | 247,114 | | | $ | 365,809 | | | $ | 83,753 | | | $ | 5,557 | | | $ | 6,756 | | | $ | 11,261 | | | $ | 46 | | | $ | 720,296 | |
| Unpaid Principal Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 6,133 | | | $ | 1,253 | | | $ | 3,749 | | | $ | 70 | | | $ | 57 | | | $ | 2,039 | | | $ | - | | | $ | 13,301 | | | $ | 8,726 | | | $ | 243 | | | $ | — | | | $ | — | | | $ | — | | | $ | 775 | | | $ | — | | | $ | 9,744 | |
| Impaired loans with no allowance recorded | | | 4,369 | | | | - | | | | 31 | | | | 1,538 | | | | 348 | | | | 226 | | | | - | | | | 6,512 | | | | 4,321 | | | | 160 | | | | 8,078 | | | | 1,211 | | | | 249 | | | | 1,963 | | | | — | | | | 15,982 | |
| Total loans individually evaluated for impairment | | | 10,502 | | | | 1,253 | | | | 3,780 | | | | 1,608 | | | | 405 | | | | 2,265 | | | | - | | | | 19,813 | | | 13,047 | | | 403 | | | 8,078 | | | 1,211 | | | 249 | | | 2,738 | | | — | | | 25,726 | |
| Loans collectively evaluated for impairment | | | 185,311 | | | | 271,030 | | | | 66,589 | | | | 9,027 | | | | 9,919 | | | | 10,520 | | | | 87 | | | | 552,483 | | | | 235,119 | | | | 365,464 | | | | 75,942 | | | | 4,742 | | | | 6,558 | | | | 8,522 | | | | 46 | | | | 696,393 | |
| Total loans held for investment | | $ | 195,813 | | | $ | 272,283 | | | $ | 70,369 | | | $ | 10,635 | | | $ | 10,324 | | | $ | 12,785 | | | $ | 87 | | | $ | 572,296 | | | $ | 248,166 | | | $ | 365,867 | | | $ | 84,020 | | | $ | 5,953 | | | $ | 6,807 | | | $ | 11,260 | | | $ | 46 | | | $ | 722,119 | |
| Related Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 548 | | | $ | 17 | | | $ | 165 | | | $ | - | | | $ | 1 | | | $ | 28 | | | $ | - | | | $ | 759 | | | $ | 432 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | | | $ | 24 | | | $ | — | | | $ | 465 | |
| Impaired loans with no allowance recorded | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 548 | | | | 17 | | | | 165 | | | | - | | | | 1 | | | | 28 | | | | - | | | | 759 | | | 432 | | | 9 | | | — | | | — | | | — | | | 24 | | | — | | | 465 | |
| Loans collectively evaluated for impairment | | | 1,653 | | | | 3,690 | | | | 1,076 | | | | 106 | | | | 99 | | | | 81 | | | | - | | | | 6,705 | | | | 1,764 | | | | 5,019 | | | | 1,210 | | | | 79 | | | | 90 | | | | 64 | | | | — | | | | 8,226 | |
| Total loans held for investment | | $ | 2,201 | | | $ | 3,707 | | | $ | 1,241 | | | $ | 106 | | | $ | 100 | | | $ | 109 | | | $ | - | | | $ | 7,464 | | | $ | 2,196 | | | $ | 5,028 | | | $ | 1,210 | | | $ | 79 | | | $ | 90 | | | $ | 88 | | | $ | — | | | $ | 8,691 | |
Included in impaired loans are $2.6$0.6 million and $1.0$3.1 million of loans guaranteed by government agencies at December 31, 20172019 and 2016,2018, respectively. A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table above 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 December 31, 20172019 and 2016.2018.
The table below reflects recorded investment in loans classified as impaired:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Impaired loans with a specific valuation allowance under ASC 310 | | $ | 12,352 | | | $ | 13,080 | | | $ | 6,172 | | | $ | 9,744 | |
| Impaired loans without a specific valuation allowance under ASC 310 | | | 8,275 | | | | 4,463 | | | | 6,656 | | | | 14,159 | |
| Total impaired loans | | $ | 20,627 | | | $ | 17,543 | | | $ | 12,828 | | | $ | 23,903 | |
| Valuation allowance related to impaired loans | | $ | 524 | | | $ | 759 | | | $ | 352 | | | $ | 465 | |
The following table presents impaired loans by class:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 7,993 | | | $ | 8,911 | | | $ | 7,998 | | | $ | 11,995 | |
| Commercial real estate : | | | | | | | | | | | | | | |
| Commercial real estate | | | 122 | | | | 142 | | | 84 | | | 102 | |
| SBA 504 1st trust deed | | | 435 | | | | 970 | | | 234 | | | 243 | |
| Land | | | - | | | | - | | | — | | | — | |
| Construction | | | - | | | | - | | | — | | | — | |
| Commercial | | | 8,574 | | | | 3,780 | | | 1,802 | | | 7,811 | |
| SBA | | | 980 | | | | 1,137 | | | 382 | | | 815 | |
| HELOC | | | 214 | | | | 373 | | | — | | | 198 | |
| Single family real estate | | | 2,309 | | | | 2,230 | | | 2,328 | | | 2,739 | |
| Consumer | | | - | | | | - | | | | — | | | | — | |
| Total | | $ | 20,627 | | | $ | 17,543 | | | $ | 12,828 | | | $ | 23,903 | |
The following table summarizes the average investment in impaired loans by class and the related interest income recognized:
| | | Year Ended December 31, | | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | Average Investment in Impaired Loans | | | Interest Income | | | Average Investment in Impaired Loans | | | Interest Income | | | Average Investment in Impaired Loans | | | Interest Income | | | Average Investment in Impaired Loans | | | Interest Income | | | Average Investment in Impaired Loans | | | Interest Income | | | Average Investment in Impaired Loans | | | Interest Income | |
| | | | | | | | | | | | | | | | | | | | | | |
| Manufactured housing | | $ | 7,616 | | | $ | 659 | | | $ | 8,495 | | | $ | 678 | | | $ | 7,607 | | | $ | 692 | | | $ | 9,171 | | | $ | 640 | | | $ | 8,709 | | | $ | 887 | | | $ | 7,616 | | | $ | 659 | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 121 | | | | 1 | | | | 572 | | | | 3 | | | | 1,420 | | | | - | | | 104 | | | — | | | 108 | | | — | | | 121 | | | 1 | |
| SBA 504 1st | | | 502 | | | | 19 | | | | 1,445 | | | | 38 | | | | 1,485 | | | | 80 | | | 190 | | | 27 | | | 341 | | | 19 | | | 502 | | | 19 | |
| Land | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | — | | | — | | | — | | | — | | | — | | | — | |
| Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | — | | | — | | | — | | | — | | | — | | | — | |
| Commercial | | | 5,176 | | | | 339 | | | | 3,276 | | | | 215 | | | | 2,925 | | | | - | | | 5,491 | | | 164 | | | 7,520 | | | 245 | | | 5,176 | | | 339 | |
| SBA | | | 797 | | | | 21 | | | | 931 | | | | 98 | | | | 1,089 | | | | 69 | | | 970 | | | 32 | | | 874 | | | 18 | | | 797 | | | 21 | |
| HELOC | | | 259 | | | | - | | | | 400 | | | | 8 | | | | 172 | | | | 11 | | | 127 | | | 11 | | | 199 | | | 11 | | | 259 | | | — | |
| Single family real estate | | | 2,013 | | | | 103 | | | | 2,166 | | | | 108 | | | | 1,604 | | | | 81 | | | 2,451 | | | 127 | | | 2,298 | | | 144 | | | 2,013 | | | 103 | |
| Consumer | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | $ | 16,484 | | | $ | 1,142 | | | $ | 17,285 | | | $ | 1,148 | | | $ | 16,302 | | | $ | 933 | | | $ | 18,504 | | | $ | 1,001 | | | $ | 20,049 | | | $ | 1,324 | | | $ | 16,484 | | | $ | 1,142 | |
The Company is not committed to lend significant additional funds on these impaired loans.
The following table reflects the recorded investment in certain types of loans at the periods indicated:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Nonaccrual loans | | $ | 6,844 | | | $ | 3,117 | | | $ | 6,956 | | | $ | 2,679 | | | $ | 6,226 | | | $ | 6,844 | |
| SBA guaranteed portion of loans included above | | $ | 2,372 | | | $ | 742 | | | $ | 1,943 | | | $ | 290 | | | $ | 2,848 | | | $ | 2,372 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Troubled debt restructured loans, gross | | $ | 16,603 | | | $ | 14,437 | | | $ | 13,741 | | | $ | 10,774 | | | $ | 16,749 | | | $ | 16,603 | |
| Loans 30 through 89 days past due with interest accruing | | $ | - | | | $ | - | | | $ | - | | | $ | 1,947 | | | $ | — | | | $ | — | |
| Interest income recognized on impaired loans | | $ | 1,142 | | | $ | 1,148 | | | $ | 933 | | | $ | 1,001 | | | $ | 1,324 | | | $ | 1,142 | |
| Foregone interest on nonaccrual and troubled debt restructured loans | | $ | 379 | | | $ | 412 | | | $ | 761 | | | $ | 512 | | | $ | 454 | | | $ | 379 | |
| Allowance for loan losses to gross loans held for investment | | | 1.24 | % | | | 1.31 | % | | | 1.44 | % | | | 1.19 | % | | | 1.21 | % | | | 1.24 | % |
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.
