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EX-31.2 - EXHIBIT 31.2 - COMMUNITY WEST BANCSHARES /ex31_2.htm
EX-10.42 - EXHIBIT 10.42 - COMMUNITY WEST BANCSHARES /ex10_42.htm
EX-10.41 - EXHIBIT 10.41 - COMMUNITY WEST BANCSHARES /ex10_41.htm
EX-31.1 - EXHIBIT 31.1 - COMMUNITY WEST BANCSHARES /ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - COMMUNITY WEST BANCSHARES /ex32_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015 or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________
 
Commission File Number:  000-23575
 
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
 
California
 
77-0446957
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California
 
93117
(Address of principal executive offices)
 
(Zip Code)
 
(805) 692-5821
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  YES     ☐  NO

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐     No  ☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock of the registrant issued and outstanding of 8,201,158 as of October 31, 2015.
 


Table of Contents
 
Index
Page
Part I.  Financial Information
 
 
Item 1 – Financial Statements
 
    3
4
   
5
   
6
   
7
   
8
       
 
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
 
     
 
32
 
47
 
47
      
Part II.  Other Information
 
 
48
 
Item 1A – Risk Factors
48
 
48
 
48
 
49
 
49
 
Item 6 – Exhibits
49
     
50
 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS

   
September 30,
2015
   
December 31,
2014
 
   
(unaudited)
     
   
(in thousands, except share amounts)
 
Assets:
       
Cash and due from banks
 
$
1,854
   
$
1,609
 
Federal funds sold
   
22
     
22
 
Interest-earning demand in other financial institutions
   
21,817
     
17,328
 
Cash and cash equivalents
   
23,693
     
18,959
 
Money market investments
   
99
     
99
 
Investment securities - available-for-sale, at fair value; amortized cost of $24,007 at September 30, 2015 and $22,141 at December 31, 2014
   
23,956
     
22,194
 
Investment securities - held-to-maturity, at amortized cost; fair value of $7,672 at September 30, 2015 and $8,894 at December 31, 2014
   
7,245
     
8,447
 
Federal Home Loan Bank stock, at cost
   
1,886
     
1,716
 
Federal Reserve Bank stock, at cost
   
1,373
     
1,373
 
Loans:
               
Held for sale, at lower of cost or fair value
   
65,491
     
66,759
 
Held for investment, net of allowance for loan losses of $7,012 at September 30, 2015 and $7,877 at December 31, 2014
   
460,495
     
420,497
 
Total loans
   
525,986
     
487,256
 
Other assets acquired through foreclosure, net
   
206
     
137
 
Premises and equipment, net
   
2,956
     
3,053
 
Other assets
   
13,637
     
14,084
 
Total assets
 
$
601,037
   
$
557,318
 
Liabilities:
               
Deposits:
               
Non-interest-bearing demand
 
$
73,073
   
$
57,364
 
Interest-bearing demand
   
250,738
     
275,631
 
Savings
   
13,943
     
15,265
 
Certificates of deposit ($250,000 or more)
   
56,745
     
13,601
 
Other certificates of deposit
   
132,287
     
115,223
 
Total deposits
   
526,786
     
477,084
 
Other borrowings
   
5,000
     
10,000
 
Other liabilities
   
3,339
     
3,227
 
Total liabilities
   
535,125
     
490,311
 
                 
Stockholders’ equity:
               
Preferred stock — no par value, 10,000,000 shares authorized; 5,574 shares issued and outstanding at September 30, 2015 and 7,014 at December 31, 2014
   
5,574
     
7,014
 
Common stock — no par value, 20,000,000 shares authorized; 8,201,158 shares issued and outstanding at September 30, 2015 and 8,203,033  at December 31, 2014
   
42,272
     
41,957
 
Retained earnings
   
18,096
     
18,005
 
Accumulated other comprehensive income (loss)
   
(30
)
   
31
 
Total stockholders’ equity
   
65,912
     
67,007
 
Total liabilities and stockholders’ equity
 
$
601,037
   
$
557,318
 

See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED  INCOME STATEMENTS (unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income:
 
(in thousands, except per share amounts)
 
Loans, including fees
 
$
7,131
   
$
6,695
   
$
21,253
   
$
20,367
 
Investment securities and other
   
244
     
208
     
834
     
619
 
Total interest income
   
7,375
     
6,903
     
22,087
     
20,986
 
Interest expense:
                               
Deposits
   
587
     
709
     
1,761
     
2,039
 
Other borrowings
   
6
     
126
     
82
     
524
 
Total interest expense
   
593
     
835
     
1,843
     
2,563
 
Net interest income
   
6,782
     
6,068
     
20,244
     
18,423
 
Provision (credit) for loan losses
   
(445
)
   
(1,178
)
   
(1,997
)
   
(3,560
)
Net interest income after provision for loan losses
   
7,227
     
7,246
     
22,241
     
21,983
 
Non-interest income:
                               
Other loan fees
   
244
     
279
     
789
     
720
 
Document processing fees
   
141
     
103
     
364
     
297
 
Service charges
   
92
     
72
     
252
     
215
 
Other
   
77
     
98
     
366
     
494
 
Total non-interest income
   
554
     
552
     
1,771
     
1,726
 
Non-interest expenses:
                               
Salaries and employee benefits
   
3,412
     
2,888
     
9,729
     
9,308
 
Occupancy, net
   
507
     
479
     
1,439
     
1,377
 
Professional services
   
212
     
436
     
736
     
1,167
 
Data processing
   
135
     
144
     
388
     
425
 
Advertising and marketing
   
116
     
129
     
348
     
429
 
Stock based compensation
   
73
     
29
     
333
     
270
 
Depreciation
   
103
     
82
     
290
     
238
 
Loan servicing and collection
   
10
     
187
     
281
     
586
 
FDIC assessment
   
99
     
83
     
252
     
253
 
Loan litigation settlement, net
   
(50
)
   
     
7,103
     
 
Other
   
421
     
422
     
1,291
     
1,382
 
Total non-interest expenses
   
5,038
     
4,879
     
22,190
     
15,435
 
Income before provision for income taxes
   
2,743
     
2,919
     
1,822
     
8,274
 
Provision for income taxes
   
1,152
     
1,207
     
803
     
3,414
 
Net income
   
1,591
     
1,712
     
1,019
     
4,860
 
Dividends on preferred stock
   
125
     
176
     
401
     
778
 
Discount on partial redemption of preferred stock
   
     
     
(129
)
   
(144
)
Net income available to common stockholders
 
$
1,466
   
$
1,536
   
$
747
   
$
4,226
 
Earnings per share:
                               
Basic
 
$
0.18
   
$
0.19
   
$
0.09
   
$
0.52
 
Diluted
 
$
0.17
   
$
0.18
   
$
0.09
   
$
0.51
 
Weighted average number of common shares outstanding:
                               
Basic
   
8,203
     
8,200
     
8,204
     
8,120
 
Diluted
   
8,508
     
8,494
     
8,503
     
8,512
 
Dividends declared per common share
 
$
0.03
   
$
0.02
   
$
0.08
   
$
0.02
 

See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Net income
 
$
1,591
   
$
1,712
   
$
1,019
   
$
4,860
 
Other comprehensive income (loss), net:
                               
Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($64),($23), $42, ($130) for each respective period presented)
   
92
     
34
     
(61
)
   
188
 
Net other comprehensive income (loss)
   
92
     
34
     
(61
)
   
188
 
Comprehensive income
 
$
1,683
   
$
1,746
   
$
958
   
$
5,048
 

See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)

   
Preferred Stock
   
Common Stock
   
Accumulated
Other
       
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Comprehensive
Income (Loss)
   
Retained
Earnings
   
Stockholders'
Equity
 
   
(in thousands)
 
Balance, December 31, 2014:
   
7
   
$
7,014
     
8,203
   
$
41,957
   
$
31
   
$
18,005
   
$
67,007
 
Net income
   
     
     
     
     
     
1,019
     
1,019
 
Exercise of stock options
   
     
     
1
     
3
     
     
     
3
 
Stock option expense
   
     
     
     
333
     
     
     
333
 
Preferred stock redemption and discount
   
(1
)
   
(1,440
)
   
     
     
     
129
     
(1,311
)
Common stock repurchase
   
     
     
(3
)
   
(21
)
   
     
     
(21
)
Dividends on preferred stock
   
     
     
     
     
     
(401
)
   
(401
)
Dividends on common stock
   
     
     
     
     
     
(656
)
   
(656
)
Other comprehensive loss, net
   
     
     
     
     
(61
)
   
     
(61
)
Balance, September 30, 2015
   
6
   
$
5,574
     
8,201
   
$
42,272
   
$
(30
)
 
$
18,096
   
$
65,912
 

See the accompanying notes.
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)

   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
(in thousands)
 
Cash flows from operating activities:
       
Net income
 
$
1,019
   
$
4,860
 
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Provision for loan losses
   
(1,997
)
   
(3,560
)
Depreciation
   
290
     
238
 
Stock-based compensation
   
333
     
270
 
Deferred income taxes
   
42
     
(581
)
Net accretion of discounts and premiums for investment securities
   
(71
)
   
(31
)
(Gains)/Losses on:
               
Sale of repossessed assets, net
   
(33
)
   
(168
)
Sale of loans, net
   
(83
)
   
(150
)
Sale of assets, net
   
32
     
 
Loans originated for sale and principal collections, net
   
1,351
     
(2,827
)
Changes in:
               
Other assets
   
537
     
5,369
 
Other liabilities
   
(6
)
   
1,238
 
Servicing rights, net
   
44
     
168
 
Net cash provided by operating activities
   
1,459
     
4,826
 
Cash flows from investing activities:
               
Principal pay downs and maturities of available-for-sale securities
   
5,635
     
1,438
 
Purchase of available-for-sale securities
   
(7,416
)
   
(5,132
)
Proceeds from principal pay downs and maturities of securities held-to-maturity
   
1,189
     
1,099
 
Loan originations and principal collections, net
   
(38,545
)
   
(22,427
)
(Purchase) liquidation of restricted stock, net
   
(170
)
   
154
 
Purchase of premises and equipment, net
   
(225
)
   
(233
)
Proceeds from sale of other real estate owned and repossessed assets, net
   
508
     
3,552
 
Net cash used in investing activities
   
(39,025
)
   
(21,549
)
Cash flows from financing activities:
               
Net increase in deposits
   
49,702
     
48,615
 
Net  decrease in borrowings
   
(5,000
)
   
(12,034
)
Exercise of stock options
   
3
     
52
 
Cash dividends paid on common stock
   
(656
)
   
(164
)
Common stock repurchase
   
(21
)
   
 
Redemption of preferred stock
   
(1,311
)
   
(7,660
)
Cash dividends paid on preferred stock
   
(417
)
   
(2,222
)
Net cash provided by financing activities
   
42,300
     
26,587
 
Net increase in cash and cash equivalents
   
4,734
     
9,864
 
Cash and cash equivalents at beginning of year
   
18,959
     
19,478
 
Cash and cash equivalents at end of period
 
$
23,693
   
$
29,342
 
Supplemental disclosure:
               
Cash paid during the period for:
               
Interest
 
$
1,830
   
$
2,513
 
Income taxes
   
650
     
2,301
 
Non-cash investing and financing activity:
               
Transfers to other assets acquired through foreclosure, net
   
544
     
928
 
Conversion of debentures
   
     
1,408
 

See the accompanying notes.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service banking through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”).  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, the fair value of other real estate owned and the fair value of securities available for sale.  Although Management believes these estimates to be reasonably accurate, actual amounts may differ.  In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.

Interim Financial Information

The accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2015 and 2014 have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by GAAP for complete financial statements.  These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

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

Reclassifications

Certain amounts in the consolidated financial statements as of December 31, 2014 and for the three and nine months ended September 30, 2014 have been reclassified to conform to the current presentation.  The reclassifications have no effect on net income, comprehensive income or stockholders’ equity as previously reported.

Loans Held For Sale

Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis.  Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision.  Loans held for sale are mostly comprised of SBA and commercial agriculture.  On August 14, 2015 the Company announced its exit from originating single family residential loans for sale.  The Company did not incur any lower of cost or fair value provision in the three and nine months ended September 30, 2015 and 2014.

Loans Held for Investment and Interest and Fees from Loans

Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.  Unearned income includes deferred loan origination fees reduced by loan origination costs.  Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.

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

When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for through interest income.
 
Nonaccrual loans:  For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest.  Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of principal and collection of interest is unlikely.  The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection.  Other personal loans are typically charged off no later than 180 days delinquent.

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

Impaired loans:  A loan is considered impaired when, based on current information; it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell.  All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.

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

Allowance for Loan Losses and Provision for Loan Losses

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

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

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

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

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

Special Mention - A Special Mention loan has potential weaknesses that require management's close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
 
Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due.  They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.

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

Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future.  Losses are taken in the period in which they are considered uncollectible.

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

Commercial, CRE and SBA Loans

Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.  A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists.  In the event there is no perceived equity, the loan is charged-off in full.  Unsecured loans which are delinquent over 90 days are also charged-off in full.

Single Family Real Estate, HELOC’s and Manufactured Housing Loans

Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for impairment.  Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists.  In the event there is no perceived equity, the loan is generally fully charged-off.  Other consumer loans which are not secured and unpaid over 90-120 days are charged-off in full.

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

The Company evaluates and individually assesses for impairment loans generally greater than $500,000, classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR or when other conditions exist which lead management to review for possible impairment.   Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans.  The amount of impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods:

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

Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
 
The Company determines the appropriate ALL on a monthly basis.  Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.  The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral.  Additional factors considered include: geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience.  These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

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

· Concentrations of credit
· International risk
· Trends in volume, maturity, and composition
· Volume and trend in delinquency
· Economic conditions
· Outside exams
· Geographic distance
· Policy and changes
· Staff experience and ability

Off Balance Sheet and Credit Exposure

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

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

Foreclosed Real Estate and Repossessed Assets

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

Income Taxes

The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements.  Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting.  These items represent “temporary differences.”  Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized.  Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense.  Deferred tax assets are included in other assets on the consolidated balance sheets.

Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required  to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
 
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”).  ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions.  ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.

Earnings Per Share

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

Recent Accounting Pronouncements

In January 2014, the FASB issued guidance within ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  The amendments in ASU 2014-04, Subtopic 310-40, Receivables -Troubled Debt Restructurings by Creditors, clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.  Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.   ASU 2014-04 was effective for the Company using either a modified retrospective transition method or a prospective transition method for reporting periods beginning after December 15, 2014.  The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

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 July 2015, this effective date was extended for the Company to December 18, 2017.  The Company may elect to apply the amendments of this Update using one of the following two methods: 1) retrospectively to each prior reporting period presented or 2) retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application.  The Company is currently evaluating the impact of the provisions in this standard on the Company’s consolidated financial statements.

2. INVESTMENT SECURITIES

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

   
September 30, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
11,293
   
$
3
   
$
(66
)
 
$
11,230
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
12,648
     
74
     
(48
)
   
12,674
 
Equity securities: Farmer Mac class A stock
   
66
     
-
     
(14
)
   
52
 
Total
 
$
24,007
   
$
77
   
$
(128
)
 
$
23,956
 
                                 
Securities held-to-maturity
                               
U.S. government agency mortgage backed securities ("MBS")
 
$
7,245
   
$
427
   
$
-
   
$
7,672
 
Total
 
$
7,245
   
$
427
   
$
-
   
$
7,672
 
 
   
December 31, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
7,846
   
$
65
   
$
(49
)
 
$
7,862
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
14,229
     
73
     
(31
)
   
14,271
 
Equity securities: Farmer Mac class A stock
   
66
     
-
     
(5
)
   
61
 
Total
 
$
22,141
   
$
138
   
$
(85
)
 
$
22,194
 
                                 
Securities held-to-maturity
                               
U.S. government agency MBS
 
$
8,447
   
$
447
   
$
-
   
$
8,894
 
Total
 
$
8,447
   
$
447
   
$
-
   
$
8,894
 

At September 30, 2015 and December 31, 2014, $31.1 million and $30.6 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.
 
The maturity periods and weighted average yields of investment securities at September 30, 2015 and December 31, 2014 were as follows:

   
September 30, 2015
 
   
Less than One Year
   
One to Five Years
   
Five to Ten Years
   
Over Ten Years
   
Total
 
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
   
Amount
   
Yield
 
Securities available-for-sale
 
(dollars in thousands)
 
U.S. government agency notes
 
$
9,010
     
2.4
%
 
$
-
     
-
   
$
2,220
     
0.9
%
 
$
-
     
-
   
$
11,230
     
2.1
%
U.S. government agency CMO
   
-
     
-
     
5,232
     
1.2
%
   
4,036
     
0.6
%
   
3,406
     
1.1
%
   
12,674
     
1.0
%
Farmer Mac class A stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
52
     
-
 
Total
 
$
9,010
     
2.4
%
 
$
5,232
     
1.2
%
 
$
6,256
     
0.7
%
 
$
3,406
     
1.1
%
 
$
23,956
     
1.5
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
-
     
-
   
$
2,222
     
3.5
%
 
$
5,023
     
2.9
%
 
$
-
     
-
   
$
7,245
     
3.1
%
Total
 
$
-
     
-
   
$
2,222
     
3.5
%
 
$
5,023
     
2.9
%
 
$
-
     
-
   
$
7,245
     
3.1
%

   
December 31, 2014
 
   
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
 
$
7,862
     
2.5
%
 
$
-
     
-
   
$
-
     
-
   
$
-
     
-
   
$
7,862
     
2.5
%
U.S. government agency CMO
   
-
     
-
     
7,826
     
1.0
%
   
2,801
     
0.6
%
   
3,644
     
1.1
%
   
14,271
     
1.1
%
Farmer Mac class A stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
61
     
-
 
Total
 
$
7,862
     
2.5
%
 
$
7,826
     
1.0
%
 
$
2,801
     
0.6
%
 
$
3,644
     
1.1
%
 
$
22,194
     
1.3
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
-
     
-
   
$
3,235
     
4.0
%
 
$
5,212
     
2.4
%
 
$
-
     
-
   
$
8,447
     
2.9
%
Total
 
$
-
     
-
   
$
3,235
     
4.0
%
 
$
5,212
     
2.4
%
 
$
-
     
-
   
$
8,447
     
2.9
%
 
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
 
   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Securities available for sale
 
(in thousands)
 
Due in one year or less
 
$
9,067
   
$
9,010
   
$
7,846
   
$
7,862
 
After one year through five years
   
5,207
     
5,232
     
7,798
     
7,826
 
After five years through ten years
   
6,244
     
6,256
     
2,792
     
2,801
 
After ten years
   
3,423
     
3,406
     
3,639
     
3,644
 
Farmer Mac class A stock
   
66
     
52
     
66
     
61
 
   
$
24,007
   
$
23,956
   
$
22,141
   
$
22,194
 
Securities held to maturity
                               
Due in one year or less
 
$
-
   
$
-
   
$
-
   
$
-
 
After one year through five years
   
2,222
     
2,404
     
3,235
     
3,479
 
After five years through ten years
   
5,023
     
5,268
     
5,212
     
5,415
 
After ten years
   
-
     
-
     
-
     
-
 
   
$
7,245
   
$
7,672
   
$
8,447
   
$
8,894
 
 
Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities.  Changes in interest rates may also impact prepayments.

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

   
September 30, 2015
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
49
   
$
4,169
   
$
17
   
$
5,059
   
$
66
   
$
9,228
 
U.S. government agency CMO
   
-
     
-
     
48
     
1,971
     
48
     
1,971
 
Equity securities: Farmer Mac class A stock
   
14
     
52
     
-
     
-
     
14
     
52
 
   
$
63
   
$
4,221
   
$
65
   
$
7,030
   
$
128
   
$
11,251
 
Securities held-to-maturity
                   
U.S. Government-agency MBS
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Total
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
 
   
December 31, 2014
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
23
   
$
1,918
   
$
26
   
$
3,971
   
$
49
   
$
5,889
 
U.S. government agency CMO
   
-
     
-
     
31
     
4,090
     
31
     
4,090
 
Equity securities: Farmer Mac class A stock
   
5
     
61
     
-
     
-
     
5
     
61
 
   
$
28
   
$
1,979
   
$
57
   
$
8,061
   
$
85
   
$
10,040
 
Securities held-to-maturity
                   
U.S. Government-agency MBS
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Total
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 

As of September 30, 2015 and December 31, 2014, there were seven and six securities, respectively, in an unrealized loss position.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In estimating other than temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.
 
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2015 and December 31, 2014, management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.
 
3. LOAN SALES AND SERVICING

SBA and Agriculture Loans

The Company periodically sells the guaranteed portion of selected SBA loans into the secondary market, on a servicing-retained basis.  The Company retains the unguaranteed portion of these loans and services the loans as required under the SBA programs to retain specified yield amounts.

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.  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.

Historically, the Company elected to use the amortizing method for the treatment of servicing assets and 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 a group of SBA loans, the Company recorded a servicing asset and elected to measure this asset at fair value in accordance with ASC 825-10 – Fair Value Option to better reflect the impact of subsequent changes in interest rates.

The SBA program stipulates that the Company retains a minimum of 5% of the loan balance, which is unguaranteed.  The percentage of each unguaranteed loan in excess of 5% may be periodically sold to a third party, typically for a cash premium.  The Company records servicing liabilities for the sold unguaranteed loans.  These servicing liabilities are calculated based on the present value of the estimated future servicing costs associated with each loan.  The balance of the remaining servicing liabilities at September 30, 2015 was not material to the Company’s financial position or results of operations.

The Company may also periodically sell certain SBA loans into the secondary market, on a servicing-released basis, typically for a cash premium.  As of September 30, 2015 and December 31, 2014, the Company had approximately $35.9 million and $40.8 million, respectively, of SBA loans included in loans held for sale.  As of September 30, 2015 and December 31, 2014, the principal balance of SBA loans serviced for others was $20.4 million and $24.6 million, respectively.

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

As of September 30, 2015 and December 31, 2014, the Company had $29.2 million and $25.1 million, respectively, of USDA loans included in loans held for sale. As of September 30, 2015 and December 31, 2014, the principal balance of USDA loans serviced for others was $1.4 million.

The following table presents the I/O strips activity as of the periods presented:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Beginning balance
 
$
270
   
$
329
   
$
293
   
$
334
 
Adjustment to fair value
   
(28
)
   
(11
)
   
(51
)
   
(16
)
Ending balance
 
$
242
   
$
318
   
$
242
   
$
318
 

The fair value adjustments on the I/O strips are recorded in non-interest income.
 
The key data assumptions used in estimating the fair value of the I/O strips as of the periods presented were as follows:

   
September 30,
 
   
2015
   
2014
 
     
Weighted-average constant prepayment rate
   
6.08
%
   
5.39
%
Weighted-average life (in years)
   
5
     
6
 
Weighted-average discount rate
   
12.23
%
   
10.53
%

A sensitivity analysis of the fair value of the I/O strips to changes in certain key assumptions is presented in the following table:

   
September 30,
 
   
2015
   
2014
 
   
( in thousands)
 
Discount Rate
       
Increase in fair value from 100 basis point decrease
 
$
6
   
$
9
 
Decrease in fair value from 100 basis point increase
   
(6
)
   
(9
)
Constant Prepayment Rate
               
Increase in fair value from 10 percent decrease
   
3
     
5
 
Decrease in fair value from 10 percent increase
   
(3
)
   
(4
)

The following is a summary of the activity for servicing assets accounted for under the amortization method:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Beginning balance
 
$
151
   
$
211
   
$
167
   
$
268
 
Amortization
   
(8
)
   
(29
)
   
(24
)
   
(86
)
Ending balance
 
$
143
   
$
182
   
$
143
   
$
182
 

The amortization of the servicing assets has been recorded in non-interest income.

The following is a summary of the activity for servicing assets accounted for under the fair value method:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Beginning balance
 
$
192
   
$
275
   
$
203
   
$
300
 
Adjustment to fair value
   
(8
)
   
(57
)
   
(19
)
   
(82
)
Ending balance
 
$
184
   
$
218
   
$
184
   
$
218
 

The fair value adjustments on the servicing assets has been recorded in non-interest income.

The key data and assumptions used in estimating the fair value of servicing assets as of the periods presented were as follows:

   
September 30,
 
   
2015
   
2014
 
     
Weighted-average constant prepayment rate
   
6.02
%
   
5.66
%
Weighted-average life (in years)
   
8
     
9
 
Weighted-average discount rate
   
11.73
%
   
10.79
%
 
A sensitivity analysis of the fair value of servicing assets to change in certain key assumptions is presented in the following table:

   
September 30,
 
   
2015
   
2014
 
   
(in thousands)
 
Discount Rate
       
Increase in fair value from 100 basis points decrease
 
$
8
   
$
10
 
Decrease in fair value from 100 basis points increase
   
(8
)
   
(9
)
Constant Prepayment Rate
               
Increase in fair value from 10 percent decrease
   
5
     
5
 
Decrease in fair value from 10 percent increase
   
(4
)
   
(5
)

This sensitivity analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s servicing assets usually is not linear.  In addition, the effect of changing one key assumption without changing other assumptions is not a viable option.

Mortgage Loans
 
During the third quarter of 2015, the Company exited from originating mortgage loans for sale.

4. LOANS HELD FOR INVESTMENT

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

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Manufactured housing
 
$
173,432
   
$
169,662
 
Commercial real estate
   
177,302
     
159,432
 
Commercial
   
70,707
     
49,683
 
SBA
   
14,707
     
21,336
 
HELOC
   
11,134
     
13,481
 
Single family real estate
   
20,670
     
14,957
 
Consumer
   
129
     
178
 
     
468,081
     
428,729
 
Allowance for loan losses
   
7,012
     
7,877
 
Deferred fees, net
   
371
     
118
 
Discount on SBA loans
   
203
     
237
 
Total loans held for investment, net
 
$
460,495
   
$
420,497
 
 
The following table presents the contractual aging of the recorded investment in past due held for investment loans by class of loans:

   
September 30, 2015
 
   
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Over 90 Days
Past Due
   
Total
Past Due
   
Total
   
Recorded
Investment
Over 90 Days
and Accruing
 
   
(in thousands)
 
Manufactured housing
 
$
173,354
   
$
78
   
$
-
   
$
-
   
$
78
   
$
173,432
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
132,424
     
-
     
-
     
612
     
612
     
133,036
     
-
 
SBA 504 1st trust deed
   
24,940
     
-
     
463
     
-
     
463
     
25,403
     
-
 
Land
   
5,541
     
-
     
-
     
-
     
-
     
5,541
     
-
 
Construction
   
13,322
     
-
     
-
     
-
     
-
     
13,322
     
-
 
Commercial
   
70,663
     
-
     
-
     
44
     
44
     
70,707
     
-
 
SBA
   
14,706
     
1
     
-
     
-
     
1
     
14,707
     
-
 
HELOC
   
11,134
     
-
     
-
     
-
     
-
     
11,134
     
-
 
Single family real estate
   
20,670
     
-
     
-
     
-
     
-
     
20,670
     
-
 
Consumer
   
129
     
-
     
-
     
-
     
-
     
129
     
-
 
Total
 
$
466,883
   
$
79
   
$
463
   
$
656
   
$
1,198
   
$
468,081
   
$
-
 

   
December 31, 2014
 
   
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Over 90 Days
Past Due
   
Total
Past Due
   
Total
   
Recorded
Investment
Over 90 Days
and Accruing
 
   
(in thousands)
 
Manufactured housing
 
$
169,233
   
$
239
   
$
-
   
$
190
   
$
429
   
$
169,662
   
$
-
 
Commercial real estate:
                                                       
Commercial real estate
   
119,090
     
632
     
-
     
186
     
818
     
119,908
     
-
 
SBA 504 1st trust deed
   
27,297
     
-
     
-
     
-
     
-
     
27,297
     
-
 
Land
   
1,569
     
-
     
-
     
-
     
-
     
1,569
     
-
 
Construction
   
10,658
     
-
     
-
     
-
     
-
     
10,658
     
-
 
Commercial
   
49,683
     
-
     
-
     
-
     
-
     
49,683
     
-
 
SBA
   
21,333
     
3
     
-
     
-
     
3
     
21,336
     
-
 
HELOC
   
13,459
     
-
     
-
     
22
     
22
     
13,481
     
-
 
Single family real estate
   
14,821
     
-
             
136
     
136
     
14,957
     
-
 
Consumer
   
178
     
-
     
-
     
-
     
-
     
178
     
-
 
Total
 
$
427,321
   
$
874
   
$
-
   
$
534
   
$
1,408
   
$
428,729
   
$
-
 

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Beginning balance
 
$
7,243
   
$
10,496
   
$
7,877
   
$
12,208
 
Charge-offs
   
(33
)
   
(318
)
   
(258
)
   
(750
)
Recoveries
   
247
     
236
     
1,390
     
1,338
 
Net recoveries
   
214
     
(82
)
   
1,132
     
588
 
Provision (credit)
   
(445
)
   
(1,178
)
   
(1,997
)
   
(3,560
)
Ending balance
 
$
7,012
   
$
9,236
   
$
7,012
   
$
9,236
 
 
As of September 30, 2015 and December 31, 2014, the Company had reserves for credit losses on undisbursed loans of $49,000 which were included in Other liabilities.
 
