Attached files
| file | filename |
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| EX-32.1 - EXHIBIT 32.1 - COMMUNITY WEST BANCSHARES / | brhc10021546_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - COMMUNITY WEST BANCSHARES / | brhc10021546_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - COMMUNITY WEST BANCSHARES / | brhc10021546_ex31-1.htm |
| EX-23.2 - EXHIBIT 23.2 - COMMUNITY WEST BANCSHARES / | brhc10021546_ex23-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
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California
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77-0446957
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(State or other jurisdiction of incorporation or organization)
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(I. R. S. Employer Identification No.)
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445 Pine Avenue, Goleta, California
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93117
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(Address of principal executive offices)
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(Zip code)
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(805) 692-5821
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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Common Stock, No Par Value
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CWBC
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Nasdaq Global Market
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Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☑
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☑
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of common stock, held by non-affiliates of the registrant was $48,807,474 based on the June 30, 2020 closing price of $8.4199
per common share, as reported on the Nasdaq Global Market. For purposes of the foregoing computation, all executive officers, directors, and five percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not
be deemed to be an admission that such executive officers, directors, or five percent beneficial owners are, in fact, affiliates of the registrant.
As of March 5, 2021, 8,503,063 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K will be found in the registrant's
definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2021 Annual Meeting of Stockholders to be held on or about May 27, 2021, which information is incorporated by reference into Part III of this Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended December 31, 2020.
1
Table of Contents
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PART I
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Page
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3
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Item 1.
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3
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Item 1A.
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7 |
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Item 1B.
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15
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Item 2.
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15
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Item 3.
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16
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Item 4.
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16
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PART II
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Item 5.
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17
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Item 6.
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18
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Item 7.
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19
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Item 7A.
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53
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Item 8.
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55
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Item 9.
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102
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Item 9A.
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102
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Item 9B.
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102
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PART III
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Item 10.
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103
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Item 11.
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103
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Item 12.
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103
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Item 13.
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103
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Item 14.
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103
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PART IV
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Item 15.
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103
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106
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CERTIFICATIONS
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PART I
Certain statements contained in this Annual Report on Form 10-K (this “Form 10-K”) are “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of the Private Securities Litigation
Reform Act of 1995, including statements that are related to or are dependent upon estimates or assumptions relating to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
The forward-looking statements contained in this Form 10-K reflect our current views about future events and financial performance and involve certain
risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement, including those risks discussed under the heading
“Risk Factors” in this Form 10-K. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (“SEC”).
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors”
beginning on page 7. Forward-looking statements speak only as of the date they are made. The Company does not undertake any obligations to update forward-looking statements to reflect circumstances and or events that occur after the date the
forward-looking statements are made.
Purpose
The following discussion is designed to provide insight into the financial condition and results of operations of Community West Bancshares (“CWBC”) and
its wholly-owned subsidiary, Community West Bank N.A (“CWB” or the “Bank”). Unless otherwise stated, the Company refers to CWBC and CWB as a consolidated entity. References to “CWBC or to the “holding company,” refer to Community West Bancshares, the
parent company, on a stand-alone basis. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes to the Consolidated Financial Statements as of December 31, 2020 and 2019 and for each of the three
years in the period ended December 31, 2020, herein referred to as the “Consolidated Financial Statements”. These Consolidated Financial Statements are presented beginning on page 57 of this Form 10-K.
| ITEM 1. |
BUSINESS
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GENERAL
Community West Bancshares, a California corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or
“BHCA,” with corporate headquarters in Goleta, California. CWBC's common stock is listed on Nasdaq under the trading symbol "CWBC". CWBC's principal business is to serve as the holding company for its wholly-owned subsidiary Community West Bank,
N.A., a national banking association chartered by the Office of the Comptroller of the Currency (“OCC”). Through CWB, the Company provides a variety of financial products and services to customers through seven full-service branch offices in the
cities of Goleta, Oxnard, Paso Robles, San Luis Obispo, Santa Barbara, Santa Maria, and Ventura, California.
The Company’s operations and financial results in 2020 were substantially influenced by the COVID-19 global pandemic (the COVID-19
pandemic, or the pandemic). Such impacts have included significant volatility in the global stock and fixed income markets, a 150-basis-point reduction in the target federal funds rate, the enactment of the Coronavirus Aid, Relief, and Economic
Security (CARES) Act, including the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA), and a variety of rulings from the Company’s banking regulators. The California governor issued a stay-at-home order which limited gatherings and travel and required workers who are not necessary to sustain or protect life to work from or stay at home. The orders, as a result of COVID-19,
have led to financial stress for many businesses and workers throughout the communities the Company serves.