The following table presents the composition of nonaccrual loans by class of loans:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | | | | (in thousands) | |
| Manufactured housing | | $ | 418 | | | $ | 800 | | | $ | 594 | | | $ | 229 | |
| Commercial real estate: | | | | | | | | | | | | | | |
| Commercial real estate | | | 122 | | | | 141 | | | 84 | | | 102 | |
| SBA 504 1st trust deed | | | 184 | | | | 712 | | | — | | | — | |
| Land | | | - | | | | - | | | — | | | — | |
| Construction | | | - | | | | - | | | — | | | — | |
| Commercial | | | 4,786 | | | | 31 | | | 1,619 | | | 4,881 | |
| SBA | | | 944 | | | | 868 | | | 382 | | | 816 | |
| HELOC | | | 214 | | | | 373 | | | — | | | 198 | |
| Single family real estate | | | 176 | | | | 192 | | | — | | | — | |
| Consumer | | | - | | | | - | | | | — | | | | — | |
| Total | | $ | 6,844 | | | $ | 3,117 | | | $ | 2,679 | | | $ | 6,226 | |
Included in nonaccrual loans are $2.4$0.3 million and $0.7$2.8 million of loans guaranteed by government agencies at December 31, 20172019 and 2016,2018, respectively.
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-K. 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 rates are updated as part of the normal loan monitoring process, at a minimum, annually.
The following tables present gross loans by risk rating:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 222,429 | | | $ | - | | | $ | 686 | | | $ | - | | | $ | 223,115 | | | $ | 256,430 | | | $ | — | | | $ | 817 | | | $ | — | | | $ | 257,247 | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 271,134 | | | | - | | | | 122 | | | | - | | | | 271,256 | | | 323,748 | | | 3,507 | | | 84 | | | — | | | 327,339 | |
| SBA 504 1st trust deed | | | 25,973 | | | | - | | | | 674 | | | | - | | | | 26,647 | | | 18,250 | | | — | | | 302 | | | — | | | 18,552 | |
| Land | | | 5,092 | | | | - | | | | - | | | | - | | | | 5,092 | | | 4,457 | | | — | | | — | | | — | | | 4,457 | |
| Construction | | | 49,832 | | | | 1,790 | | | | - | | | | - | | | | 51,622 | | | 33,280 | | | — | | | 2,014 | | | — | | | 35,294 | |
| Commercial | | | 64,543 | | | | 817 | | | | 8,083 | | | | - | | | | 73,443 | | | 66,525 | | | 170 | | | 1,619 | | | — | | | 68,314 | |
| SBA | | | 4,221 | | | | 102 | | | | 1,752 | | | | | | | | 6,075 | | | 2,379 | | | 28 | | | 1,154 | | | | | | 3,561 | |
| HELOC | | | 9,208 | | | | - | | | | 214 | | | | - | | | | 9,422 | | | 4,531 | | | — | | | — | | | — | | | 4,531 | |
| Single family real estate | | | 10,165 | | | | - | | | | 181 | | | | - | | | | 10,346 | | | 11,840 | | | — | | | 5 | | | — | | | 11,845 | |
| Consumer | | | 83 | | | | - | | | | - | | | | - | | | | 83 | | | | 94 | | | | — | | | | — | | | | — | | | | 94 | |
| Total, net | | $ | 662,680 | | | $ | 2,709 | | | $ | 11,712 | | | $ | - | | | $ | 677,101 | | | $ | 721,534 | | | $ | 3,705 | | | $ | 5,995 | | | $ | — | | | $ | 731,234 | |
| SBA guarantee | | | - | | | | - | | | | 3,188 | | | | - | | | | 3,188 | | |
| Government guarantee | | | | — | | | | 1,530 | | | | 867 | | | | — | | | | 2,397 | |
| Total | | $ | 662,680 | | | $ | 2,709 | | | $ | 14,900 | | | $ | - | | | $ | 680,289 | | | $ | 721,534 | | | $ | 5,235 | | | $ | 6,862 | | | $ | — | | | $ | 733,631 | |
| | | December 31, 2016 | | | December 31, 2018 | |
| | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | | | Pass | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | | (in thousands) | | | (in thousands) | |
| Manufactured housing | | $ | 191,784 | | | $ | - | | | $ | 2,438 | | | $ | - | | | $ | 194,222 | | | $ | 246,884 | | | $ | — | | | $ | 230 | | | $ | — | | | $ | 247,114 | |
| Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial real estate | | | 212,259 | | | | 1,988 | | | | 142 | | | | - | | | | 214,389 | | | 269,855 | | | — | | | 102 | | | — | | | 269,957 | |
| SBA 504 1st trust deed | | | 22,664 | | | | - | | | | 1,215 | | | | - | | | | 23,879 | | | 20,109 | | | — | | | 1,048 | | | — | | | 21,157 | |
| Land | | | 3,167 | | | | - | | | | - | | | | - | | | | 3,167 | | | 6,381 | | | — | | | — | | | — | | | 6,381 | |
| Construction | | | 30,707 | | | | - | | | | - | | | | - | | | | 30,707 | | | 66,683 | | | 1,631 | | | — | | | — | | | 68,314 | |
| Commercial | | | 63,002 | | | | 7,268 | | | | 99 | | | | - | | | | 70,369 | | | 73,580 | | | — | | | 7,771 | | | — | | | 81,351 | |
| SBA | | | 8,297 | | | | 108 | | | | 389 | | | | | | | | 8,794 | | | 2,770 | | | 34 | | | 1,557 | | | — | | | 4,361 | |
| HELOC | | | 9,671 | | | | - | | | | 621 | | | | - | | | | 10,292 | | | 6,558 | | | — | | | 198 | | | — | | | 6,756 | |
| Single family real estate | | | 12,553 | | | | - | | | | 197 | | | | - | | | | 12,750 | | | 11,256 | | | — | | | 5 | | | — | | | 11,261 | |
| Consumer | | | 87 | | | | - | | | | - | | | | - | | | | 87 | | | | 46 | | | | — | | | | — | | | | — | | | | 46 | |
| Total, net | | $ | 554,191 | | | $ | 9,364 | | | $ | 5,101 | | | $ | - | | | $ | 568,656 | | | $ | 704,122 | | | $ | 1,665 | | | $ | 10,911 | | | $ | — | | | $ | 716,698 | |
| SBA guarantee | | | - | | | | - | | | | 1,370 | | | | - | | | | 1,370 | | |
| Government guarantee | | | | — | | | | — | | | | 3,598 | | | | — | | | | 3,598 | |
| Total | | $ | 554,191 | | | $ | 9,364 | | | $ | 6,471 | | | $ | - | | | $ | 570,026 | | | $ | 704,122 | | | $ | 1,665 | | | $ | 14,509 | | | $ | — | | | $ | 720,296 | |
Troubled Debt Restructured Loan (TDR)
A TDR is a loan on which the bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction in the face amount of the debt, a reduction in the accrued interest, extensions, deferrals, renewals and rewrites. The majority of the bank’s modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest. A TDR is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
The following tables summarize the financial effects of TDR loans by class for the periods presented:
| | | For the December 31 2017 | | | For the Year Ended December 31, 2019 | |
| | | Number of Loans | | | Pre- Modification Recorded Investment | | | Post Modification Recorded Investment | | | Balance of Loans with Rate Reduction | | | Balance of Loans with Term Extension | | | Effect of Allowance for Loan Losses | | | 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) | | | (dollars in thousands) | |
| Manufactured housing | | | 11 | | | $ | 894 | | | $ | 894 | | | $ | 894 | | | $ | 894 | | | $ | 48 | | | 1 | | | $ | 25 | | | $ | 25 | | | $ | 25 | | | $ | 25 | | | $ | 2 | |
| Commercial | | | 3 | | | | 3,052 | | | | 3,052 | | | | - | | | | 3,052 | | | | 41 | | | — | | | — | | | — | | | — | | | — | | | — | |
| SBA | | | 2 | | | | 298 | | | | 298 | | | | - | | | | 298 | | | | 1 | | | | 1 | | | | 48 | | | | 48 | | | | 48 | | | | — | | | | — | |
| HELOC | | | 0 | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| Single family real estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| Total | | | 16 | | | $ | 4,244 | | | $ | 4,244 | | | $ | 894 | | | $ | 4,244 | | | $ | 90 | | | | 2 | | | $ | 73 | | | $ | 73 | | | $ | 73 | | | $ | 25 | | | $ | 2 | |
| | | For the December 31 2016 | | | For the Year Ended December 31, 2018 | |
| | | Number
of Loans | | | Pre- Modification Recorded Investment | | | Post Modification Recorded Investment | | | Balance of Loans with Rate Reduction | | | Balance of Loans with Term Extension | | | Effect of Allowance for Loan Losses | | | 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) | | | (dollars in thousands) | |
| Manufactured housing | | | 25 | | | $ | 1,903 | | | $ | 1,903 | | | $ | 1,903 | | | $ | 1,903 | | | $ | 112 | | | 12 | | | $ | 1,047 | | | $ | 1,213 | | | $ | 1,100 | | | $ | 1,213 | | | $ | 66 | |
| Commercial | | | 5 | | | | 1,075 | | | | 1,075 | | | | - | | | | 1,075 | | | | 13 | | | 3 | | | 1,780 | | | 1,780 | | | — | | | 1,780 | | | — | |
| SBA | | | 1 | | | | 92 | | | | 92 | | | | - | | | | 92 | | | | - | | | — | | | — | | | — | | | — | | | — | | | — | |
| HELOC | | | 1 | | | | 257 | | | | 257 | | | | - | | | | 257 | | | | - | | | — | | | — | | | — | | | — | | | — | | | — | |
| Single family real estate | | | 1 | | | | 105 | | | | 105 | | | | 105 | | | | 105 | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total | | | 33 | | | $ | 3,432 | | | $ | 3,432 | | | $ | 2,008 | | | $ | 3,432 | | | $ | 132 | | | | 15 | | | $ | 2,827 | | | $ | 2,993 | | | $ | 1,100 | | | $ | 2,993 | | | $ | 66 | |
| | | For the December 31 2015 | | | For the Year Ended December 31, 2017 | |
| | | Number of Loans | | | Pre- Modification Recorded Investment | | | Post Modification Recorded Investment | | | Balance of Loans with Rate Reduction | | | Balance of Loans with Term Extension | | | Effect of Allowance for Loan Losses | | | 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) | | | (dollars in thousands) | |