The following tables summarize the changes in the allowance for loan losses by portfolio type:

   
For the Three Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2015
 
(in thousands)
 
Beginning balance
 
$
3,808
   
$
1,779
   
$
795
   
$
686
   
$
45
   
$
129
   
$
1
   
$
7,243
 
Charge-offs
   
(33
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(33
)
Recoveries
   
38
     
13
     
40
     
153
     
3
     
-
     
-
     
247
 
Net (charge-offs) recoveries
   
5
     
13
     
40
     
153
     
3
     
-
     
-
     
214
 
Provision (credit)
   
(220
)
   
43
     
35
     
(284
)
   
(5
)
   
(15
)
   
1
     
(445
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 
                                                                 
2014
   
Beginning balance
 
$
4,753
   
$
1,985
   
$
1,503
   
$
1,750
   
$
238
   
$
265
   
$
2
   
$
10,496
 
Charge-offs
   
(112
)
   
-
     
-
     
(140
)
   
-
     
(66
)
   
-
     
(318
)
Recoveries
   
37
     
13
     
38
     
144
     
3
     
1
     
-
     
236
 
Net (charge-offs) recoveries
   
(75
)
   
13
     
38
     
4
     
3
     
(65
)
   
-
     
(82
)
Provision (credit)
   
(225
)
   
(459
)
   
(137
)
   
(320
)
   
(51
)
   
14
     
-
     
(1,178
)
Ending balance
 
$
4,453
   
$
1,539
   
$
1,404
   
$
1,434
   
$
190
   
$
214
   
$
2
   
$
9,236
 

   
For The Nine Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2015
 
(in thousands)
 
Beginning balance
 
$
4,032
   
$
1,459
   
$
986
   
$
1,066
   
$
140
   
$
192
   
$
2
   
$
7,877
 
Charge-offs
   
(258
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(258
)
Recoveries
   
103
     
533
     
383
     
361
     
8
     
2
     
-
     
1,390
 
Net (charge-offs) recoveries
   
(155
)
   
533
     
383
     
361
     
8
     
2
     
-
     
1,132
 
Provision (credit)
   
(284
)
   
(157
)
   
(499
)
   
(872
)
   
(105
)
   
(80
)
   
-
     
(1,997
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 
                                                                 
2014
   
Beginning balance
 
$
5,114
   
$
2,552
   
$
2,064
   
$
1,951
   
$
280
   
$
245
   
$
2
   
$
12,208
 
Charge-offs
   
(516
)
   
(16
)
   
-
     
(152
)
   
-
     
(66
)
   
-
     
(750
)
Recoveries
   
75
     
844
     
114
     
281
     
21
     
3
     
-
     
1,338
 
Net (charge-offs) recoveries
   
(441
)
   
828
     
114
     
129
     
21
     
(63
)
   
-
     
588
 
Provision (credit)
   
(220
)
   
(1,841
)
   
(774
)
   
(646
)
   
(111
)
   
32
     
-
     
(3,560
)
Ending balance
 
$
4,453
   
$
1,539
   
$
1,404
   
$
1,434
   
$
190
   
$
214
   
$
2
   
$
9,236
 

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

   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Loans Held for Investment as of September 30, 2015:
 
(in thousands)
 
Recorded Investment:
                               
Impaired loans with an allowance recorded
 
$
4,434
   
$
386
   
$
3,019
   
$
400
   
$
20
   
$
1,979
   
$
-
   
$
10,238
 
Impaired loans with no allowance recorded
   
3,631
     
2,470
     
44
     
148
     
298
     
290
     
-
     
6,881
 
Total loans individually evaluated for impairment
   
8,065
     
2,856
     
3,063
     
548
     
318
     
2,269
     
-
     
17,119
 
Loans collectively evaluated for impairment
   
165,367
     
174,446
     
67,644
     
14,159
     
10,816
     
18,401
     
129
     
450,962
 
Total loans held for investment
 
$
173,432
   
$
177,302
   
$
70,707
   
$
14,707
   
$
11,134
   
$
20,670
   
$
129
   
$
468,081
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
4,502
   
$
442
   
$
3,019
   
$
2,019
   
$
20
   
$
1,979
   
$
-
   
$
11,981
 
Impaired loans with no allowance recorded
   
5,438
     
3,879
     
50
     
1,953
     
310
     
423
     
-
     
12,053
 
Total loans individually evaluated for impairment
   
9,940
     
4,321
     
3,069
     
3,972
     
330
     
2,402
     
-
     
24,034
 
Loans collectively evaluated for impairment
   
165,367
     
174,446
     
67,644
     
14,159
     
10,816
     
18,401
     
129
     
450,962
 
Total loans held for investment
 
$
175,307
   
$
178,767
   
$
70,713
   
$
18,131
   
$
11,146
   
$
20,803
   
$
129
   
$
474,996
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
460
   
$
4
   
$
41
   
$
32
   
$
-
   
$
18
   
$
-
   
$
555
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
460
     
4
     
41
     
32
     
-
     
18
     
-
     
555
 
Loans collectively evaluated for impairment
   
3,133
     
1,831
     
829
     
523
     
43
     
96
     
2
     
6,457
 
Total loans held for investment
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Loans Held for Investment as of December 31, 2014:
 
(in thousands)
 
Recorded Investment:
                               
Impaired loans with an allowance recorded
 
$
4,717
   
$
2,783
   
$
3,122
   
$
1,837
   
$
86
   
$
591
   
$
-
   
$
13,136
 
Impaired loans with no allowance recorded
   
2,734
     
831
     
44
     
4
     
-
     
90
     
-
     
3,703
 
Total loans individually evaluated for impairment
   
7,451
     
3,614
     
3,166
     
1,841
     
86
     
681
     
-
     
16,839
 
Loans collectively evaluated for impairment
   
162,211
     
155,818
     
46,517
     
19,495
     
13,395
     
14,276
     
178
     
411,890
 
Total loans held for investment
 
$
169,662
   
$
159,432
   
$
49,683
   
$
21,336
   
$
13,481
   
$
14,957
   
$
178
   
$
428,729
 
Unpaid Principal Balance
                                                               
Impaired loans with an allowance recorded
 
$
5,172
   
$
2,979
   
$
4,914
   
$
9,512
   
$
91
   
$
644
   
$
-
   
$
23,312
 
Impaired loans with no allowance recorded
   
4,243
     
2,895
     
50
     
225
     
-
     
191
     
-
     
7,604
 
Total loans individually evaluated for impairment
   
9,415
     
5,874
     
4,964
     
9,737
     
91
     
835
     
-
     
30,916
 
Loans collectively evaluated for impairment
   
162,211
     
155,818
     
46,517
     
19,495
     
13,395
     
14,276
     
178
     
411,890
 
Total loans held for investment
 
$
171,626
   
$
161,692
   
$
51,481
   
$
29,232
   
$
13,486
   
$
15,111
   
$
178
   
$
442,806
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
 
$
399
   
$
77
   
$
241
   
$
104
   
$
1
   
$
32
   
$
-
   
$
854
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
399
     
77
     
241
     
104
     
1
     
32
     
-
     
854
 
Loans collectively evaluated for impairment
   
3,633
     
1,382
     
745
     
962
     
139
     
160
     
2
     
7,023
 
Total loans held for investment
 
$
4,032
   
$
1,459
   
$
986
   
$
1,066
   
$
140
   
$
192
   
$
2
   
$
7,877
 

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment.  In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table below as “Impaired loans without specific valuation allowance under ASC 310.”  The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of September 30, 2015 and December 31, 2014.

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

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Impaired loans with a specific valuation allowance under ASC 310
 
$
10,238
   
$
13,136
 
Impaired loans without a specific valuation allowance under ASC 310
   
6,881
     
3,703
 
Total impaired loans
 
$
17,119
   
$
16,839
 
Valuation allowance related to impaired loans
 
$
555
   
$
854
 

The following tables summarize impaired loans by class of loans:

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Manufactured housing
 
$
8,065
   
$
7,451
 
Commercial real estate :
               
Commercial real estate
   
880
     
2,320
 
SBA 504 1st trust deed
   
1,976
     
1,294
 
Commercial
   
3,063
     
3,166
 
SBA
   
548
     
1,841
 
HELOC
   
318
     
86
 
Single family real estate
   
2,269
     
681
 
Total
 
$
17,119
   
$
16,839
 
 
The following table summarizes average investment in impaired loans by class of loans and the related interest income recognized:

   
Three Months Ended
September 30,
 
   
2015
   
2014
 
   
Average Investment
in Impaired Loans
   
Interest
Income
   
Average Investment
in Impaired Loans
   
Interest
Income
 
   
(in thousands)
 
Manufactured housing
 
$
7,490
   
$
197
   
$
7,240
   
$
260
 
Commercial real estate:
                               
Commercial real estate
   
860
     
-
     
2,333
     
-
 
SBA 504 1st trust deed
   
1,712
     
31
     
1,265
     
18
 
Land
   
-
     
-
     
-
     
-
 
Construction
   
-
     
-
     
-
     
-
 
Commercial
   
2,825
     
-
     
3,206
     
17
 
SBA
   
663
     
17
     
1,560
     
3
 
HELOC
   
190
     
8
     
453
     
-
 
Single family real estate
   
2,284
     
24
     
668
     
1
 
Consumer
   
-
     
-
     
-
     
-
 
Total
 
$
16,024
   
$
277
   
$
16,725
   
$
299
 

   
Nine Months Ended
 
   
September 30,
 
   
2015
   
2014
 
   
Average Investment
in Impaired Loans
   
Interest
Income
   
Average Investment
in Impaired Loans
   
Interest
Income
 
   
(in thousands)
 
Manufactured housing
 
$
7,346
   
$
448
   
$
8,072
   
$
404
 
Commercial real estate:
                               
Commercial real estate
   
1,548
     
-
     
2,539
     
-
 
SBA 504 1st
   
1,417
     
65
     
1,029
     
48
 
Land
   
-
     
-
     
68
     
-
 
Construction
   
-
     
-
     
-
     
-
 
Commercial
   
2,895
     
-
     
3,447
     
69
 
SBA
   
1,226
     
53
     
1,671
     
9
 
HELOC
   
137
     
8
     
526
     
8
 
Single family real estate
   
1,441
     
57
     
707
     
3
 
Consumer
   
-
     
-
     
-
     
-
 
Total
 
$
16,010
   
$
631
   
$
18,059
   
$
541
 

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

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

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Nonaccrual loans
 
$
7,385
   
$
17,883
 
SBA guaranteed portion of loans included above
   
(2,098
)
   
(6,856
)
Total nonaccrual loans, net
 
$
5,287
   
$
11,027
 
                 
Troubled debt restructured loans, gross
 
$
12,654
   
$
9,685
 
Loans 30 through 89 days past due with interest accruing
 
$
-
   
$
-
 
Allowance for loan losses to gross loans held for investment
   
1.50
%
   
1.84
%

The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days delinquent.  Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Foregone interest on nonaccrual and TDR loans for the three months ended September 30, 2015 and 2014 was $0.1 million and $0.3 million, respectively.  Foregone interest on nonaccrual and TDR loans for the nine months ended September 30, 2015 and 2014 was $0.6 million and $1.0 million, respectively.
 
The following table presents the composition of nonaccrual loans, net of government guarantees, by class of loans:

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Manufactured housing
 
$
1,618
   
$
1,480
 
Commercial real estate:
               
Commercial real estate
   
880
     
2,951
 
SBA 504 1st trust deed
   
1,709
     
1,021
 
Commercial
   
44
     
3,167
 
SBA
   
429
     
1,713
 
HELOC
   
318
     
86
 
Single family real estate
   
289
     
609
 
Total
 
$
5,287
   
$
11,027
 

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

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”.  For a detailed discussion on these risk classifications see “Note 1 Summary of Significant Accounting Policies - Allowance for Loan Losses and Provision for Loan Losses” of this Form 10-Q.   Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date.  Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.