In response, the Company updated operating protocols to ensure all banking services continued while prioritizing the health and safety of clients and associates. The branch
lobbies remained opened to service clients utilizing the latest Centers for Disease Control and Prevention (CDC) guidelines, and in compliance with State and Local Orders, as pronounced and updated from time to time. Sales associates, support teams and management largely continued working remotely; however, associates located in the Company's corporate offices and operations centers began to gradually return to those locations at reduced capacity levels in
the third quarter. In addition, the Company has maintained its focus on enhancing remote, mobile, and online processes and controls.
To assist clients during the pandemic, the Company implemented distinct COVID-19 relief programs to provide payment deferrals, fee waivers, and
suspension of residential property foreclosures. The Company also actively monitored the actions of federal and state governments to proactively assist clients and ensure awareness of each financial assistance program available.
The Bank underwent a significant level of cross training and redeployment of associate resources to rapidly meet the influx of client requests in
response to the passage of the CARES Act, the establishment of the PPP and the approval of the Consolidated Appropriations Act. As of December 31, 2020, the Company had approximately 501 active PPP loans with $69.5 million in balances, net of
unearned fees of $1.6 million.
Further, as of December 31, 2020, the Company had $5.1 million in loans, or 0.5% of the total portfolio, that were deferred to provide relief to
borrowers adversely impacted by the pandemic.
These programs, along with the SBA PPP, could mask or delay the detection or reporting of deterioration in credit quality indicators. The industries most
heavily impacted include retail, healthcare, hospitality, schools, and energy. The Company’s management team has evaluated the loans related to the affected industries, and at December 31, 2020, the Bank’s loans to these industries were $179.2
million, which is 20.9% of our $857.6 million loan portfolio.
The extent to which COVID-19 impacts our business will depend on future developments, which cannot be predicted. Future developments include new information which may emerge
concerning the severity of COVID-19 and the actions to contain the coronavirus or treat its impact, among others. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be
dictated by, among other factors, its duration, the success of efforts to contain it and the impact of actions taken in response. Uncertainty created by the COVID-19 pandemic is pervasive, and the pandemic will likely impact our operations, clients,
and various areas of risk; however, we are unable at this time, to estimate the full impact of the COVID-19 pandemic on our ongoing financial and operational results. The Company expects to see continued
volatility in the economic markets and government responses to the COVID-19 pandemic. These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company into 2021.
Human Capital
The Company’s vision is to be the Bank of choice, providing an unparalleled experience for our clients, employees and community. Attracting, retaining
and developing high performing employees and providing them with a remarkable employee experience are key to providing a remarkable client experience, and are important contributors to the Bank’s success.
Employee Demographics
The following table describes the composition of the Company’s workforce at December 31, 2020.
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Number
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Full-time
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123
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Part-time
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2
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Temporary
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3
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Women
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83 (or 64.8%)
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Minorities
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54 (or 42.2%)
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Diversity, Equity and Inclusion
The Company is committed to fostering, cultivating and preserving a culture of diversity and inclusion. Human Capital is among the most
valuable of assets. The collective sum of individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities and talent that the Company’s employees invest in their work represents a significant
part of the Company’s culture, reputation and achievements. The Company’s diversity initiatives and awareness are applicable—but not limited—to practices and protocols on
recruitment and selection; compensation; professional development and training; promotions; transfers; and the ongoing development of a work environment built on the premise of gender and diversity equity that encourages and enforces respectful
communication, teamwork, employee participation with representation of all groups and employee perspectives, work/life balance, and employer and employee contributions to the communities they serve to promote a greater understanding and respect for
diversity.
Talent Acquisition
The Company’s demand for qualified candidates grows as the Company’s business grows. Building a diverse and inclusive workforce is a component of the
Company’s talent strategy. The Company attracts talented individuals with a combination of competitive pay and benefits. Through talent management, career development, and succession planning, the Company is striving to source a meaningful
percentage of candidates internally, in addition to candidates located within the communities the Company serves.
Professional Development
The Company’s talent management program is an interactive practice that engages employees through performance check-ins and reviews, goal setting,
individual development plans, and continuous coaching and feedback. The Company offers a variety of programs to help employees learn new skills, establish and meet personalized development goals, take on new roles, advance their careers and become
better leaders.