| Manufactured housing | | | 27 | | | $ | 2,400 | | | $ | 2,390 | | | $ | 2,087 | | | $ | 2,243 | | | $ | 109 | | | 11 | | | $ | 894 | | | $ | 894 | | | $ | 894 | | | $ | 894 | | | $ | 48 | |
| Commercial real estate | | | 1 | | | | 161 | | | | 161 | | | | 161 | | | | 161 | | | | 2 | | | 3 | | | 3,052 | | | 3,052 | | | - | | | 3,052 | | | 41 | |
| SBA | | | 1 | | | | 297 | | | | 297 | | | | - | | | | 297 | | | | 5 | | | 2 | | | 298 | | | 298 | | | — | | | 298 | | | 1 | |
| HELOC | | | 1 | | | | 54 | | | | 54 | | | | 54 | | | | 54 | | | | - | | | - | | | - | | | - | | | - | | | - | | | — | |
| Single family real estate | | | 1 | | | | 1,917 | | | | 1,917 | | | | 1,917 | | | | 1,917 | | | | 35 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | | 31 | | | $ | 4,829 | | | $ | 4,819 | | | $ | 4,219 | | | $ | 4,672 | | | $ | 151 | | | | 16 | | | $ | 4,244 | | | $ | 4,244 | | | $ | 894 | | | $ | 4,244 | | | $ | 90 | |
The average rate concession was 8382 basis points and 7873 basis points for the twelve months ended December 31, 20172019 and 2016,2018, respectively. The average term extension in months was 127147 and 147151 for the twelve months ended December 31, 20172019 and 2016,2018, 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 twelve months ended December 31, 20172019 or 2016.2018.
At December 31, 2017,2019, there were no material loan commitments outstanding on TDR loans.
Related Parties
Principal stockholders, directors, and executive officers of the Company, together with companies they control and family members, are considered to be related parties. In the ordinary course of business, the Company has extended credit to these related parties. Federal banking regulations require that any such extensions of credit not be offered on terms more favorable than would be offered to non-related party borrowers of similar creditworthiness.
The following table summarizes the aggregate activity in such loans:
| Loans to related parties | | Year Ended December 31, | | |
| | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Balance, beginning | | $ | 943 | | | $ | 4,294 | | | $ | 3,505 | | | $ | 3,505 | |
| New loans | | | 2,741 | | | | 125 | | | — | | | 160 | |
| Repayments and other | | | (179 | ) | | | (3,476 | ) | | | (343 | ) | | | (160 | ) |
| Balance, ending | | $ | 3,505 | | | $ | 943 | | | $ | 3,162 | | | $ | 3,505 | |
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 20172019 or 2016.2018.
Unfunded loan commitments outstanding with related parties total approximately $0.3 million at December 31, 20172019 and 2016, respectively.$1.0 million at December 31 2018.
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Bank premises and land | | $ | 1,355 | | | $ | 1,355 | | | $ | 3,959 | | | $ | 1,355 | |
| Furniture, fixtures and equipment | | | 10,241 | | | | 9,387 | | | 11,077 | | | 10,956 | |
| Leasehold improvements | | | 4,025 | | | | 3,036 | | | 5,106 | | | 5,747 | |
| Construction in progress | | | 944 | | | | 454 | | | | 7 | | | | 5 | |
| | | | 16,565 | | | | 14,232 | | | 20,149 | | | 18,063 | |
| Accumulated depreciation | | | (10,984 | ) | | | (10,301 | ) | | | (12,494 | ) | | | (11,682 | ) |
| Premises and equipment, net | | $ | 5,581 | | | $ | 3,931 | | | $ | 7,655 | | | $ | 6,381 | |
Lease Obligations
The Company leases certain premises under non-cancelable operating leases expiring through 2027.2028. The following is a schedule of future minimum rental payments under these leases at December 31, 2017:2019:
| | | (in thousands) | | | (in thousands) | |
| 2018 | | $ | 1,258 | | |
| 2019 | | | 1,209 | | |
| 2020 | | | 1,157 | | | $ | 1,015 | |
| 2021 | | | 1,085 | | | 884 | |
| 2022 | | | 963 | | | 779 | |
| 2023 | | | 705 | |
| 2024 | | | 713 | |
| Thereafter | | | 3,173 | | | | 3,291 | |
| | | $ | 8,845 | | |
| Total | | | $ | 7,387 | |
The Company leases the majority of its office locations and many of these leases contain multiple renewal options and provisions for increased rents. Total rent expense of $1.3 million, $1.2 million $1.0 million and $0.9$1.2 million is included in occupancy expenses for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. Total depreciation expense of $0.7$0.9 million, $0.7$0.8 million, and $0.4$0.7 million is included in occupancy expenses for the each of the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
| 6. | OTHER ASSETS ACQUIRED THROUGH FORECLOSURE |
The following table summarizes the changes in other assets acquired through foreclosure:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Balance, beginning of period | | $ | 137 | | | $ | 198 | | | $ | 137 | | | $ | — | | | $ | 372 | | | $ | 137 | |
| Additions | | | 501 | | | | 350 | | | | 609 | | | 3,401 | | | 174 | | | 501 | |
| Proceeds from dispositions | | | (416 | ) | | | (395 | ) | | | (538 | ) | | (844 | ) | | (484 | ) | | (416 | ) |
| Gains (losses) on sales, net | | | 150 | | | | (16 | ) | | | (10 | ) | | | (33 | ) | | | (62 | ) | | | 150 | |
| Balance, end of period | | $ | 372 | | | $ | 137 | | | $ | 198 | | | $ | 2,524 | | | $ | — | | | $ | 372 | |
The provision for income taxes consisted of the following:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| Current: | | (in thousands) | | | (in thousands) | |
| Federal | | $ | 3,722 | | | $ | 3,000 | | | $ | 1,569 | | | $ | 2,402 | | | $ | 2,130 | | | $ | 3,722 | |
| State | | | 1,298 | | | | 1,022 | | | | 590 | | | | 1,337 | | | | 1,208 | | | | 1,298 | |
| | | | 5,020 | | | | 4,022 | | | | 2,159 | | | 3,739 | | | 3,338 | | | 5,020 | |
| Deferred: | | | | | | | | | | | | | | | | | | | | | |
| Federal | | | 701 | | | | (338 | ) | | | 4 | | | (242 | ) | | (421 | ) | | 701 | |
| State | | | (173 | ) | | | (71 | ) | | | (25 | ) | | | (86 | ) | | | (108 | ) | | | (173 | ) |
| | | | 528 | | | | (409 | ) | | | (21 | ) | | | (328 | ) | | | (529 | ) | | | 528 | |
| Total provision for income taxes | | $ | 5,548 | | | $ | 3,613 | | | $ | 2,138 | | | $ | 3,411 | | | $ | 2,809 | | | $ | 5,548 | |
The reconciliation between the statutory income tax rate and the Company’s effective tax rate follows:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | | | | | |
| Federal income tax at statutory rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | | 21.0 | % | | 21.0 | % | | 34.0 | % |
| State franchise tax, net of federal benefit | | | 7.2 | % | | | 7.2 | % | | | 7.2 | % | | 8.6 | % | | 8.6 | % | | 7.2 | % |
| Other | | | -0.4 | % | | | -0.3 | % | | | 1.5 | % | | 0.4 | % | | (2.1 | )% | | (0.4 | )% |
| Tax law change | | | 12.2 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 12.2 | % |
| Total provision for income taxes | | | 53.0 | % | | | 40.9 | % | | | 42.7 | % | | | 30.0 | % | | | 27.5 | % | | | 53.0 | % |
The cumulative tax effects of the primary temporary differences are as shown in the following table:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Deferred Tax Assets: | | (in thousands) | | | (in thousands) | |
| Allowance for loan losses | | $ | 2,514 | | | $ | 3,006 | | | $ | 2,663 | | | $ | 2,619 | |
| Unrealized loss on AFS securities | | | - | | | | 20 | | | 14 | | | 58 | |
| Other | | | 1,562 | | | | 1,734 | | | | 2,446 | | | | 2,028 | |
| Total gross deferred tax assets | | | 4,076 | | | | 4,760 | | | 5,123 | | | 4,705 | |
| Deferred tax asset valuation allowance | | | - | | | | - | | | | — | | | | — | |
| Total deferred tax assets | | | 4,076 | | | | 4,760 | | | 5,123 | | | 4,705 | |
| Deferred Tax Liabilities: | | | | | | | | | | | | | | |
| Deferred state taxes | | | (233 | ) | | | (319 | ) | | (266 | ) | | (248 | ) |
| Depreciation | | | (142 | ) | | | (197 | ) | | (653 | ) | | (446 | ) |
| Unrealized gain on AFS securities | | | (11 | ) | | | - | | | — | | | — | |
| Other | | | (521 | ) | | | (511 | ) | | | (1,032 | ) | | | (786 | ) |
| Total deferred tax liabilities | | | (907 | ) | | | (1,027 | ) | | | (1,951 | ) | | | (1,480 | ) |
| Net deferred tax asset | | $ | 3,169 | | | $ | 3,733 | | | $ | 3,172 | | | $ | 3,225 | |
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 $3.2 million at December 31, 20172019 are reported in the consolidated balance sheet as a component of total assets.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 34% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the 21%. rate. The revaluation resulted in a cost of $1.3 million income tax expense and a corresponding reduction in the net deferred tax asset. The other provisions of the Tax Cuts and JobJobs Act did not have a material impact on the fiscal 2017 consolidated financial statements.