The following tables present gross loans by risk rating:

   
September 30, 2015
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
168,925
   
$
-
   
$
4,507
   
$
-
   
$
173,432
 
Commercial real estate:
                                       
Commercial real estate
   
121,320
     
7,408
     
4,308
     
-
     
133,036
 
SBA 504 1st trust deed
   
21,010
     
591
     
3,802
     
-
     
25,403
 
Land
   
5,541
     
-
     
-
     
-
     
5,541
 
Construction
   
13,322
     
-
     
-
     
-
     
13,322
 
Commercial
   
60,815
     
6,532
     
3,360
     
-
     
70,707
 
SBA
   
11,282
     
162
     
619
     
73
     
12,136
 
HELOC
   
10,309
     
-
     
825
     
-
     
11,134
 
Single family real estate
   
18,357
     
-
     
2,313
     
-
     
20,670
 
Consumer
   
129
     
-
     
-
     
-
     
129
 
Total, net
   
431,010
     
14,693
     
19,734
     
73
     
465,510
 
SBA guarantee
   
-
     
-
     
2,571
     
-
     
2,571
 
Total
 
$
431,010
   
$
14,693
   
$
22,305
   
$
73
   
$
468,081
 
 
   
December 31, 2014
 
   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
162,638
   
$
-
   
$
7,024
   
$
-
   
$
169,662
 
Commercial real estate:
                                       
Commercial real estate
   
106,909
     
6,544
     
6,455
     
-
     
119,908
 
SBA 504 1st trust deed
   
23,038
     
1,085
     
3,174
     
-
     
27,297
 
Land
   
1,569
     
-
     
-
     
-
     
1,569
 
Construction
   
10,658
     
-
     
-
     
-
     
10,658
 
Commercial
   
46,275
     
158
     
3,250
     
-
     
49,683
 
SBA
   
12,803
     
173
     
1,891
     
97
     
14,964
 
HELOC
   
12,888
     
-
     
593
     
-
     
13,481
 
Single family real estate
   
14,105
     
-
     
852
     
-
     
14,957
 
Consumer
   
178
     
-
     
-
     
-
     
178
 
Total, net
   
391,061
     
7,960
     
23,239
     
97
     
422,357
 
SBA guarantee
   
-
     
-
     
6,372
     
-
     
6,372
 
Total
 
$
391,061
   
$
7,960
   
$
29,611
   
$
97
   
$
428,729
 

Troubled Debt Restructured Loan (TDR)

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

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

   
For the Three Months Ended September 30, 2015
 
   
Number
of Loans
   
Pre-
Modification
Recorded Investment
   
Post
Modification
Recorded Investment
   
Balance of
Loans with
Rate Reduction
   
Balance of
Loans with
Term Extension
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
Manufactured housing
   
11
   
$
1,292
   
$
1,292
   
$
1,292
   
$
1,292
   
$
58
 
Total
   
11
   
$
1,292
   
$
1,292
   
$
1,292
   
$
1,292
   
$
58
 

   
For the Nine Months Ended September 30, 2015
 
   
Number
of Loans
   
Pre-
Modification
Recorded Investment
   
Post
Modification
Recorded Investment
   
Balance of
Loans with
Rate Reduction
   
Balance of
Loans with
Term Extension
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
Manufactured housing
   
19
   
$
1,756
   
$
1,746
   
$
1,443
   
$
1,599
   
$
73
 
SBA
   
1
     
297
     
297
     
-
     
297
     
5
 
HELOC
   
1
     
54
     
54
     
54
     
54
     
-
 
Single family real estate
   
1
     
1,917
     
1,917
     
1,917
     
1,917
     
35
 
Total
   
22
   
$
4,024
   
$
4,014
   
$
3,414
   
$
3,867
   
$
113
 
 
   
For the Three Months Ended September 30, 2014
 
   
Number
of Loans
   
Pre-
Modification
Recorded Investment
   
Post
Modification
Recorded Investment
   
Balance of
Loans with
Rate Reduction
   
Balance of
Loans with
Term Extension
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
Manufactured housing
   
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Total
   
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 

   
For the Nine Months Ended September 30, 2014
 
   
Number
of Loans
   
Pre-
Modification
Recorded Investment
   
Post
Modification
Recorded Investment
   
Balance of
Loans with
Rate Reduction
   
Balance of
Loans with
Term Extension
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
Manufactured housing
   
5
   
$
272
   
$
272
   
$
272
   
$
272
   
$
10
 
Total
   
5
   
$
272
   
$
272
   
$
272
   
$
272
   
$
10
 

The average rate concessions were 100 basis points and 76 basis points, respectively, for the three and nine months ended September 30, 2015 and 70 basis points for the nine months ended September 30, 2014.  The average term extension in months was 180 and 149 for the third quarter and year to date 2015, respectively, and 180 for the year to date 2014.

The following tables present TDR's by class for which there was a payment default during the period:

   
Three Months Ended
September 30,
 
   
2015
   
2014
 
   
Number
of Loans
   
Recorded
Investment
   
Effect on
Allowance for
Loan Losses
   
Number
of Loans
   
Recorded
Investment
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
     
-
   
$
-
   
$
-
     
-
   
$
-
   
$
-
 
Total
   
-
   
$
-
   
$
-
     
-
   
$
-
   
$
-
 

   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
   
Number
of Loans
   
Recorded
Investment
   
Effect on
Allowance for
Loan Losses
   
Number
of Loans
   
Recorded
Investment
   
Effect on
Allowance for
Loan Losses
 
   
(dollars in thousands)
 
Manufactured housing
   
-
   
$
-
   
$
-
     
1
   
$
18
   
$
1
 
Total
   
-
   
$
-
   
$
-
     
1
   
$
18
   
$
1
 

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.

At September 30, 2015 there were no material loan commitments outstanding on TDR loans.
 
5. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Balance, beginning of period
 
$
267
   
$
610
   
$
137
   
$
3,811
 
Additions
   
209
     
137
     
544
     
822
 
Proceeds from dispositions
   
(286
)
   
(290
)
   
(508
)
   
(4,326
)
Gains on sales, net
   
16
     
18
     
33
     
168
 
Balance, end of period
 
$
206
   
$
475
   
$
206
   
$
475
 

6. FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2015 and December 31, 2014.  The estimated fair value amounts for September 30, 2015 and December 31, 2014 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates.  As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
 
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following tables summarize the fair value of assets measured on a recurring basis:
 
   
Fair Value Measurements at the End of the Reporting Period Using:
 
September 30, 2015
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Fair
Value
 
Assets:
 
(in thousands)
 
Investment securities available-for-sale
 
$
52
   
$
23,904
   
$
-
   
$
23,956
 
Interest only strips
   
-
     
-
     
242
     
242
 
Servicing assets
   
-
     
-
     
184
     
184
 
   
$
52
   
$
23,904
   
$
426
   
$
24,382
 

   
Fair Value Measurements at the End of the Reporting Period Using:
 
December 31, 2014
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Fair
Value
 
Assets:
 
(in thousands)
 
Investment securities available-for-sale
 
$
61
   
$
22,133
   
$
-
   
$
22,194
 
Interest only strips
   
-
     
-
     
293
     
293
 
Servicing assets
   
-
     
-
     
203
     
203
 
   
$
61
   
$
22,133
   
$
496
   
$
22,690
 

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 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.  For additional information see Note 3 “Loan Sales and Servicing” beginning on page 15.

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

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

   
Fair Value Measurements at the End of the Reporting Period Using
 
   
Total
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Active
Markets for
Similar Assets
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
As of September 30, 2015:
               
Impaired loans
 
$
4,568
   
$
-
   
$
4,568
   
$
-
 
Loans held for sale
   
70,271
     
-
     
70,271
     
-
 
Foreclosed real estate and repossessed assets
   
206
     
-
     
206
     
-
 
   
$
75,045
   
$
-
   
$
75,045
   
$
-
 
                                 
As of December 31, 2014:
   
Impaired loans
 
$
5,580
   
$
-
   
$
5,580
   
$
-
 
Loans held for sale
   
71,475
     
-
     
71,475
     
-
 
Foreclosed real estate and repossessed assets
   
137
     
-
     
137
     
-
 
   
$
77,192
   
$
-
   
$
77,192
   
$
-
 

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 September 30, 2015 and December 31 2014, the Company had loans held for sale with an aggregate carrying value of $65.5 million and $66.8 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:

   
September 30, 2015
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
23,693
   
$
23,693
   
$
-
   
$
-
   
$
23,693
 
Interest-bearing deposits in other financial institutions
   
99
     
99
     
-
     
-
     
99
 
FRB and FHLB stock
   
3,259
     
-
     
3,259
     
-
     
3,259
 
Investment securities
   
31,201
     
52
     
31,576
     
-
     
31,628
 
Loans, net
   
525,986
     
-
     
529,796
     
11,996
     
541,792
 
Financial liabilities:
                                       
Deposits
   
526,786
     
-
     
527,662
     
-
     
527,662
 
Other borrowings
   
5,000
     
-
     
5,001
     
-
     
5,001
 


   
December 31, 2014
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
18,959
   
$
18,959
   
$
-
   
$
-
   
$
18,959
 
Interest-bearing deposits in other financial institutions
   
99
     
99
     
-
     
-
     
99
 
FRB and FHLB stock
   
3,089
     
-
     
3,089
     
-
     
3,089
 
Investment securities
   
30,641
     
61
     
31,027
     
-
     
31,088
 
Loans, net
   
487,256
     
-
     
490,193
     
10,405
     
500,598
 
Financial liabilities:
                                       
Deposits
   
477,084
     
-
     
477,204
     
-
     
477,204
 
Other borrowings
   
10,000
     
-
     
10,070
     
-
     
10,070
 

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

Cash and cash equivalents

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

Money market investments

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

Investment securities

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

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

Federal Reserve Stock and Federal Home Loan Bank Stock

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

Loans

Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value based on a third party independent valuation.  As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy.  Fair values of impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.

Deposits

The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date.  The fair value measurement of deposit liabilities is categorized as Level 2 in the fair value hierarchy.

Federal Home Loan Bank advances and other borrowings

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

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

The standby letters of credit outstanding at September 30, 2015 and December 31, 2014 were $0.1 million, respectively.  Unfunded loan commitments at September 30, 2015 and December 31, 2014 were $38.0 million and $28.2 million, respectively.

7. OTHER BORROWINGS AND CONVERTIBLE DEBENTURES

Federal Home Loan Bank Advances – The Company through the bank has a blanket lien credit line with the FHLB.  FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities.  There were $5.0 million of FHLB advances outstanding at September 30, 2015 and $10.0 million at December 31, 2014, borrowed at fixed rates with a weighted average rate of 0.55% and 2.74%, respectively.  The Company also had $90.0 million of letters of credit with FHLB at September 30, 2015 to secure public funds.  At September 30, 2015, CWB had pledged to the FHLB, $31.1 million of securities and $138.2 million of loans.  At September 30, 2015, CWB had $68.4 million available for additional borrowing.  At December 31, 2014, CWB had pledged to the FHLB, $30.6 million of securities and $67.3 million of loans. At December 31, 2014, CWB had $106.2 million available for additional borrowing.  Total FHLB interest expense for the three and nine months ended September 30, 2015 and 2014 was $6,000 and $0.1 million, and $0.1 million and $0.5 million, respectively.

Federal Reserve Bank – CWB has established a credit line with the FRB.  Advances are collateralized in the aggregate by eligible loans.  There were no outstanding FRB advances as of September 30, 2015 and December 31, 2014.  CWB had $93.3 million and $88.0 million in borrowing capacity as of September 30, 2015 and December 31, 2014, respectively.

Convertible Debentures - Effective March 10, 2014, the Company exercised its early redemption rights and called the outstanding debentures.  All $1.4 million debentures were converted to 317,550 shares of common stock and $34,000 to cash.

Federal Funds Purchased Lines The Company has federal funds borrowing lines at correspondent banks totaling $25.0 million.    There was no amount outstanding as of September 30, 2015 and December 31, 2014.
 
Line of Credit - As of October 29, 2015, the Company has entered into a line of credit agreement for up to $10.0 million.  The rate is one month libor + 3.75%.

8. STOCKHOLDERS’ EQUITY

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
Unrealized holding gains
(losses) on AFS
   
Unrealized holding gains
(losses) on AFS
 
   
(in thousands)
 
Beginning balance
 
$
(122
)
 
$
(120
)
 
$
31
   
$
(274
)
Other comprehensive income (loss) before reclassifications
   
92
     
34
     
(61
)
   
188
 
Amounts reclassified from accumulated other comprehensive income
   
-
     
-
     
-
     
-
 
Net current-period other comprehensive income (loss)
   
92
     
34
     
(61
)
   
188
 
Ending Balance
 
$
(30
)
 
$
(86
)
 
$
(30
)
 
$
(86
)

There were no reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2015 or 2014.

Preferred Stock

The Company’s Series A Preferred Stock paid cumulative dividends at 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 2014, the Company completed redemption of 55% of the Series A Preferred Stock.  The Company redeemed 8,586 shares of Series A Preferred Stock for $8.4 million and recognized a discount on the partial redemption of $0.2 million.

During 2015, the Company redeemed an additional 1,440 shares of Series A Preferred Stock for $1.4 million and recognized a discount on the partial redemption of $0.1 million.
 
During the three and nine months ended September 30, 2015 and 2014, the Company recorded $0.1 million and $0.4 million respectively, of dividends on preferred stock.

Common Stock Warrant

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

Common Stock

During the third quarter of 2015, the Company repurchased 3,000 common stock shares for an average price of $6.84 a share under the recently announced common stock repurchase program.
 