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 December 31, 20172019 or December 31, 2016.2018.
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740). ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December 31, 2017.2019.
The Company is subject to income taxation in the United States and certain state jurisdictions. The Company’s federal and state income tax returns are filed on a consolidated basis. The Company is generally open to examination by tax authorities for the years 20132014 and later. Although the Company is unable to determine the outcome under examination, it has evaluated whether there are any uncertain tax positions in accordance with ASC 740-10 and concluded that there are no significant uncertain tax positions requiring recognition in the financial statements.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the Consolidated Financial Statements in the period in which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. As of December 31, 2019, the Company does not have any uncertain tax positions.
The table below summarizes deposits by type:
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Non-interest bearing demand deposits | | $ | 108,500 | | | $ | 100,372 | | | $ | 110,843 | | | $ | 108,161 | |
| Interest-bearing deposits: | | | | | | | | | | | | | | |
| NOW accounts | | | 24,863 | | | | 18,111 | | | 25,523 | | | 23,085 | |
| Money market deposit account | | | 231,854 | | | | 234,912 | | | 288,755 | | | 247,346 | |
| Savings accounts | | | 14,085 | | | | 14,007 | | | 15,689 | | | 14,641 | |
| Time deposits of $250,000 or more | | | 81,985 | | | | 77,509 | | | 96,431 | | | 93,439 | |
| Other time deposits | | | 238,397 | | | | 167,325 | | | | 213,693 | | | | 229,334 | |
| Total deposits | | $ | 699,684 | | | $ | 612,236 | | | $ | 750,934 | | | $ | 716,006 | |
Of the total deposits at December 31, 2017 $379.32019 $440.8 million may be immediately withdrawn. Time certificates of deposit are the only deposits which have a specified maturity.
The summary of the contractual maturities for all time deposits is as follows:
| | | (in thousands) | | | (in thousands) | |
| 2018 | | $ | 251,934 | | |
| 2019 | | | 52,313 | | |
| 2020 | | | 12,614 | | | $ | 272,257 | |
| 2021 | | | 3,031 | | | 25,028 | |
| 2022 | | | 490 | | | 8,375 | |
| 2023 | | | 2,647 | |
| 2024 | | | 1,817 | |
| Thereafter | | | - | | | | — | |
| | | $ | 320,382 | | |
| Total | | | $ | 310,124 | |
The Company through the bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”), which provides Federal Deposit Insurance Corporation (“FDIC”) insurance for large deposits. Federal banking law and regulation place restrictions on depository institutions regarding brokered deposits as they pose increased liquidity risk for institutions that gather significant amounts of brokered deposits. At December 31, 20172019 and 2016,2018, the Company had $32.1$28.7 million and $46.7$35.2 million, respectively, of reciprocal CDARS deposits.
The Company also accepts deposits from related parties which totaled $23.6$27.1 million at December 31, 20172019 and $20.5$12.5 million at December 31, 2016.2018.
The following table summarizes the Company’s FHLB advances by maturity date:
| FHLB Borrowing | | December 31, | |
| | | 2017 | | | 2016 | |
| Contractual Maturity Date | | Amount | | | Rate | | | Amount | | | Rate | |
| | | (dollars in thousands) | |
| January 3, 3017 | | $ | - | | | | 0.00 | % | | $ | 5,000 | | | | 0.52 | % |
| January 9, 2017 | | | - | | | | 0.00 | % | | | 5,000 | | | | 0.47 | % |
| January 23, 2017 | | | - | | | | 0.00 | % | | | 5,000 | | | | 0.59 | % |
| March 20, 2017 | | | - | | | | 0.00 | % | | | 5,000 | | | | 0.67 | % |
| April 17, 2017 | | | - | | | | 0.00 | % | | | 5,000 | | | | 0.70 | % |
| January 2, 2018 | | | 25,000 | | | | 1.40 | % | | | - | | | | 0.00 | % |
| January 16, 2018 | | | 10,000 | | | | 1.42 | % | | | - | | | | 0.00 | % |
| January 29, 2018 | | | 5,000 | | | | 1.45 | % | | | - | | | | 0.00 | % |
| February 20, 2018 | | | 5,000 | | | | 1.49 | % | | | - | | | | 0.00 | % |
| March 1, 2018 | | | 5,000 | | | | 1.47 | % | | | - | | | | - | |
| Total FHLB advances | | $ | 50,000 | | | | | | | $ | 25,000 | | | | | |
| Weighted average rate | | | | | | | 1.43 | % | | | | | | | 0.59 | % |
| | | December 31, | |
| | | 2019 | | | 2018 | |
| Contractual Maturity Date | | Amount | | | Rate | | | Amount | | | Rate | |
| | | (dollars in thousands) | |
| January 2, 2019 | | $ | — | | | | — | | | $ | 25,000 | | | | 2.56 | % |
| March 21, 2019 | | | — | | | | — | | | | 5,000 | | | | 2.34 | % |
| April 3, 2019 | | | — | | | | — | | | | 5,000 | | | | 2.29 | % |
| May 31, 2019 | | | — | | | | — | | | | 5,000 | | | | 2.41 | % |
| March 30, 2020 | | | 5,000 | | | | 2.56 | % | | | 5,000 | | | | 2.56 | % |
| April 3, 2020 | | | 15,000 | | | | 2.54 | % | | | 15,000 | | | | 2.54 | % |
| April 27, 2020 | | | 5,000 | | | | 2.49 | % | | | — | | | | — | |
| May 29, 2020 | | | 5,000 | | | | 2.35 | % | | | — | | | | — | |
| October 2, 2020 | | | 20,000 | | | | 1.74 | % | | | — | | | | — | |
| April 5, 2021 | | | 10,000 | | | | 2.65 | % | | | 10,000 | | | | 2.65 | % |
| May 10, 2021 | | | 5,000 | | | | 2.44 | % | | | — | | | | — | |
| Total FHLB advances | | $ | 65,000 | | | | | | | $ | 70,000 | | | | | |
| Weighted average rate | | | | | | | 2.29 | % | | | | | | | 2.52 | % |
The Company through the bank has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. Total FHLB advances were $50.0$65.0 million and $25.0$70.0 million at December 31, 20172019 and 2016,2018, respectively, borrowed at fixed rates. The Company also had $125.0$114.3 million of letters of credit with FHLB at December 31, 20172019 to secure public funds. At December 31, 2017,2019, the Company had pledged to the FHLB, $36.2$25.6 million of securities and $235.4$324.2 million of loans. At December 31, 2017,2019, the Company had $63.9$60.5 million available for additional borrowing. At December 31, 2016,2018, the Company had pledged to the FHLB, $31.7$32.2 million of securities and $161.3$269.4 million of loans. At December 31, 2016,2018, CWB had $56.8$35.9 million available for additional borrowing. Total FHLB interest expense for the years ended December 31, 2019, 2018 and 2017 2016was $1.2 million, $1.0 million and 2015 was $0.3 million, $30,000 and $0.1 million, respectively.
Other Borrowing – In July of 2017,2019, the Company entered into a one-yearchange in terms on its revolving line of credit agreement for upreducing the maximum available to $15.0$10.0 million. The line of credit matures July 30, 2022. The Company must maintain a compensating deposit with the lender of 25% of the outstanding principal balance in a non-interest bearing deposit account whichaccount. The required balance was $1.7 million and $1.0$1.2 million at December 31, 2017 and 2016, respectively.2018. 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%. At December 31, 2017,2019 and 2018 , the line of credit balance was $6.8zero and $5.0 million, at a rate of 5.320%.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 December 31, 20172019 and 2016.2018. Available borrowing capacity was $104.3$108.6 million and $95.1$103.8 million as of December 31, 20172019 and 2016,2018, respectively.
Federal Funds Purchased Lines– The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There was no amount outstanding as of December 31, 20172019 and 2016.2018.
| 10. | COMMITMENTS AND CONTINGENCIES |
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrowers’ current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of standby letters of credit, the risk arises from the possibility of the failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. Typically, letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Commitments to extend credit | | $ | 68,812 | | | $ | 82,954 | | | $ | 67,538 | | | $ | 57,450 | |
| Standby letters of credit | | | - | | | | - | | | | 655 | | | | — | |
| Total | | $ | 68,812 | | | $ | 82,954 | | | $ | 68,193 | | | $ | 57,450 | |
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.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are not included in the allowance for credit losses reported in Note 4, “Loans Held For Investment” of these Consolidated Financial Statements and are accounted for as a separate loss contingency as a liability. This loss contingency for unfunded loan commitments and letters of credit was $95,000$85,000 and $125,000$73,000 as of December 31, 20172019 and 2016,2018, respectively. Changes to this liability are adjusted through other non-interest expense.
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, commercial 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 December 31, 20172019 and 2016,2018, manufactured housing loans comprised 30.4%33.2% and 30.8%32.2%, respectively of total loans. As of December 31, 20172019 and 2016,2018, commercial real estate loans accounted for approximately 48.3%49.7% and 43.1%47.6% of total loans, respectively. Approximately 33.9%31.9% and 32.3%33.8% of these commercial real estate loans were owner occupied at December 31, 20172019 and 2016,2018, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 55.0%54.3% and 54.6%57.9% at December 31, 20172019 and 2016,2018, respectively. The Company was within established policy limits at December 31, 20172019 and 2016.2018.
Loan Sales and Servicing
The Company retains a certain level of risk relating to the servicing activities and retained interest in sold loans. In addition, during the period of time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower default, foreclosure and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential purchasers.
In connection with certain loan sales, the Company enters agreements which generally require the company to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company to the loan purchaser, any misrepresentation during the loan origination process or, in some cases, upon any fraud or early default on such loans.
The Company has sold loans that are guaranteed or insured by government agencies for which the Company retained all servicing rights and responsibilities. The Company is required to perform certain monitoring functions in connection with these loans to preserve the guarantee by the government agency and prevent loss to the Company in the event of nonperformance by the borrower. Management believes that the Company is in compliance with these requirements. The outstanding balance of the loans serviced for others was approximately $12.8$76.3 million and $15.4$9.2 million at December 31, 20172019 and 2016,2018, respectively.
Salary Continuation
The Company has agreements with certain key officers, which provide for a monthly cash payment to the officers or beneficiaries in the event of death, disability or retirement, beginning in the month after the retirement date or death and extending for a period of fifteen years subject to vesting. The Company purchased life insurance policies of $2.9$5.0 million as an investment. The income from the policy investments will help fund this liability.
Additionally, the Company has an agreement with a former officer which provides for $50,000 per year in monthly cash payments. The remaining contractual obligation at December 31, 2017 is one year. At December 31, 20172019 and 2016,2018, the Company had accrued salary continuation liability for these agreements of $0.5$0.8 million and $0.4$0.6 million, respectively. The cash surrender value of the life insurance policies was $4.5$6.9 million at December 31, 2017,2019, and is included in other assets.
Other
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 will not have a material impact on the Company’s financial position or results of operations.
Preferred Stock
The Company’s Series A Preferred Stock paid cumulative dividends at a rate of 5% per year until February 15, 2014 then increased to a rate of 9% per year. The Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.
During 2015, the Company redeemed the remaining 7,014 shares of Series A Preferred Stock for $6.9 million and recognized a discount on the redemption of $0.1 million.
Common Stock Warrant
The Warrant issued as part of the TARP providesprovided for the purchase of up to 521,158 shares of the common stock, at an exercise price of $4.49 per share (“Warrant Shares”). The Warrant is immediately exercisable and has a 10-year term. The exercise price and the ultimate number ofWarrants were exercised for 300,401 shares of common stock that may be issued underprior to expiration in 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 secondfourth 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.2018.
Common Stock
During the years ended December 31, 20172019 and 2016,2018, the Company recorded $1.3$1.8 million and $1.1$1.6 million, respectively of dividends on common stock.
On August 24, 2017,February 28, 2019, the Board of Directors extended the repurchase program and increased the common stock repurchase program of uprepurchases to $3.0$4.5 million for two additional years.until August 31, 2021. Under this program the Company has repurchased 187,569350,189 common stock shares for $1.4$3.1 million at an average price of $7.25$8.75 per share. There were no repurchases of common stock under this program during the year ended December 31, 2017.
Stock Option Plans
The Company has twoone stock option plansplan available for option grants. Stock options granted in 20172019 generally have a vesting period of 5 years and a contractual life of 10 years. The Company recognizes compensation cost for options ratably over the requisite service period for all awards. As of December 31, 2017, 258,0002019, 55,100 options were available for future grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. The expected volatility is based on the historical volatility of the stock of the Company over the expected life of the options. The risk-free rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend rate assumption was the dividend yield at grant date. A summary of the assumptions used in calculating the fair value of option awards during the years ended December 31, 2017, 20162019, 2018 and 20152017 are as follows:
| Stock options | | December 31, | | |
| | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | |
| | | | | | | |
| Expected life in years | | | 6.4 | | | | 6.5 | | | | 6.5 | | | 6.2 | | | 6.3 | | | 6.4 | |
| Risk-free interest rate | | | 2.04 | % | | | 1.62 | % | | | 1.77 | % | | 2.41 | % | | 2.85 | % | | 2.04 | % |
| Expected volatility | | | 44.1 | % | | | 49.5 | % | | | 64.9 | % | | 27.6 | % | | 34.7 | % | | 44.1 | % |
| Annual dividend rate | | | 1.49 | % | | | 1.73 | % | | | 1.41 | % | | 2.00 | % | | 1.64 | % | | 1.49 | % |
A summary of option activity under the plan is presented below:
| | | December 31, 2017 | |
| | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | |
| | | (in thousands, except exercise price and contractual terms) | |
| Outstanding options, beginning of period | | | 705 | | | $ | 6.41 | | | | | | | |
| Granted | | | 159 | | | | 10.15 | | | | | | | |
| Exercised | | | (97 | ) | | | 5.05 | | | | | | | |
| Forefeited or expired | | | (87 | ) | | | 8.57 | | | | | | | |
| Outstanding options, end of period | | | 680 | | | $ | 7.21 | | | | 7.5 | | | | 2,342 | |
| Options exerciseable, end of period | | | 319 | | | $ | 6.35 | | | | 6.6 | | | | 1,371 | |
| Options expected to vest, end of period | | | 576 | | | $ | 7.03 | | | | 7.3 | | | | 719 | |
| | December 31, 2016 | | | Year ended December 31, 2019 | |
| | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | |
| | | (in thousands, except exercise price and contractual terms) | | | (in thousands, except exercise price and contractual terms) | |
| Outstanding options, beginning of period | | | 665 | | | | 6.03 | | | | | | | | | 679 | | | $ | 8.32 | | | | | | | |
| Granted | | | 192 | | | | 7.12 | | | | | | | | | 126 | | | 10.19 | | | | | | | |
| Exercised | | | (74 | ) | | | 2.99 | | | | | | | | | (39 | ) | | 6.92 | | | | | | | |
| Forefeited or expired | | | (78 | ) | | | 8.12 | | | | | | | | |
| Forfeited or expired | | | | (35 | ) | | | 7.81 | | | | | | | |
| Outstanding options, end of period | | | 705 | | | $ | 6.41 | | | | 7.3 | | | $ | 2,057 | | | | 731 | | | $ | 8.74 | | | | 6.9 | | | $ | 1,805 | |
| Options exerciseable, end of period | | | 301 | | | $ | 5.86 | | | | 5.7 | | | $ | 1,082 | | |