During the three and nine months ended September 30, 2015, the Company paid a quarterly common stock dividend of $0.2 million and $0.7 million, respectively.  The Company paid a common stock dividend of $0.2 million in the third quarter of 2014.

During the first quarter of 2014, the Company issued 316,872 shares of common stock in conjunction with debenture conversions.

9. EARNINGS PER SHARE

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands, except per share amounts)
 
Net income
 
$
1,591
   
$
1,712
   
$
1,019
   
$
4,860
 
Less: dividends and accretion on preferred stock and discount on partial redemption
   
125
     
176
     
272
     
634
 
Net income available to common stockholders
 
$
1,466
   
$
1,536
   
$
747
   
$
4,226
 
Add: debenture interest expense and costs, net of income taxes
   
-
     
-
     
-
     
103
 
Net income for diluted calculation of earnings per common share
 
$
1,466
   
$
1,536
   
$
747
   
$
4,329
 
Weighted average number of common shares outstanding - basic
   
8,203
     
8,200
     
8,204
     
8,120
 
Weighted average number of common shares outstanding - diluted
   
8,508
     
8,494
     
8,503
     
8,512
 
Earnings per share:
                               
Basic
 
$
0.18
   
$
0.19
   
$
0.09
   
$
0.52
 
Diluted
 
$
0.17
   
$
0.18
   
$
0.09
   
$
0.51
 

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

Effective January 1, 2015, CWB was subject to the new guidelines for determining regulatory capital known as “Basel III.”  These capital rules among other things implement capital reforms and introduce a minimum Common Equity Tier 1 (CET1) ratio of 4.5% and a capital conservation buffer of 2.5%.  Phase-in of the capital conservation buffer requirements will begin on January 1, 2016.

Effective March 31, 2015, CWBC met the requirements under the final rule changes to the Federal Reserve’s Small Bank Holding Company Policy Statement for institutions with $500 million to $1 billion in total consolidated assets.  Under the revised policy, CWBC is no longer subject to certain consolidated regulatory financial reporting requirements and is not subject to Basel III capital rules and reporting requirements.

As of September 30, 2015 and December 31, 2014, the Company and CWB met the minimum capital ratio requirements to be classified as well-capitalized, as defined by the banking agencies.
 
The Company’s and CWB’s capital amounts and ratios as of September 30, 2015 and December 31, 2014 are presented in the table below:

   
Total
Capital
   
Tier 1
Capital
   
Common
Equity Tier 1
Capital
   
Risk-
Weighted
Assets
   
Adjusted
Average
Assets
   
Total Risk-
Based Capital
Ratio
   
Tier 1
Risk-Based
Capital Ratio
   
Common
Equity Tier 1
Ratio
   
Tier 1
Leverage
Ratio
 
September 30, 2015
 
(dollars in thousands)
 
CWB
 
$
70,756
   
$
64,543
   
$
64,543
   
$
496,221
   
$
601,486
     
14.26
%
   
13.01
%
   
13.01
%
   
10.73
%
                                                                         
Well-capitalized ratios
                                           
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%
Minimum capital ratios
                                           
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
                                                                         
                                                                         
December 31, 2014 (Under previous requirements)
 
CWBC (Consolidated)
 
$
72,569
   
$
66,939
     
N/
A
 
$
448,199
   
$
564,630
     
16.19
%
   
14.94
%
   
N/
A
   
11.86
%
CWB
 
$
71,303
   
$
65,673
     
N/
A
 
$
448,118
   
$
564,331
     
15.91
%
   
14.66
%
   
N/
A
   
11.64
%
                                                                         
Well-capitalized ratios
                                           
10.00
%
   
6.00
%
   
N/
A
   
5.00
%
Minimum capital ratios
                                           
8.00
%
   
4.00
%
   
N/
A
   
4.00
%

11. CONTINGENCIES

Loan Litigation Settlement

On or about December 16, 2013, CWB was served with the Summons and Complaint in the action entitled Residential Funding Company, LLC v. Community West Bank, N.A., United States District Court of Minnesota, Case No. 0:13-CV-03468-JRT-JJK.  The Summons was issued and Complaint filed on December 13, 2013 (the “Action”).  Generally, Residential Funding Company, LLC (“RFC”) sought damages for breach of contract and indemnification for certain unspecified residential mortgage loans originated by CWB and sold to RFC in accordance with an agreement.  RFC alleged that some $22 million in loans were sold over the course of the agreement.  RFC further alleged that CWB made certain representations and warranties with respect to the loans and that CWB failed to comply with such representations and warranties.

RFC alleged it placed the loans from CWB into residential mortgage backed securitizations trusts (“Trusts”) and issued certificates in the Trusts to outside investors.  The loans CWB sold to RFC were eventually included along with numerous other third party lender loans in approximately 30 different Trusts. RFC alleged that, over time, the loans defaulted or became delinquent and, from 2008 until May 14, 2012, RFC faced numerous claims and lawsuits stemming from the loans.  RFC alleged that it had to file for bankruptcy protection to defend the claims.  RFC alleged that CWB was responsible for the problems with the loans in the Action and that numerous other lenders were responsible in the other actions RFC has filed.  RFC alleged that under its agreement with CWB, CWB agreed to indemnify RFC for losses or repurchase the loans at RFC’s option. CWB denied any liability in the Action.   The status of the Action has been disclosed in quarterly filings commencing with the Annual Report on Form 10-K for the year ended December 31, 2013.

On June 8, 2015, CWB reached a settlement with RFC.  The settlement resolved the Action and any further litigation between RFC and CWB concerning residential mortgage loans sold to RFC.

Under the settlement, CWB agreed to pay RFC $7.5 million and received a dismissal with prejudice in the Action.

The Action was just one of many filed by RFC against various banks still pending in courts in New York and Minnesota.

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

This discussion is designed to provide insight into management’s assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity.  It should be read in conjunction with the Company’s unaudited interim consolidated financial statements and notes thereto included herein and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

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

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

· general economic conditions, either nationally or locally in some or all areas in which business is conducted, or conditions in the real estate or securities markets or the banking industry which could affect liquidity in the capital markets, the volume of loan origination, deposit flows, real estate values, the levels of non-interest income and the amount of loan losses;
· changes in existing loan portfolio composition and credit quality, and changes in loan loss requirements;
· legislative or regulatory changes which may adversely affect the Company’s business, including but not limited to the impact of the Dodd-Frank Act and Consumer Protection Act and the regulations required to be promulgated thereunder;
· the drought in California and its impact on the economy;
· the Company’s success in implementing its new business initiatives, including expanding its product line, adding new branches and successfully building its brand image;
· changes in interest rates which may reduce net interest margin and net interest income;
· increases in competitive pressure among financial institutions or non-financial institutions;
· technological changes which may be more difficult to implement or more expensive than anticipated;
· changes in borrowing facilities, capital markets and investment opportunities which may adversely affect the business;
· changes in accounting principles, policies or guidelines which may cause conditions to be perceived differently;
· litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;
· the ability to originate and purchase loans with attractive terms and acceptable credit quality;
· the ability to attract and retain key members of management; and
· the ability to realize cost efficiencies.

For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and in item 1A of Part II of this Quarterly Report.

Financial Overview and Highlights

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

Financial Result Highlights for the Third Quarter of 2015

Net income available to common shareholders of the Company of $1.5 million, or $0.17 per diluted share in the third quarter of 2015 (3Q15) compared to net income of $1.7 million or $0.18 per diluted share in the third quarter a year ago. (3Q14).
 
The significant factors impacting the Company’s third quarter earnings performance were:
 
· Net income of $1.5 million in 3Q15 compared to net income available to common stockholders of $1.7 million in 3Q14.
· Net interest margin for 3Q15 was 4.55% compared to 4.31% for 3Q14.
· Total loans increased 7.9% to $526.0 million at September 30, 2015 compared to $487.3 million at December 31, 2014.
· Total deposits increased 10.4% to $526.8 million at September 30, 2015 from $477.1 at December 31, 2014.
· Net nonaccrual loans decreased 51.7% to $5.3 million at September 30, 2015, compared to $11.0 million at December 31, 2014 and from $10.9 million at September 30, 2014.
· Allowance for loan losses was $7.0 million at September 30, 2015, or 1.50% of total loans held for investment compared to 1.84% at December 31, 2014 and 2.14% one year ago.
· Most key asset quality ratios improved for Q3 2015 compared to Q3 2014.  Nonaccrual loans and net other assets acquired through foreclosure to total assets improved to 0.91% from 1.99% in Q3 2014 and net nonaccrual loans to gross loans improved to 0.99% at the end of Q3 2015 compared to 2.19% at the end of Q3 2014.
· Loan production office opened in San Luis Obispo.

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the three and nine months ended September 30, 2015 throughout the analysis sections of this report.

Critical Accounting Policies

A number of critical accounting policies are used in the preparation of the Company’s consolidated financial statements.  These policies relate to areas of the financial statements that involve estimates and judgments made by management.  These include provision and allowance for loan losses and servicing assets.  These critical accounting policies are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands, except per share amounts)
 
                 
Net income available to common stockholders
 
$
1,466
   
$
1,536
   
$
747
   
$
4,226
 
Basic earnings per share
   
0.18
     
0.19
     
0.09
     
0.52
 
Diluted earnings per share
   
0.17
     
0.18
     
0.09
     
0.51
 
Total assets
   
601,037
     
572,143
                 
Gross loans
   
532,998
     
499,277
                 
Total deposits
   
526,786
     
484,750
                 
Total stockholders' equity
   
65,912
     
65,754
                 
Book value per common share
   
7.36
     
7.07
                 
Net interest margin
   
4.55
%
   
4.31
%
   
4.76
%
   
4.50
%
Return on average assets
   
1.05
%
   
1.19
%
   
0.24
%
   
1.16
%
Return on average stockholders' equity
   
9.64
%
   
10.44
%
   
2.03
%
   
9.54
%
 
The following table sets forth a summary financial overview for the comparable three and nine months ended September 30, 2015 and 2014:

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2015
   
2014
   
(Decrease)
   
2015
   
2014
   
(Decrease)
 
   
(in thousands, except per share amounts)
 
Consolidated Income Statement Data:
                       
Interest income
 
$
7,375
   
$
6,903
   
$
472
   
$
22,087
   
$
20,986
   
$
1,101
 
Interest expense
   
593
     
835
     
(242
)
   
1,843
     
2,563
     
(720
)
Net interest income
   
6,782
     
6,068
     
714
     
20,244
     
18,423
     
1,821
 
Provision (credit) for loan losses
   
(445
)
   
(1,178
)
   
733
     
(1,997
)
   
(3,560
)
   
1,563
 
Net interest income after provision for loan losses
   
7,227
     
7,246
     
(19
)
   
22,241
     
21,983
     
258
 
Non-interest income
   
554
     
552
     
2
     
1,771
     
1,726
     
45
 
Non-interest expenses
   
5,038
     
4,879
     
159
     
22,190
     
15,435
     
6,755
 
Income before income taxes
   
2,743
     
2,919
     
(176
)
   
1,822
     
8,274
     
(6,452
)
Provision for income taxes
   
1,152
     
1,207
     
(55
)
   
803
     
3,414
     
(2,611
)
Net income
 
$
1,591
   
$
1,712
   
$
(121
)
 
$
1,019
   
$
4,860
   
$
(3,841
)
Dividends on preferred stock
   
125
     
176
     
(51
)
   
401
     
778
     
(377
)
Discount on partial redemption of preferred stock
   
-
     
-
     
-
     
(129
)
   
(144
)
   
15
 
Net income available to common stockholders
 
$
1,466
   
$
1,536
   
$
(70
)
 
$
747
   
$
4,226
   
$
(3,479
)
Income per share - basic
 
$
0.18
   
$
0.19
   
$
(0.01
)
 
$
0.09
   
$
0.52
   
$
(0.43
)
Income per share - diluted
 
$
0.17
   
$
0.18
   
$
(0.01
)
 
$
0.09
   
$
0.51
   
$
(0.42
)
 
Interest Rates and Differentials

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

   
Three Months Ended September 30,
 
   
2015
   
2014
 
   
Average
Balance
   
Interest
   
Average
Yield/Cost
 (2)
   
Average
Balance
   
Interest
   
Average
 Yield/Cost
(2)
 
Interest-Earning Assets
 
(in thousands)
 
Federal funds sold and interest-earning deposits
 
$
30,174
   
$
23
     
0.30
%
 
$
29,927
   
$
21
     
0.28
%
Investment securities
   
34,725
     
221
     
2.52
%
   
34,016
     
187
     
2.18
%
Loans (1)
   
526,119
     
7,131
     
5.38
%
   
495,213
     
6,695
     
5.36
%
Total earnings assets
   
591,018
     
7,375
     
4.95
%
   
559,156
     
6,903
     
4.90
%
Nonearning Assets
                                               
Cash and due from banks
   
1,395
                     
1,695
                 
Allowance for loan losses
   
(7,331
)
                   
(10,432
)
               
Other assets
   
16,694
                     
21,476
                 
Total assets
 
$
601,776
                   
$
571,895
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
255,735
     
228
     
0.35
%
   
278,028
     
297
     
0.42
%
Savings deposits
   
14,397
     
28
     
0.77
%
   
15,991
     
48
     
1.19
%
Time deposits
   
178,136
     
331
     
0.74
%
   
127,694
     
364
     
1.13
%
Total interest-bearing deposits
   
448,268
     
587
     
0.52
%
   
421,713
     
709
     
0.67
%
Other borrowings
   
10,489
     
6
     
0.23
%
   
18,000
     
126
     
2.78
%
Total interest-bearing liabilities
   
458,757
     
593
     
0.51
%
   
439,713
     
835
     
0.75
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
74,840
                     
62,646
                 
Other liabilities
   
2,701
                     
4,477
                 
Stockholders' equity
   
65,478
                     
65,059
                 
Total Liabilities and Stockholders' Equity
 
$
601,776
                   
$
571,895
                 
Net interest income and margin (3)
         
$
6,782
     
4.55
%
         
$
6,068
     
4.31
%
Net interest spread (4)
                   
4.44
%
                   
4.15
%
 
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
   
Nine Months Ended September 30,
 
   
2015
   
2014
 
   
Average
Balance
   
Interest
   
Average
 Yield/Cost
 (2)
   
Average
Balance
   
Interest
   
Average
 Yield/Cost
(2)
 
  Interest-Earning Assets
 
(in thousands)
 
Federal funds sold and interest-earning deposits
 
$
28,870
   
$
68
     
0.31
%
 
$
27,538
   
$
57
     
0.28
%
Investment securities
   
34,360
     
766
     
2.98
%
   
33,073
     
562
     
2.27
%
Loans (1)
   
505,708
     
21,253
     
5.62
%
   
487,033
     
20,367
     
5.59
%
Total earnings assets
   
568,938
     
22,087
     
5.19
%
   
547,644
     
20,986
     
5.12
%
  Nonearning Assets
                                               
Cash and due from banks
   
1,587
                     
1,648
                 
Allowance for loan losses
   
(7,578
)
                   
(11,303
)
               
Other assets
   
16,554
                     
23,758
                 
Total assets
 
$
579,501
                   
$
561,747
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
260,501
     
677
     
0.35
%
   
270,202
     
827
     
0.41
%
Savings deposits
   
14,774
     
95
     
0.86
%
   
16,010
     
160
     
1.34
%
Time deposits
   
154,575
     
989
     
0.86
%
   
122,483
     
1,052
     
1.15
%
Total interest-bearing deposits
   
429,850
     
1,761
     
0.55
%
   
408,695
     
2,039
     
0.67
%
Convertible debentures
   
-
     
-
     
-
     
322
     
30
     
12.46
%
Other borrowings
   
9,634
     
82
     
1.14
%
   
23,685
     
494
     
2.79
%
Total interest-bearing liabilities
   
439,484
     
1,843
     
0.56
%
   
432,702
     
2,563
     
0.79
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
69,654
                     
56,940
                 
Other liabilities
   
3,364
                     
3,980
                 
Stockholders' equity
   
66,999
                     
68,125
                 
Total Liabilities and Stockholders' Equity
 
$
579,501
                   
$
561,747
                 
Net interest income and margin (3)
         
$
20,244
     
4.76
%
         
$
18,423
     
4.50
%
Net interest spread (4)
                   
4.63
%
                   
4.33
%

(1) Includes nonaccrual loans.
(2) Annualized.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
 
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.  For purposes of this table, nonaccrual loans have been included in the average loan balances.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2015 versus 2014
   
2015 versus 2014
 
 
Increase (Decrease)
Due to Changes in (1)
   
Increase (Decrease)
Due to Changes in (1)
 
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
   
(in thousands)
   
(in thousands)
 
Interest income:
                       
Investment securities
 
$
5
   
$
29
   
$
34
   
$
29
   
$
175
   
$
204
 
Federal funds sold and other
   
-
     
2
     
2
     
3
     
8
     
11
 
Loans, net
   
419
     
17
     
436
     
785
     
101
     
886
 
Total interest income
   
424
     
48
     
472
     
817
     
284
     
1,101
 
                                                 
Interest expense:
                                               
Interest checking
   
(20
)
   
(49
)
   
(69
)
   
(25
)
   
(125
)
   
(150
)
Savings
   
(3
)
   
(17
)
   
(20
)
   
(8
)
   
(57
)
   
(65
)
Time deposits
   
94
     
(127
)
   
(33
)
   
206
     
(269
)
   
(63
)
Other borrowings
   
(4
)
   
(116
)
   
(120
)
   
(120
)
   
(292
)
   
(412
)
Convertible debentures
   
-
     
-
     
-
     
-
     
(30
)
   
(30
)
Total interest expense
   
67
     
(309
)
   
(242
)
   
53
     
(773
)
   
(720
)
Net increase
 
$
357
   
$
357
   
$
714
   
$
764
   
$
1,057
   
$
1,821
 

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

Comparison of interest income, interest expense and net interest margin

The Company’s primary source of revenue is interest income.  Interest income for the three and nine months ended September 30, 2015 was $7.4 million and $22.1 million, respectively compared to $6.9 million and $21.0 million for the three and nine months ended September 30, 2014, respectively.  Total interest income in the third quarter of 2015 benefited from increased yields on loans due to $13.8 million in loan growth.  The loan portfolio continues to have compression in the yields on loans.  The annualized yield on interest-earning assets for the third quarter 2015 compared to 2014 was 4.95% compared to 4.90%.

Interest expense for the three and nine months ended September 30, 2015 compared to 2014 decreased by $0.2 million and $0.7 million, respectively.  This decline for the third quarter and year to date comparable periods was primarily due to decreased interest paid on FHLB advances.  The annualized average cost of interest-bearing deposits also declined across all deposit types by 15 basis points to 0.52% for the three months ended September 30, 2015 compared to the same period in 2014.  The annualized average cost of interest-bearing deposits for the first nine months of 2015 decreased 12 basis points compared to the same period in 2014.  During the third quarter and first nine months of 2015, the Company’s non-interest bearing demand deposits grew by $0.8 million and $15.7 million, respectively, contributing to a decline in total cost of deposits to 0.45% and 0.47%, respectively.  The average cost of deposits for the three and nine months ended September 30, 2014 were 0.58% and 0.59%, respectively.  The average cost of other borrowings also declined for the comparable periods as higher cost FHLB advances matured and the convertible debentures were converted to equity.

The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was an increase in the interest margin for the third quarter of 2015 to 4.55% compared to 4.31% in the third quarter of 2014.  For the first nine months of 2015, the net interest margin increased to 4.76% compared to 4.50% for the first half of 2014.
 
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) for the third quarter of 2015 compared to $(1.2 million) for the third quarter of 2014.  The provision (credit) for the three months ended September 30, 2015 resulted from $0.5 million from reduced historical loss factors and impaired loan reserves, $0.2 million net recoveries partially offset by $0.2 million due to increase loan balances and $0.1 million from increased credit qualitative factors and grade changes.  The provision (credit) for the three months ended September 30, 2014 resulted primarily from $1.1 million from reduced historical loss factors and $0.2 million from reduction in the impaired loan reserve partially offset by $0.1 million due to loan growth and net loan charge-offs.  The result of the improvements in credit quality, historical loss rates and net recoveries was the ratio of allowance for loan losses to loans held for investment decreased from 2.14% at September 30, 2014 to 1.50% at September 30, 2015.
 
The following schedule summarizes the provision, charge-offs (recoveries) by loan category for the three and nine months ended September 30, 2015 and 2014:
 
   
For the Three Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2015
 
(in thousands)
 
Beginning balance
 
$
3,808
   
$
1,779
   
$
795
   
$
686
   
$
45
   
$
129
   
$
1
   
$
7,243
 
Charge-offs
   
(33
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(33
)
Recoveries
   
38
     
13
     
40
     
153
     
3
     
-
     
-
     
247
 
Net (charge-offs) recoveries
   
5
     
13
     
40
     
153
     
3
     
-
     
-
     
214
 
Provision (credit)
   
(220
)
   
43
     
35
     
(284
)
   
(5
)
   
(15
)
   
1
     
(445
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 
                                                                 
2014
   
Beginning balance
 
$
4,753
   
$
1,985
   
$
1,503
   
$
1,750
   
$
238
   
$
265
   
$
2
   
$
10,496
 
Charge-offs
   
(112
)
   
-
     
-
     
(140
)
   
-
     
(66
)
   
-
     
(318
)
Recoveries
   
37
     
13
     
38
     
144
     
3
     
1
     
-
     
236
 
Net (charge-offs) recoveries
   
(75
)
   
13
     
38
     
4
     
3
     
(65
)
   
-
     
(82
)
Provision (credit)
   
(225
)
   
(459
)
   
(137
)
   
(320
)
   
(51
)
   
14
     
-
     
(1,178
)
Ending balance
 
$
4,453
   
$
1,539
   
$
1,404
   
$
1,434
   
$
190
   
$
214
   
$
2
   
$
9,236
 

   
For The Nine Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2015
 
(in thousands)
 
Beginning balance
 
$
4,032
   
$
1,459
   
$
986
   
$
1,066
   
$
140
   
$
192
   
$
2
   
$
7,877
 
Charge-offs
   
(258
)
   
-
     
-
     
-
     
-
     
-
     
-
     
(258
)
Recoveries
   
103
     
533
     
383
     
361
     
8
     
2
     
-
     
1,390
 
Net (charge-offs) recoveries
   
(155
)
   
533
     
383
     
361
     
8
     
2
     
-
     
1,132
 
Provision (credit)
   
(284
)
   
(157
)
   
(499
)
   
(872
)
   
(105
)
   
(80
)
   
-
     
(1,997
)
Ending balance
 
$
3,593
   
$
1,835
   
$
870
   
$
555
   
$
43
   
$
114
   
$
2
   
$
7,012
 
                                                                 
2014
   
Beginning balance
 
$
5,114
   
$
2,552
   
$
2,064
   
$
1,951
   
$
280
   
$
245
   
$
2
   
$
12,208
 
Charge-offs
   
(516
)
   
(16
)
   
-
     
(152
)
   
-
     
(66
)
   
-
     
(750
)
Recoveries
   
75
     
844
     
114
     
281
     
21
     
3
     
-
     
1,338
 
Net (charge-offs) recoveries
   
(441
)
   
828
     
114
     
129
     
21
     
(63
)
   
-
     
588
 
Provision (credit)
   
(220
)
   
(1,841
)
   
(774
)
   
(646
)
   
(111
)
   
32
     
-
     
(3,560
)
Ending balance
 
$
4,453
   
$
1,539
   
$
1,404
   
$
1,434
   
$
190
   
$
214
   
$
2
   
$
9,236
 

The percentage of net nonaccrual loans to the total loan portfolio has decreased to 0.99% as of September 30, 2015 from 2.23% at December 31, 2014.
 
The allowance for loan losses compared to net nonaccrual loans has increased to 132.6% as of September 30, 2015 from 71.5% as of December 31, 2014.  Total past due loans decreased to $1.2 million as of September 30, 2015 from $1.4 million as of December 31, 2014.  The majority of this decrease was in manufactured housing loans past due.
 
Non-Interest Income
 
The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers, gains from loan sales, and other.
 
The following table summarizes the Company's non-interest income for the periods indicated:
 
   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2015
   
2014
   
(Decrease)
   
2015
   
2014
   
(Decrease)
 
   
(in thousands)
 
Other loan fees
 
$
244
   
$
279
   
$
(35
)
 
$
789
   
$
720
   
$
69
 
Document processing fees
   
141
     
103
     
38
     
364
     
297
     
67
 
Service charges
   
92
     
72
     
20
     
252
     
215
     
37
 
Gains from loan sales, net
   
10
     
57
     
(47
)
   
117
     
150
     
(33
)
Other
   
67
     
41
     
26
     
249
     
344
     
(95
)
Total non-interest income
 
$
554
   
$
552
   
$
2
   
$
1,771
   
$
1,726
   
$
45
 
 
Total non-interest income stayed flat for the third quarter 2015 compared to 2014 and increased slightly for the year to date of 2015 compared to 2014.  For the third quarter 2015 compared to 2014 increased document processing fees from manufactured housing loans due to increased volumes and increased service charges mostly from account analysis fees were mostly offset by decreased other loan fees and gains from loan sales as the Company had decreased mortgage loan volumes and exited the mortgage loan origination business.
 
The slight increase for first nine months of 2015 compared to the same period in 2014 is mostly due to fees from mortgage and manufactured housing loans and account analysis service charges.  These increases were partially offset by decreased other income primarily from decreased gains from loan deficiency judgments.
 
Non-Interest Expenses

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

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2015
   
2014
   
(Decrease)
   
2015
   
2014
   
(Decrease)
 
   
(in thousands)
 
Salaries and employee benefits
 
$
3,412
   
$
2,888
   
$
524
   
$
9,729
   
$
9,308
   
$
421
 
Occupancy, net
   
507
     
479
     
28
     
1,439
     
1,377
     
62
 
Professional services
   
212
     
436
     
(224
)
   
736
     
1,167
     
(431
)
Data processing
   
135
     
144
     
(9
)
   
388
     
425
     
(37
)
Advertising and marketing
   
116
     
129
     
(13
)
   
348
     
429
     
(81
)
Stock based compensation
   
73
     
29
     
44
     
333
     
270
     
63
 
Depreciation
   
103
     
82
     
21
     
290
     
238
     
52
 
Loan servicing and collection
   
10
     
187
     
(177
)
   
281
     
586
     
(305
)
FDIC assessment
   
99
     
83
     
16
     
252
     
253
     
(1
)
Loan litigation settlement, net
   
(50
)
   
-
     
(50
)
   
7,103
     
-
     
7,103
 
Other
   
421
     
422
     
(1
)
   
1,291
     
1,382
     
(91
)
Total non-interest expenses
 
$
5,038
   
$
4,879
   
$
159
   
$
22,190
   
$
15,435
   
$
6,755
 

Total non-interest expenses for the third quarter and year-to-date 2015 compared to 2014 increased $0.2 million and $6.6 million respectively.  The increase for the third quarter 2015 compared to 2014 was mostly from $0.5 million of salary expenses incurred for increased loan production and business development staff.  During the third quarter 2015, the Company added a loan production office in San Luis Obispo.  This increase was partially offset by decreased legal and auditing expenses of $0.2 million and decreased loan collection expenses of $0.2 million.  Legal and loan collection expenses have benefited from the improvement in the Company’s credit quality.