| Options exercisable, end of period | | | | 394 | | | $ | 7.77 | | | | 5.9 | | | $ | 1,337 | |
| Options expected to vest, end of period | | | 282 | | | $ | 6.83 | | | | 7.1 | | | $ | 696 | | | | 644 | | | $ | 8.52 | | | | 6.7 | | | $ | 1,721 | |
| | | December 31, 2015 | | | Year Ended December 31, 2018 | |
| | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | |
| | | (in thousands, except exercise price and contractual terms) | | | (in thousands, except exercise price and contractual terms) | |
| Outstanding options, beginning of period | | | 457 | | | $ | 5.61 | | | | | | | | | 680 | | | $ | 7.21 | | | | | | | |
| Granted | | | 243 | | | | 6.70 | | | | | | | | | 136 | | | 11.61 | | | | | | | |
| Exercised | | | (7 | ) | | | 2.08 | | | | | | | | | (102 | ) | | 5.39 | | | | | | | |
| Forefeited or expired | | | (28 | ) | | | 5.82 | | | | | | | | |
| Forfeited or expired | | | | (35 | ) | | | 8.16 | | | | | | | |
| Outstanding options, end of period | | | 665 | | | $ | 6.03 | | | | 7.4 | | | $ | 914 | | | | 679 | | | $ | 8.32 | | | | 7.4 | | | $ | 1,400 | |
| Options exerciseable, end of period | | | 322 | | | $ | 5.75 | | | | 6.0 | | | $ | 666 | | |
| Options exercisable, end of period | | | | 340 | | | $ | 7.39 | | | | 6.6 | | | $ | 945 | |
| Options expected to vest, end of period | | | 233 | | | $ | 6.08 | | | | 7.1 | | | $ | 219 | | | | 588 | | | $ | 8.08 | | | | 7.2 | | | $ | 1,318 | |
| | | Year Ended December 31, 2017 | |
| | | Option Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Term | | | Aggregate Intrinsic Value | |
| | | (in thousands, except exercise price and contractual terms) | |
| Outstanding options, beginning of period | | | 705 | | | $ | 6.41 | | | | | | | |
| Granted | | | 159 | | | | 10.15 | | | | | | | |
| Exercised | | | (97 | ) | | | 5.05 | | | | | | | |
| Forfeited or expired | | | (87 | ) | | | 8.57 | | | | | | | |
| Outstanding options, end of period | | | 680 | | | $ | 7.21 | | | | 7.5 | | | $ | 2,342 | |
| Options exercisable, end of period | | | 319 | | | $ | 6.35 | | | | 6.6 | | | $ | 1,371 | |
| Options expected to vest, end of period | | | 576 | | | $ | 7.03 | | | | 7.3 | | | $ | 719 | |
As of December 31, 2017, 20162019, 2018 and 2015,2017, there was $0.7$0.6 million, $0.7 million and $0.7 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s plan. That cost is expected to be recognized over a weighted average period of 3.33.0 years, 3.53.2 years, and 3.83.3 years, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, 2016was $0.1 million, $0.6 million, and 2015, was $0.5 million, $0.3 million, and $34,000, respectively.
The following table summarizes the change in unvested stock option shares during the year ended December 31, 2017:2019:
| | | Number of Option Shares | | | Weighted Average Grant-Date Fair Value | | | Number of Option Shares | | | Weighted Average Grant-Date Fair Value | |
| | | (in thousands, except per share data) | | | (in thousands, except per share data) | |
| Unvested options, beginning of period | | | 404 | | | $ | 3.41 | | | 339 | | | $ | 3.70 | |
| Granted | | | 159 | | | | 4.00 | | | 126 | | | 2.51 | |
| Vested | | | (155 | ) | | | 3.51 | | | (105 | ) | | 3.71 | |
| Forefeited | | | (47 | ) | | | 3.53 | | |
| Forfeited | | | | (23 | ) | | | 3.14 | |
| Unvested options, end of period | | | 361 | | | $ | 3.61 | | | | 337 | | | $ | 3.29 | |
The following table presents a reconciliation of basic earnings per share and diluted earnings per share:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (in thousands, except per share amounts) | |
| Net income | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,870 | |
| Less: dividends and accretion on preferred stock | | | - | | | | - | | | | 445 | |
| discount on partial redemption | | | - | | | | - | | | | (129 | ) |
| Net income available to common stockholders | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | |
| Add: debenture interest expense and costs, net of income taxes | | | - | | | | - | | | | - | |
| Net income for diluted calculation of earnings per common share | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | |
| Weighted average number of common shares outstanding - basic | | | 8,146 | | | | 8,114 | | | | 8,203 | |
| Weighted average number of common shares outstanding - diluted | | | 8,589 | | | | 8,444 | | | | 8,491 | |
| Earnings per share: | | | | | | | | | | | | |
| Basic | | $ | 0.60 | | | $ | 0.64 | | | $ | 0.31 | |
| Diluted | | $ | 0.57 | | | $ | 0.62 | | | $ | 0.30 | |
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 December 31, 20172019 and 2016.2018. The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.
| | | Total Capital (To Risk- Weighted Assets) | | | Tier 1 Capital (To Risk- Weighted Assets) | | | Common Equity Tier 1 (To Risk- Weighted Assets) | | | Leverage Ratio/Tier1 Capital (To Average Assets) | | | 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, 2017 | | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 11.31 | % | | | 10.10 | % | | | 10.10 | % | | | 8.83 | % | |
| December 31, 2019 | | | | | | | | | | | | | |
| CWB’s actual regulatory ratios | | | 11.41 | % | | 10.28 | % | | 10.28 | % | | 9.06 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % | | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % | | 10.00 | % | | 8.00 | % | | 6.50 | % | | N/A | |
| Minimum capital requirements including fully-phased in capital conservation buffer (2019) | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | | | 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) | | | 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, 2016 | | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 12.27 | % | | | 11.04 | % | | | 11.04 | % | | | 10.08 | % | |
| December 31, 2018 | | | | | | | | | | | | | |
| CWB’s actual regulatory ratios | | | 10.83 | % | | 9.68 | % | | 9.68 | % | | 8.57 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % | | 8.00 | % | | 6.00 | % | | 4.50 | % | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % | | 10.00 | % | | 8.00 | % | | 6.50 | % | | 5.00 | % |
| Minimum capital requirements including fully-phased in capital conservation buffer (2019) | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | | | 10.50 | % | | 8.50 | % | | 7.00 | % | | N/A | |
The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 on January 1, 2018. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income. However the recognition of these income streams did not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Exchange Fees and Other Service Charges
Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks and other services. The Company’s performance obligation for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for periods indicated.
| Non-interest income | | Twelve Months Ended December 31, | |
| In-scope of Topic 606: | | 2019 | | | 2018 | | | 2017 | |
| Service charges on deposit accounts | | $ | 507 | | | $ | 369 | | | $ | — | |
| Exchange fees and other service charges | | | 159 | | | | 186 | | | | — | |
| Non-interest income (in-scope of Topic 606) | | | 666 | | | | 555 | | | | — | |
| Non-interest income (out-of-scope of Topic 606) | | | 2,941 | | | | 2,073 | | | | — | |
| Total | | $ | 3,607 | | | $ | 2,628 | | | $ | — | |
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2019 and December 31, 2018, the Company did not have any signficant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
As described in Note 1 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, effective January 1, 2019, we adopted Topic 842. We have operating leases for office space. Our office leases are typically for terms of between 2 and 10 years. Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments. When renewal options exist, we generally do not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset. As part of the adoption, we elected the package of practical expedients permitted under the transition guidance, but not the hindsight practical expedient. As of December 31, 2019, the balance of the right-of-use assets was $6.3 million and the lease liabilities were $6.3 million. The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying Consolidated Balance Sheets.
| | | Twelve Months Ended December 31, | |
| | | 2019 | | | 2018 | |
| Lease cost: | | (in thousands) | |
| Operating lease cost | | | 1,137 | | | | — | |
| Sublease income | | | — | | | | — | |
| Total lease cost | | | 1,137 | | | | — | |
| | | | | | | | | |
| Other information | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | — | | | | — | |
| Operating cash flows from operating leases | | | 1,117 | | | | — | |
| Weighted average remaining lease term in years - operating leases | | | 9.62 | | | | — | |
| Weighted average discount rate - operating leases | | | 3.23 | % | | | — | |
Future minimum operating lease payments:
| | | December 31, | |
| | | 2019 | | | 2018 | |
| | | (in thousands) | |
| 2020 | | $ | 1,015 | | | $ | — | |
| 2021 | | | 884 | | | | — | |
| 2022 | | | 779 | | | | — | |
| 2023 | | | 705 | | | | — | |
| 2024 | | | 713 | | | | — | |
| Thereafter | | | 3,291 | | | | — | |
| Total future minimum lease payments | | $ | 7,387 | | | $ | — | |
| Less remaining imputed interest | | | 1,071 | | | | — | |
| Total lease liabilities | | $ | 6,316 | | | $ | — | |
| 15. | EMPLOYEE BENEFIT PLANS |
401(k) Plan:
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants are able to defer up to a maximum of $18,000$19,000 (for those under 50 years of age in 2017)2019) of their annual compensation. The Company may elect to match a discretionary amount each year, which was 3% of the participant’s eligible compensation. The Company’s total contribution was $0.3 million $0.2 million, and $0.2 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
Deferred Compensation Plans:
A deferred compensation plan covers the executive officers. Under the plan, the Company pays each participant a percentage of their base salary plus interest. Vesting occurs at age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was $0.1 million resulting in a deferred compensation liability of $0.9$1.3 million and $0.6$1.1 million as of the year-end 20172019 and 2016.2018.