Total non-interest expenses for the nine months ended September 30, 2015 compared to 2014 increased due to the net loan litigation settlement of $7.1 million related to certain residential mortgage loan sales.  The Company previously exited this business.  Excluding the net loan litigation settlement, non-interest expenses decreased $0.3 million for year-to-date 2015 compared to 2014.  Salaries and benefits increased by $0.4 million in the year to date 2015 compared to 2014 primarily the result of increased personnel and the additional bonus and vacation accruals associated with the increase in personnel.  During the second and third quarters of 2015, the Company added additional loan production and business development staff.  Offsetting this increase were decreased professional services expenses of $0.4 million and loan servicing and collection expenses of $0.3 million.  Professional services expenses included declines in legal expense of $0.3 million and accounting and audit fees of $0.1 million.  Loan servicing and collection expenses have benefited from the Company’s improved credit quality.  Loan collection expenses have improved by $0.2 million and other repossessed asset expenses have declined by $0.1 million for the first nine months of 2015 compared to 2014.
 
Income Taxes

Income tax expense for the third quarter and first nine months of 2015 were $1.2 million and $0.8 million, respectively, compared to $1.2 million and $3.4 million for the third quarter and first nine months of 2014.  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 bases including operating losses and tax credit carryforwards.  Net deferred tax assets of $3.2 million at September 30, 2015 are reported in the consolidated balance sheet as a component of total assets.

Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized.  Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income.  The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
 
There was no valuation allowance on deferred tax assets at September 30, 2015 or December 31, 2014.

The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740).  ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions.  ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions.  There were no uncertain tax positions at September 30, 2015 and December 31, 2014.

BALANCE SHEET ANALYSIS

Total assets increased to $601.0 million at September 30, 2015 from $557.3 million at December 31, 2014.  This increase in assets was mostly due to the increase in loans of $38.7 million to $526.0 million at September 30, 2015 from $487.3 million at December 31, 2014.

Total liabilities increased $44.8 million at September 30, 2015 to $535.1 million compared to $490.3 million at December 31, 2014.  The increase in liabilities is mostly from deposits.  Total deposits increased to $526.8 million at September 30, 2015 from $477.1 million at December 31, 2014.

Total stockholders’ equity decreased to $65.9 million at September 30, 2015 from $67.0 million at December 31, 2014.  This was primarily due to the redemption of $1.4 million of preferred stock, $0.7 million dividends on common stock and $0.4 million of dividends on preferred stock partially offset by net income of $1.0 million and $0.3 million of stock based compensation.  The book value per common share was $7.36 at September 30, 2015 compared to $7.31 at December 31, 2014.

Selected Balance Sheet Accounts

   
September 30,
2015
   
December 31,
2014
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
(dollars in thousands)
 
Cash and cash equivalents
 
$
23,693
   
$
18,959
   
$
4,734
     
25.0
%
Investment securities available-for-sale
   
23,956
     
22,194
     
1,762
     
7.9
%
Investment securities held-to-maturity
   
7,245
     
8,447
     
(1,202
)
   
(14.2
)%
Loans - held for sale
   
65,491
     
66,759
     
(1,268
)
   
(1.9
)%
Loans - held for investment, net
   
460,495
     
420,497
     
39,998
     
9.5
%
Total assets
   
601,037
     
557,318
     
43,719
     
7.8
%
Total deposits
   
526,786
     
477,084
     
49,702
     
10.4
%
Other borrowings
   
5,000
     
10,000
     
(5,000
)
   
(50.0
)%
Total stockholder's equity
   
65,912
     
67,007
     
(1,095
)
   
(1.6
)%

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

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Manufactured housing
 
$
173,432
   
$
169,662
 
Commercial real estate
   
177,302
     
159,432
 
Commercial
   
70,707
     
49,683
 
SBA
   
14,707
     
21,336
 
HELOC
   
11,134
     
13,481
 
Single family real estate
   
20,670
     
14,957
 
Consumer
   
129
     
178
 
     
468,081
     
428,729
 
Allowance for loan losses
   
7,012
     
7,877
 
Deferred costs, net
   
371
     
118
 
Discount on SBA loans
   
203
     
237
 
Total loans held for investment, net
 
$
460,495
   
$
420,497
 
 
The Company had $65.5 million of loans held for sale at September 30, 2015 compared to $66.8 million at December 31, 2014.  Loans held for sale at September 30, 2015 consisted of $35.9 million SBA loans, $29.2 million commercial agriculture loans, and $0.4 million of single family real estate loans.  Loans held for sale at December 31, 2014, were $40.9 million SBA loans, $25.1 million commercial agriculture loans, and $0.8 million single family real estate loans.

Concentrations of Lending Activities

The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California.  The Company monitors concentrations within five broad categories: geography, industry, product, call code, and collateral.  The Company makes manufactured housing, commercial, SBA, construction, real estate and consumer loans to customers through branch offices located in the Company’s primary markets.  The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas.  As of September 30, 2015 and December 31, 2014, manufactured housing loans comprised 32.5% and 34.3%, respectively of total loans.  As of September 30, 2015 and December 31, 2014, commercial real estate loans accounted for approximately 33.2% and 32.2% of total loans, respectively.  Approximately 65.1% and 48.3% of these commercial real estate loans were owner-occupied at September 30, 2015 and December 31, 2014, respectively.  Substantially all of these loans are secured by first liens with an average loan to value ratios of 52.0% and 48.9% at September 30, 2015 and December 31, 2014, respectively.  The Company was within established policy limits at September 30, 2015 and December 31, 2014.

Asset Quality

For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations.  The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans.  Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans.
 
   
Three Months Ended
September 30,
 
   
2015
   
2014
 
   
(in thousands)
 
Nonaccrual loans (net of guranteed portion)
 
$
5,287
   
$
10,939
 
Troubled debt restructured loans, gross
   
12,654
     
10,052
 
Nonaccrual loans to gross loans
   
0.99
%
   
2.19
%
Net charge-offs (recoveries) (annualized) to average loans
   
(0.16
)%
   
0.07
%
Allowance for loan losses to nonaccrual loans
   
132.63
%
   
84.43
%
Allowance for loan losses to gross loans
   
1.32
%
   
1.85
%

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

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
Nonaccrual loans
 
$
7,385
   
$
17,883
 
SBA guaranteed portion of loans included above
   
(2,098
)
   
(6,856
)
Total nonaccrual loans, net
 
$
5,287
   
$
11,027
 
                 
Troubled debt restructured loans, gross
 
$
12,654
   
$
9,685
 
Loans 30 through 89 days past due with interest accruing
 
$
-
   
$
-
 
Allowance for loan losses to gross loans held for investment
   
1.50
%
   
1.84
%

Impaired loans

A loan is considered impaired when, based on current information; it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays or payment shortfalls on a case-by-case basis.  When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.  For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment.  All other loans are measured for impairment based on the present value of future cash flows.  Impairment is measured on a loan-by-loan basis for all loans in the portfolio.
 
A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial difficulty.  These concessions include but are not limited to term extensions, rate reductions and principal reductions.  Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions.  TDR loans are also considered impaired.
 
The following schedule summarizes impaired loans and specific reserves by loan class as of the periods indicated:

   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Impaired Loans as of September 30, 2015:
 
(in thousands)
 
Recorded Investment:
                               
Impaired loans with an allowance recorded
 
$
4,434
   
$
386
   
$
3,019
   
$
400
   
$
20
   
$
1,979
   
$
-
   
$
10,238
 
Impaired loans with no allowance recorded
   
3,631
     
2,470
     
44
     
148
     
298
     
290
     
-
     
6,881
 
Total loans individually evaluated for impairment
   
8,065
     
2,856
     
3,063
     
548
     
318
     
2,269
     
-
     
17,119
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
   
460
     
4
     
41
     
32
     
-
     
18
     
-
     
555
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
460
     
4
     
41
     
32
     
-
     
18
     
-
     
555
 
Total impaired loans, net
 
$
7,605
   
$
2,852
   
$
3,022
   
$
516
   
$
318
   
$
2,251
   
$
-
   
$
16,564
 

 
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
   
(in thousands)
 
Recorded Investment:
                               
Impaired loans with an allowance recorded
 
$
4,717
   
$
2,783
   
$
3,122
   
$
1,837
   
$
86
   
$
591
   
$
-
   
$
13,136
 
Impaired loans with no allowance recorded
   
2,734
     
831
     
44
     
4
     
-
     
90
     
-
     
3,703
 
Total loans individually evaluated for impairment
   
7,451
     
3,614
     
3,166
     
1,841
     
86
     
681
     
-
     
16,839
 
Related Allowance for Credit Losses
                                                               
Impaired loans with an allowance recorded
   
399
     
77
     
241
     
104
     
1
     
32
     
-
     
854
 
Impaired loans with no allowance recorded
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total loans individually evaluated for impairment
   
399
     
77
     
241
     
104
     
1
     
32
     
-
     
854
 
Total impaired loans, net
 
$
7,052
   
$
3,537
   
$
2,925
   
$
1,737
   
$
85
   
$
649
   
$
-
   
$
15,985
 

Total impaired loans increased in the third quarter of 2015 by $0.3 million compared to December 31, 2014.  The majority of this increase was in impaired single family real estate of $1.6 million mostly from the addition of one loan for $1.9 million offset by one loan upgrade of $0.2 million and one loan transferred to Other Real Estate Owned (“OREO”) of $0.1 million.  Impaired SBA 504 1st TD loans increased by $0.7 million due to three new loan additions of $1.2 million and one loan payoff of $0.5 million for the comparable periods.  Manufactured housing impaired loans and HELOC impaired loans also increased by $0.6 million and $0.2 million, respectively.  These increases were partially offset by decreases in impaired commercial real estate loans, impaired SBA loans and impaired commercial loans of $1.4 million, $1.3 million and $0.1 million, respectively mostly due to loan payoffs.
 
The following table summarizes the composite of nonaccrual loans net of SBA guarantee:
 
   
At September 30, 2015
   
At December 31, 2014
 
   
Nonaccrual
Balance
   
%
   
Percent of
Total Loans
   
Nonaccrual
Balance
   
%
   
Percent of
Total Loans
 
   
(dollars in thousands)
 
Manufactured housing
 
$
1,618
     
30.60
%
   
0.30
%
 
$
1,480
     
13.42
%
   
0.30
%
Commercial real estate
   
2,589
     
48.98
%
   
0.49
%
   
3,972
     
36.03
%
   
0.80
%
Commercial
   
44
     
0.83
%
   
0.01
%
   
3,167
     
28.72
%
   
0.64
%
SBA
   
429
     
8.11
%
   
0.08
%
   
1,713
     
15.53
%
   
0.35
%
HELOC
   
318
     
6.01
%
   
0.06
%
   
86
     
0.78
%
   
0.02
%
Single family real estate
   
289
     
5.47
%
   
0.05
%
   
609
     
5.52
%
   
0.12
%
Total nonaccrual loans
 
$
5,287
     
100.00
%
   
0.99
%
 
$
11,027
     
100.00
%
   
2.23
%

Net nonaccrual loans decreased $5.7 million or 51.8%, from $11.0 million at December 31, 2014 to $5.3 million at September 30, 2015.  The percentage of net nonaccrual loans to the total loan portfolio has decreased to 0.99% as of September 30, 2015 from 2.23% at December 31, 2014 and 2.19% at September 30, 2014.
 
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.
 
Total gross TDR loans have increased $3.0 million or 30.9% to $12.7 million at September 30, 2015 from $9.7 million at December 31, 2014.  The Company recorded eleven new manufactured housing TDR loans with recorded investments of $1.3 million in the third quarter of 2015.  The majority of these new manufactured housing TDR loans are the result of older loans with balloon maturities in which the borrower(s) income has declined due to retirement or other reasons but which are still performing loans.

Allowance For Loan Losses

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Allowance for loan losses:
 
(in thousands)
 
Balance at beginning of period
 
$
7,243
   
$
10,496
   
$
7,877
   
$
12,208
 
Provisions charged to operating expenses:
                               
Manufactured housing
   
(220
)
   
(225
)
   
(284
)
   
(220
)
Commercial real estate
   
43
     
(459
)
   
(157
)
   
(1,841
)
Commercial
   
35
     
(137
)
   
(499
)
   
(774
)
SBA
   
(284
)
   
(320
)
   
(872
)
   
(646
)
HELOC
   
(5
)
   
(51
)
   
(105
)
   
(111
)
Single family real estate
   
(15
)
   
14
     
(80
)
   
32
 
Consumer
   
1
     
-
     
-
     
-
 
Total Provision (credit)
   
(445
)
   
(1,178
)
   
(1,997
)
   
(3,560
)
Recoveries of loans previously charged-off:
                               
Manufactured housing
   
38
     
37
     
103
     
75
 
Commercial real estate
   
13
     
13
     
533
     
844
 
Commercial
   
40
     
38
     
383
     
114
 
SBA
   
153
     
144
     
361
     
281
 
HELOC
   
3
     
3
     
8
     
21
 
Single family real estate
   
-
     
1
     
2
     
3
 
Consumer
   
-
     
-
     
-
     
-
 
Total recoveries
   
247
     
236
     
1,390
     
1,338
 
Loans charged-off:
                               
Manufactured housing
   
33
     
112
     
258
     
516
 
Commercial real estate
   
-
     
-
     
-
     
16
 
Commercial
   
-
     
-
     
-
     
-
 
SBA
   
-
     
140
     
-
     
152
 
HELOC
   
-
     
-
     
-
     
-
 
Single family real estate
   
-
     
66
     
-
     
66
 
Consumer
   
-
     
-
     
-
     
-
 
Total charged-off
   
33
     
318
     
258
     
750
 
Net charge-offs (recoveries)
   
(214
)
   
82
     
(1,132
)
   
(588
)
Balance at end of period
 
$
7,012
   
$
9,236
   
$
7,012
   
$
9,236
 
 
Potential Problem Loans

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

   
September 30, 2015
 
   
Number
of Loans
   
Loan
Balance (1)
   
Percent
   
Percent
 of Total
Loans
 
   
(dollars in thousands)
 
                 
Manufactured housing
   
32
   
$
1,772
     
7.30
%
   
0.33
%
Commercial real estate
   
10
     
14,198
     
58.49
%
   
2.66
%
Commercial
   
10
     
7,028
     
28.96
%
   
1.32
%
SBA
   
19
     
587
     
2.42
%
   
0.11
%
HELOC
   
3
     
574
     
2.36
%
   
0.11
%
Single family real estate
   
2
     
113
     
0.47
%
   
0.02
%
Total
   
76
   
$
24,272
     
100.00
%
   
4.55
%

(1) Loan balance includes $3.6 million guaranteed by government agencies

   
December 31, 2014
 
   
Number
of Loans
   
Loan
Balance (1)
   
Percent
   
Percent
of Total
Loans
 
   
(dollars in thousands)
 
                 
Manufactured housing
   
93
   
$
5,513
     
22.29
%
   
1.11
%
Commercial real estate
   
12
     
17,285
     
69.88
%
   
3.49
%
Commercial
   
9
     
484
     
1.96
%
   
0.10
%
SBA
   
26
     
632
     
2.56
%
   
0.13
%
HELOC
   
7
     
577
     
2.33
%
   
0.12
%
Single family real estate
   
4
     
243
     
0.98
%
   
0.05
%
Total
   
151
   
$
24,734
     
100.00
%
   
5.00
%

(1) Loan balance includes $4.4 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.
 