The Company also provides an unfunded nonqualified deferred compensation arrangement to provide supplemental retirement benefits for the Participants which are a select group of management or highly compensated employees of the Company. The Participants may defer up to 30% of their base salary and bonus each plan year. The 36 month certificate of deposit rate is paid on the vested balance.
15.16. | FAIR VALUE MEASUREMENT |
The fair value of an asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction occurring in the principal market for such asset or liability. ASC 820 establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy under ASC 820 and the methods and assumptions used by the Company in estimating the fair value of its financial instruments are described in “Note 1. Summary of Significant Accounting Policies – Fair Value of Financial Instruments” of these Notes to the Consolidated Financial Statements.
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: | | | Fair Value Measurements at the End of the Reporting Period Using: | |
| December 31, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Value | | |
| December 31, 2019 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value | |
Assets: | | (in thousands) | | | (in thousands) | |
| Investment securities measured at fair value | | | $ | 167 | | | $ | - | | | $ | - | | | $ | 167 | |
| Investment securities available-for-sale | | $ | 156 | | | $ | 28,627 | | | $ | - | | | $ | 28,783 | | | | - | | | | 19,264 | | | | - | | | | 19,264 | |
| Interest only strips | | | - | | | | - | | | | 87 | | | | 87 | | | | - | | | | - | | | | 41 | | | | 41 | |
| Servicing assets | | | - | | | | - | | | | 97 | | | | 97 | | | | - | | | | - | | | | 846 | | | | 846 | |
| | | $ | 156 | | | $ | 28,627 | | | $ | 184 | | | $ | 28,967 | | | $ | 167 | | | $ | 19,264 | | | $ | 887 | | | $ | 20,318 | |
| | | Fair Value Measurements at the End of the Reporting Period Using: | | | Fair Value Measurements at the End of the Reporting Period Using: | |
| December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Value | | |
| December 31, 2018 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value | |
Assets: | | (in thousands) | | | (in thousands) | |
| Investment securities measured at fair value | | | $ | 121 | | | $ | - | | | $ | - | | | $ | 121 | |
| Investment securities available-for-sale | | $ | 115 | | | $ | 22,566 | | | $ | - | | | $ | 22,681 | | | | - | | | | 24,931 | | | | - | | | | 24,931 | |
| Interest only strips | | | - | | | | - | | | | 119 | | | | 119 | | | | - | | | | - | | | | 63 | | | | 63 | |
| Servicing assets | | | - | | | | - | | | | 158 | | | | 158 | | | | - | | | | - | | | | 101 | | | | 101 | |
| | | $ | 115 | | | $ | 22,566 | | | $ | 277 | | | $ | 22,958 | | | $ | 121 | | | $ | 24,931 | | | $ | 164 | | | $ | 25,216 | |
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 strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. I/O strips are classified as level 3 in the fair value hierarchy. The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds. 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 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 | | | 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) | | | 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 December 31, 2017: | | | | | | | | | | | | | |
| As of December 31, 2019: | | | | | | | | | | |
| Impaired loans | | $ | 6,323 | | | $ | - | | | $ | 6,323 | | | $ | - | | | $ | 2,334 | | | $ | — | | | $ | 2,334 | | | $ | — | |
| Loans held for sale | | | 56,222 | | | | - | | | | 56,222 | | | | - | | | | 42,900 | | | | — | | | | 42,900 | | | | — | |
| Foreclosed real estate and repossessed assets | | | 372 | | | | - | | | | 372 | | | | - | | | | 2,524 | | | | — | | | | 2,524 | | | | — | |
| | | $ | 62,917 | | | $ | - | | | $ | 62,917 | | | $ | - | | | $ | 47,758 | | | $ | — | | | $ | 47,758 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2016: | | | | |
| As of December 31, 2018: | | | | | | | | | | | | | | | | | |
| Impaired loans | | $ | 2,008 | | | $ | - | | | $ | 2,008 | | | $ | - | | | $ | 5,592 | | | $ | — | | | $ | 5,592 | | | $ | — | |
| Loans held for sale | | | 64,954 | | | | - | | | | 64,954 | | | | - | | | | 49,050 | | | | — | | | | 49,050 | | | | — | |
| Foreclosed real estate and repossessed assets | | | 137 | | | | - | | | | 137 | | | | - | | | | — | | | | — | | | | — | | | | — | |
| | | $ | 67,099 | | | $ | - | | | $ | 67,099 | | | $ | - | | | $ | 54,642 | | | $ | — | | | $ | 54,642 | | | $ | — | |
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered impaired an allowance for a loan loss is established. The fair value measurement and disclosure requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans. Impaired loans are measured at an observable market price, if available or at the fair value of the loan’s collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation. When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy. For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
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 December 31, 20172019 and 2016,2018, the Company had loans held for sale with an aggregate carrying value of $55.1$42.0 million and $61.4$48.4 million respectively.
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:
| | | December 31, 2017 | | | December 31, 2019 | |
| | | Carrying | | | Fair Value | | | Carrying | | Fair Value | |
| | | Amount | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Amount | | Level 1 | | Level 2 | | Level 3 | | Total | |
| Financial assets: | | (in thousands) | | | (in thousands) | |
| Cash and cash equivalents | | $ | 45,869 | | | $ | 45,869 | | | $ | - | | | $ | - | | | $ | 45,869 | | | $ | 82,661 | | | $ | 82,661 | | | $ | — | | | $ | — | | | $ | 82,661 | |
| FRB and FHLB stock | | | 3,720 | | | | - | | | | 3,720 | | | | - | | | | 3,720 | | | | 4,087 | | | | — | | | | 4,087 | | | | — | | | | 4,087 | |
| Investment securities | | | 36,348 | | | | 156 | | | | 36,298 | | | | - | | | | 36,454 | | | | 25,563 | | | | 167 | | | | 25,399 | | | | — | | | | 25,566 | |
| Loans, net | | | 726,189 | | | | - | | | | 705,723 | | | | 13,779 | | | | 719,502 | | | | 766,846 | | | | — | | | | | | | | 9,907 | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 699,684 | | | | - | | | | 699,211 | | | | - | | | | 699,211 | | | | 750,934 | | | | — | | | | 751,398 | | | | — | | | | 751,398 | |
| Other borrowings | | | 56,843 | | | | - | | | | 56,842 | | | | - | | | | 56,842 | | | | 65,000 | | | | — | | | | 65,236 | | | | — | | | | 65,236 | |
| | | December 31, 2016 | | | December 31, 2018 | |
| | | Carrying | | | Fair Value | | | Carrying | | Fair Value | |
| | | Amount | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Amount | | Level 1 | | Level 2 | | Level 3 | | Total | |
| Financial assets: | | (in thousands) | | | (in thousands) | |
| Cash and cash equivalents | | $ | 34,116 | | | $ | 34,116 | | | $ | - | | | $ | - | | | $ | 34,116 | | | $ | 56,915 | | | $ | 56,915 | | | $ | — | | | $ | — | | | $ | 56,915 | |
| FRB and FHLB stock | | | 3,443 | | | | - | | | | 3,443 | | | | - | | | | 3,443 | | | | 4,087 | | | | — | | | | 4,087 | | | | — | | | | 4,087 | |
| Investment securities | | | 31,683 | | | | 115 | | | | 31,715 | | | | - | | | | 31,830 | | | | 32,353 | | | | 121 | | | | 32,079 | | | | — | | | | 32,200 | |
| Loans, net | | | 623,355 | | | | - | | | | 599,919 | | | | 14,775 | | | | 614,694 | | | | 759,552 | | | | — | | | | 735,377 | | | | 17,846 | | | | 753,223 | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | 612,236 | | | | - | | | | 612,215 | | | | - | | | | 612,215 | | | | 716,006 | | | | — | | | | 712,900 | | | | — | | | | 712,900 | |
| Other borrowings | | | 29,000 | | | | - | | | | 28,999 | | | | - | | | | 28,999 | | | | 75,000 | | | | — | | | | 74,930 | | | | — | | | | 74,930 | |
Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments as well as its future net interest income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in the net portfolio value and net interest income resulting from hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, the Board of Directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits. As of December 31, 2017,2019, the Company’s interest rate risk profile was within Board-approved limits.
The Company’s subsidiary bank has an Asset and Liability Management Committee charged with managing interest rate risk within Board approved limits. Such limits are structured to prohibit an interest rate risk profile that is significantly asset or liability sensitive.
Fair value of commitments
Loan commitments on which the committed interest rates were less than the current market rate are insignificant at December 31, 20172019 and 2016.2018. The estimated fair value of standby letters of credit outstanding at December 31, 20162018 was also insignificant.
16.17. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The following table summarizes the changes in other comprehensive income by component, net of tax for the period indicated:
| | | Year Ended December 31, | | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | 2018 | | 2017 | |
| Unrealized holding gains (losses ) on AFS | | (in thousands) | | | (in thousands) | |
| Beginning balance | | $ | (29 | ) | | $ | (68 | ) | | $ | 31 | | | $ | (141 | ) | | $ | 25 | | | $ | (29 | ) |
| Other comprehensive income (loss) before reclassifications | | | 54 | | | | 39 | | | | (99 | ) | | | 63 | | | | (107 | ) | | | 54 | |
| Amounts reclassified from accumulated other comprehensive income | | | - | | | | - | | | | - | | | | — | | | | (59 | ) | | | — | |
| Net current-period other comprehensive income | | | 54 | | | | 39 | | | | (99 | ) | | | 63 | | | | (166 | ) | | | 54 | |
| Ending Balance | | $ | 25 | | | $ | (29 | ) | | $ | (68 | ) | | $ | (78 | ) | | $ | (141 | ) | | $ | 25 | |
There were no reclassifications out of accumulated other comprehensive income for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
17.18. | PARENT COMPANY FINANCIAL INFORMATION |
The condensed financial statements of the holding company are presented in the following tables:
COMMUNITY WEST BANCSHARES
Condensed Balance Sheets
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | (in thousands) | | | (in thousands) | |
| Assets: | | | | | | | | | | | | |
| Cash and cash equivalents (including interest-bearing deposits in other financial institutions) | | $ | 973 | | | $ | 575 | | | $ | 972 | | | $ | 299 | |
| Investment in subsidiary | | | 70,825 | | | | 68,585 | | | 81,171 | | | 72,429 | |
| Total loans | | | 4,915 | | | | - | | | — | | | 8,355 | |
| Other assets | | | 190 | | | | 319 | | | | 168 | | | | 240 | |
| Total assets | | $ | 76,903 | | | $ | 69,479 | | | $ | 82,311 | | | $ | 81,323 | |
| | | | | | | | | | | | | | | |
| Liabilities and Stockholders' Equity: | | | | | | | | | |
| Liabilities and Stockholders’ Equity: | | | | | | | |
| Other borrowings | | $ | 6,843 | | | $ | 4,000 | | | $ | — | | | $ | 5,000 | |
| Other liabilities | | | 15 | | | | 114 | | | | 333 | | | | 172 | |
| Total liabilities | | | 6,858 | | | | 4,114 | | | | 333 | | | | 5,172 | |
| Common stock | | | 42,604 | | | | 41,575 | | |
| Retained earnings | | | 27,441 | | | | 23,790 | | |
| Total stockholders' equity | | | 70,045 | | | | 65,365 | | |
| Total liabilities and stockholders' equity | | $ | 76,903 | | | $ | 69,479 | | |
| Total stockholders’ equity | | | | 81,978 | | | | 76,151 | |
| Total liabilities and stockholders’ equity | | | $ | 82,311 | | | $ | 81,323 | |
COMMUNITY WEST BANCSHARES
Condensed Income Statements
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | 2018 | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Interest income | | $ | 60 | | | $ | 5 | | | $ | 3 | | | $ | 227 | | | $ | 264 | | | $ | 60 | |
| Interest expense | | | 196 | | | | 247 | | | | 44 | | | | 111 | | | | 329 | | | | 196 | |
| Net interest expense | | | (136 | ) | | | (242 | ) | | | (41 | ) | | | 116 | | | | (65 | ) | | | (136 | ) |
| Provision for loan losses | | | | (145 | ) | | | 60 | | | | — | |
| Net interest income after provision for loan losses | | | | 261 | | | | (125 | ) | | | (136 | ) |
| Income from consolidated subsidiary | | | 5,441 | | | | 5,671 | | | | 3,335 | | | | 8,145 | | | | 7,844 | | | | 5,441 | |
| Other income | | | - | | | | - | | | | - | | |
| Total income | | | 5,305 | | | | 5,429 | | | | 3,294 | | | | 8,406 | | | | 7,719 | | | | 5,305 | |
| Total non-interest expenses | | | 669 | | | | 495 | | | | 571 | | | | 405 | | | | 516 | | | | 669 | |
| Income before income tax benefit | | | 4,636 | | | | 4,934 | | | | 2,723 | | | | 8,001 | | | | 7,203 | | | | 4,636 | |
| Income tax benefit | | | (279 | ) | | | (295 | ) | | | (147 | ) | | | 38 | | | | (206 | ) | | | (279 | ) |
| Net income | | | 4,915 | | | | 5,229 | | | | 2,870 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Preferred stock dividends and accretion on preferred stock | | | - | | | | - | | | | 445 | | |
| Discount on partial redemption of preferred stock | | | - | | | | - | | | | (129 | ) | |
| Net income available to common stockholders' | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,554 | | |
COMMUNITY WEST BANCSHARES
Condensed Statements of Cash Flows
| | | December 31, | | | December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2019 | | 2018 | | 2017 | |
| | | (in thousands) | | | (in thousands) | |
| Cash Flows from Operating Activities: | | | | | | | | | | | | | | | | |
| Net income | | $ | 4,915 | | | $ | 5,229 | | | $ | 2,870 | | | $ | 7,963 | | | $ | 7,409 | | | $ | 4,915 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | | | | | | | — | | | | — | | | | — | |
| Equity in undistributed income from subsidiary | | | (5,441 | ) | | | (5,671 | ) | | | (3,335 | ) | | | (8,145 | ) | | | (7,844 | ) | | | (5,441 | ) |
| Stock-based compensation | | | 537 | | | | 338 | | | | 412 | | | | 382 | | | | 478 | | | | 537 | |
| Changes in: | | | | | | | | | | | | | | | — | | | | — | | | | — | |
| Other assets | | | 129 | | | | (138 | ) | | | 41 | | | | 72 | | | | (50 | ) | | | 129 | |
| Other liabilities | | | (99 | ) | | | 70 | | | | 45 | | | | 161 | | | | 157 | | | | (99 | ) |
| Net cash provided by (used in) operating activities | | | 41 | | | | (172 | ) | | | 33 | | |
| Net cash provided by operating activities | | | | 433 | | | | 150 | | | | 41 | |
| Cash Flows from Investing Activities: | | | | | | | | | | | | | | | — | | | | — | | | | — | |
| Loans originations and principal collections, net | | | (4,915 | ) | | | | | | | | | |
| Loan originations and principal collections, net | | | | 8,355 | | | | (3,440 | ) | | | (4,915 | ) |
| Net dividends from and investment in subsidiary | | | 3,201 | | | | 1,000 | | | | 5,131 | | | | (534 | ) | | | 6,158 | | | | 3,201 | |
| Net cash provided by investing activities | | | (1,714 | ) | | | 1,000 | | | | 5,131 | | |
| Net cash provided by (used in) investing activities | | | | 7,821 | | | | 2,718 | | | | (1,714 | ) |
| Cash Flows from Financing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net increase (decrease) from other borrowings | | | 2,843 | | | | (1,500 | ) | | | 5,500 | | | | (5,000 | ) | | | (1,843 | ) | | | 2,843 | |
| Redemption of convertible debentures | | | - | | | | - | | | | - | | |
| Preferred stock dividends paid | | | - | | | | - | | | | (524 | ) | |
| Redemption of preferred stock | | | - | | | | - | | | | (6,885 | ) | |
| Common stock dividends paid | | | (1,264 | ) | | | (1,096 | ) | | | (902 | ) | | | (1,821 | ) | | | (1,581 | ) | | | (1,264 | ) |
| Common stock repurchase | | | - | | | | (1,338 | ) | | | (28 | ) | | | (1,030 | ) | | | (669 | ) | | | — | |
| Proceeds from issuance of common stock | | | 492 | | | | 220 | | | | 14 | | | | 270 | | | | 551 | | | | 492 | |
| Net cash used in financing activities | | | 2,071 | | | | (3,714 | ) | | | (2,825 | ) | | | (7,581 | ) | | | (3,542 | ) | | | 2,071 | |
| Net increase (decrease) in cash and cash equivalents | | | 398 | | | | (2,886 | ) | | | 2,339 | | |
| Net (decrease) increase in cash and cash equivalents | | | | 673 | | | | (674 | ) | | | 398 | |
| Cash and cash equivalents at beginning of year | | | 575 | | | | 3,461 | | | | 1,122 | | | | 299 | | | | 973 | | | | 575 | |
| Cash and cash equivalents at end of year | | $ | 973 | | | $ | 575 | | | $ | 3,461 | | | $ | 972 | | | $ | 299 | | | $ | 973 | |