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits and to manage liquidity, capital, and interest rate risk.
 
The carrying value of investment securities was as follows:

   
September 30,
   
December 31,
 
   
2015
   
2014
 
   
(in thousands)
 
U.S. government agency notes
 
$
11,230
   
$
7,862
 
U.S. government agency mortgage backed securities ("MBS")
   
7,245
     
8,447
 
U.S. government agency collateralized mortgage obligations ("CMO")
   
12,674
     
14,271
 
Equity securities: Farmer Mac class A stock
   
52
     
61
 
   
$
31,201
   
$
30,641
 

Other Assets Acquired Through Foreclosure

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(in thousands)
 
Balance, beginning of period
 
$
267
   
$
610
   
$
137
   
$
3,811
 
Additions
   
209
     
137
     
544
     
822
 
Proceeds from dispositions
   
(286
)
   
(290
)
   
(508
)
   
(4,326
)
Gains (losses) on sales, net
   
16
     
18
     
33
     
168
 
Balance, end of period
 
$
206
   
$
475
   
$
206
   
$
475
 

Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure.  Properties or other assets (primarily manufactured housing) are classified as other real estate owned and other repossessed assets and are reported at fair value at the time of foreclosure less estimated costs to sell.  Costs relating to development or improvement of the assets are capitalized and costs related to holding the assets are charged to expense.  At September 30, 2015 and 2014, the Company had a valuation allowance on foreclosed assets of $10,000 and $19,000, respectively.  At September 30, 2015, the Company had no mortgage loans in process of foreclosure.

Deposits

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

           
 
 
   
September 30,
   
December 31,
   
Increase
   
Percent
Increase
 
   
2015
   
2014
   
(Decrease)
   
(Decrease)
 
   
(dollars in thousands)
 
Non-interest bearing demand deposits
 
$
73,073
   
$
57,364
   
$
15,709
     
27.4
%
Interest-bearing demand deposits
   
250,738
     
275,631
     
(24,893
)
   
(9.0
)%
Savings
   
13,943
     
15,265
     
(1,322
)
   
(8.7
)%
Certificates of deposit ($250,000 or more)
   
56,745
     
13,601
     
43,144
     
317.2
%
Other certificates of deposit
   
132,287
     
115,223
     
17,064
     
14.8
%
   Total deposits
 
$
526,786
   
$
477,084
   
$
49,702
     
10.4
%

Total deposits increased to $526.8 million at September 30, 2015 from $477.1 million at December 31, 2014, an increase of $49.7 million.  This increase was primarily from certificates of deposit and non-interest bearing demand deposits.  Deposits are the primary source of funding the Company’s asset growth.  In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”).  CDARS provides a mechanism for obtaining FDIC insurance for large deposits.  At September 30, 2015 and December 31, 2014, the Company had $20.5 million and $14.5 million, respectively of CDARS deposits.
 
Liquidity and Capital Resources
 
Liquidity Management

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

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

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

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

CWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”).  Advances are collateralized in the aggregate by CWB’s eligible loans and securities.  CWB had $5.0 million of FHLB advances at September 30, 2015 and $10.0 million at December 31, 2014 borrowed at fixed rates.  The Company also had $90.0 million of letters of credit with FHLB at September 30, 2015 to secure public funds.  At September 30, 2015, CWB had pledged to the FHLB, $31.1 million of securities and $138.2 million of loans.  At September 30, 2015, CWB had $68.4 million available for additional borrowing.  At December 31, 2014, CWB had pledged to the FHLB, securities of $30.6 million at carrying value and $67.3 million of loans.

CWB has established a credit line with the Federal Reserve Bank (“FRB”).  There were no outstanding FRB advances as of September 30, 2015 and December 31, 2014.  CWB had $93.3 million and $88.0 million in borrowing capacity as of September 30, 2015 and December 31, 2014, respectively.

The Company has federal funds purchased lines at correspondent banks with a total borrowing capacity of $25.0 million.  There was no amount outstanding as of September 30, 2015 and December 31, 2014.

The Company continues to face strong competition for core deposits.  The liquidity ratio of the Company was 18.8% and 19.4% at September 30, 2015 and December 31, 2014, respectively.  The Company’s liquidity ratio fluctuates in conjunction with loan funding demands.  The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.

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

Capital Resources

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

Effective January 1, 2015, CWB was subject to the new guidelines for determining regulatory capital known as “Basel III.”  These capital rules among other things implement capital reforms and introduce a minimum Common Equity Tier 1 (CET1) ratio of 4.5% and a capital conservation buffer of 2.5%.  Phase-in of the capital conservation buffer requirements will begin on January 1, 2016.

Effective March 31, 2015, CWBC met the requirements under the final rule changes to the Federal Reserve’s Small Bank Holding Company Policy Statement for institutions with $500 million to $1 billion in total consolidated assets.  Under the revised policy, CWBC is no longer subject to certain consolidated regulatory financial reporting requirements and is not subject to Basel III capital rules and reporting requirements.
 
As of September 30, 2015 and December 31, 2014, the Company and CWB met the minimum capital ratio requirements to be classified as well-capitalized, as defined by the banking agencies.

The Company’s and CWB’s capital amounts and ratios as of September 30, 2015 and December 31, 2014 are presented in the table below:

   
Total
Capital
   
Tier 1
Capital
   
Common
Equity Tier 1
Capital
   
Risk-
Weighted
Assets
   
Adjusted
Average
Assets
   
Total Risk-
Based Capital
Ratio
   
Tier 1
Risk-Based
Capital Ratio
   
Common
Equity Tier 1
Ratio
   
Tier 1
Leverage
Ratio
 
September 30, 2015
 
(dollars in thousands)
 
CWB
 
$
70,756
   
$
64,543
   
$
64,543
   
$
496,221
   
$
601,486
     
14.26
%
   
13.01
%
   
13.01
%
   
10.73
%
                                                                         
Well-capitalized ratios
                                           
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%
Minimum capital ratios
                                           
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
                                                                         
December 31, 2014 (Under previous requirements)
 
CWBC (Consolidated)
 
$
72,569
   
$
66,939
     
N/A
 
$
448,199
   
$
564,630
     
16.19
%
   
14.94
%
   
N/A
 
   
11.86
%
CWB
 
$
71,303
   
$
65,673
     
N/A
 
 
$
448,118
   
$
564,331
     
15.91
%
   
14.66
%
   
N/A
 
   
11.64
%
                                                                         
Well-capitalized ratios
                                           
10.00
%
   
6.00
%
   
N/A
 
   
5.00
%
Minimum capital ratios
                                           
8.00
%
   
4.00
%
   
N/A
 
   
4.00
%

Supervision and Regulation
 
Banking is a complex, highly regulated industry.  The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the Federal Deposition Insurance Corporation’s (“FDIC”) insurance fund, and facilitate the conduct of sound monetary policy.  In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (“OCC”), and FDIC.

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

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

For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Certain qualitative and quantitative disclosures about market risk is set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K.  For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk.”

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).  Based upon that evaluation, the Company’s management, which includes the Company's Chief Executive Officer and the Chief Financial Officer, has concluded that, as of the end of the period covered by this report, disclosure controls and procedures are effective in ensuring that information relating to the Company (including its consolidated subsidiary) required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended September 30, 2015 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or about December 16, 2013, CWB was served with the Summons and Complaint in the action entitled Residential Funding Company, LLC v. Community West Bank, N.A., United States District Court of Minnesota, Case No. 0:13-CV-03468-JRT-JJK.  The Summons was issued and Complaint filed on December 13, 2013 (the “Action”).  Generally, Residential Funding Company, LLC (“RFC”) sought damages for breach of contract and indemnification for certain unspecified residential mortgage loans originated by CWB and sold to RFC in accordance with an agreement.  RFC alleged that some $22 million in loans were sold over the course of the agreement.  RFC further alleged that CWB made certain representations and warranties with respect to the loans and that CWB failed to comply with such representations and warranties.

RFC alleged it placed the loans from CWB into residential mortgage backed securitizations trusts (“Trusts”) and issued certificates in the Trusts to outside investors.  The loans CWB sold to RFC were eventually included along with numerous other third party lender loans in approximately 30 different Trusts. RFC alleged that, over time, the loans defaulted or became delinquent and, from 2008 until May 14, 2012, RFC faced numerous claims and lawsuits stemming from the loans.  RFC alleged that it had to file for bankruptcy protection to defend the claims.  RFC alleged that CWB was responsible for the problems with the loans in the Action and that numerous other lenders were responsible in the other actions RFC has filed.  RFC alleged that under its agreement with CWB, CWB agreed to indemnify RFC for losses or repurchase the loans at RFC’s option. CWB denied any liability in the Action.   The status of the Action has been disclosed in quarterly filings commencing with the Annual Report on Form 10-K for the year ended December 31, 2013.

On June 8, 2015, CWB reached a settlement with RFC.  The settlement resolved the Action and any further litigation between RFC and CWB concerning residential mortgage loans sold to RFC.

Under the settlement, CWB agreed to pay RFC $7.5 million and received a dismissal with prejudice in the Action.

The Action was just one of many filed by RFC against various banks still pending in courts in New York and Minnesota.

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.

ITEM 1A. RISK FACTORS

Investing in our common stock involves various risks which are particular to our Company, our industry and our market area.  Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The following is a summary of the Company’s repurchases of its common stock during the three months ended September 30, 2015.
 
 
 
 
 
 
Period
   
Total Number of Shares
Purchased (a)
   
Average Price Paid per
Share
   
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (b)
   
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet be Purchased
Under the Plans or
Programs (b)
 
July 1 – 31
     
N/A
   
N/A
 
   
N/A
 
   
N/A
 
August 1 – 31
     
N/A
 
   
N/A
 
   
N/A
 
   
N/A
 
September 1 – 30
     
N/A
 
   
6.8367
     
3,000
   
$
2,979,490
 
Total
     
N/A
 
   
6.8367
     
3,000
   
$
2,979,490
 

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following Exhibits are filed herewith.
 
 
Exhibit No.
     
 
10.41
Employment and Confidentiality Agreement, dated June 1, 2015, among Community West Bank, Community West Bancshares and William F. Filippin.
     
 
10.42
Promissory Note, dated October 29, 2015, between Community West Bancshares and Grandpoint Bank.
     
 
31.1
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a),  promulgated under the Securities Exchange Act of 1934, as amended.
     
 
31.2
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
     
 
32.1*
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as Amended, and 18 U.S.C. 1350.
   
 
101INS – XBRL Instance Document
 
101SCH –XBRL Taxonomy Extension Schema Document  
 
101CAL – XBRL Taxonomy Calculation Linkbase Document  
 
101DEF – XBRL Taxonomy Extension Definition Linkbase Document
 
101LAB – XBRL Taxonomy Label Linkbase Document
 
101PRE – XBRL Taxonomy Presentation Linkbase Document

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

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

COMMUNITY WEST BANCSHARES
(Registrant)
 
Date: November 6, 2015
BY:     /s/ Charles G. Baltuskonis
 
Charles G. Baltuskonis
 
Executive Vice President and
 
Chief Financial Officer
   
 
On Behalf of Registrant and as a Duly Authorized Officer and as Principal Financial and Accounting Officer
 
EXHIBIT INDEX

Exhibit
Number
 
Employment and Confidentiality Agreement, dated June 1, 2015, among Community West Bank, Community West   Bancshares and William F. Filippin.
   
Promissory Note, dated October 29, 2015, between Community West Bancshares and Grandpoint Bank.
   
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
   
101
101INS – XBRL Instance Document
 
101SCH –XBRL Taxonomy Extension Schema Document
 
101CAL – XBRL Taxonomy Calculation Linkbase Document
 
101DEF – XBRL Taxonomy Extension Definition Linkbase Document
 
101LAB – XBRL Taxonomy Label Linkbase Document
 
101PRE – XBRL Taxonomy Presentation Linkbase Document
 
* This certification is furnished to, but shall not be deemed filed, with the Commission.  This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange  Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.
 
 
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