Employee Engagement
The Company recognizes that employees who are involved in, enthusiastic about, and committed to their work and workplace contribute meaning-fully to the
success of the Company. In addition to the Executive Management Team, two Committees have been formed to address engagement through a lens of equity and inclusion: The Elevate Committee and the Leadership Committee. The Elevate Committee is
comprised of entry- to mid-level employees from all departments and branches, with priorities on elevating those voices and fostering an inclusive and collaborative team environment. The Leadership Committee is comprised of senior managers and
leaders across the functional areas with a focus on tactical planning for execution of key strategic initiatives, efficiencies and improvements to benefit both the client and the employee experience. The Company solicits employee feedback through a
confidential company-wide survey on culture, management, career opportunities, compensation and benefits. The results of this survey are reviewed with management and are used to recognize improvements and focus on areas of concern, as well as update
employee programs, initiatives and communications. The Company has a number of other engagement initiatives, including quarterly town hall meetings with the Company’s Chief Executive Officer and senior executives, quarterly and annual employee
recognition events, and opportunities for variable pay outside of review cycles.
Succession Planning
The Company is focused on facilitating internal succession by encouraging internal mobility, enhancing its talent pool through professional development
programs, structuring training programs to teach skills valuable in navigating the changing world of financial services, creating career paths and development action plans for career advancement, and expanding opportunities through diversity and
inclusion initiatives and efforts.
PRODUCTS AND SERVICES
CWB is focused on relationship-based banking for small- to medium-sized businesses and their owners, professional, high-net worth individuals, and
non-profit organizations in the communities served by its branch offices. The products and services provided include deposit products such as checking accounts, savings accounts, money market accounts, fixed rate, fixed maturity certificates of
deposits, treasury management products, and lending products, including commercial, commercial real estate, agricultural and consumer loans.
Competition in our markets remains healthy. The Company continues to be competitive due to its focus on high quality customer service and our experienced relationship bankers who have
strong relationships within the communities the Company serves.
Manufactured Housing
The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved mobile home parks
throughout California primarily on or near the coast. The parks must meet specific criteria. The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for
crops, equipment, and livestock. These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), the Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. The FSA typically issues a 90%
guarantee up to $1,776,000 (amount adjusted annually based on inflation) for up to 40 years.
The Company also originates and sells loans to the secondary market through the Federal Agricultural Mortgage Corporation ("Farmer Mac") program. Farmer
Mac provides the Company with access to flexible, low-cost financing and effective risk management tools to help farm, ranch, and rural utility clients.
Small Business Administration Lending
CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990. The Company originates SBA loans
which can be sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The primary SBA loan program that CWB offers is the Section 504 (“504”)
program.
CWB also offers Business & Industry ("B&I") loans. These loans are similar to the SBA product, except they are guaranteed by the U.S. Department
of Agriculture. The maximum guaranteed amount is 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the
secondary market.
As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation responsibility from the SBA.
Under the CARES Act, CWB offered SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1%
for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds
to the lender or the date that is 10 months after the day of the covered period if the borrower does not apply for forgiveness within the 10-month period.
Loans to One Borrower
Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the Bank’s unimpaired
capital and unimpaired surplus, and the secured and unsecured obligations of any one borrower. CWB was approved to increase this lending limit under the OCC’s Special Lending Limits Program to 25% on selected products. This program ensures that
national bank lending limits, such as CWB’s, would remain competitive with state-chartered banks. In addition, California state banking law generally limits the amount of funds that a state-chartered bank may lend to a single borrower to 15% of the
Bank's capital for unsecured loans and 25% of the Bank's capital for secured loans, and considers real estate secured loans as “secured” for lending limits purposes.
Foreign Operations
The Company has no foreign operations. The Bank may provide loans, letters of credit and other trade-related services to commercial enterprises that
conduct business outside the United States.
Customer Concentration
The Company does not have any customer relationships that individually account for 10% of consolidated or segment revenues, respectively.
COMPETITION
The financial services industry is highly competitive. Many of the Bank's competitors are much larger in total assets and capitalization, have greater
access to capital markets, have higher lending limits, can offer a broader range of financial services than the Bank can offer, and may have lower cost structures.
This increasingly competitive environment is primarily a result of long-term changes in regulation that made mergers and geographic expansion easier; changes in technology and product
delivery systems and web-based tools; the accelerating pace of consolidation among financial services providers; and the flight of deposit clients to perceived increased safety. The Company competes for clients related to loans and deposits and
customers with other banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial services providers. This strong competition for deposit and loan products
directly affects the rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses, and increase revenues
to remain competitive. The competitive environment is also significantly impacted by federal and state legislation that makes it easier for non-bank financial institutions to compete with the Company.
GOVERNMENT POLICIES
The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory authorities,
including those of the states in which it operates and the U.S. government. These laws, regulations and policies include, for example, statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve
System which impact interest rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory agencies. Changes in these laws, regulations and policies may greatly
affect our operations. See “Item 1A Risk Factors – Curtailment of government guaranteed loan programs could affect a segment of our business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Supervision and Regulation.”
Additional Available Information
The Company maintains an Internet website at http://www.communitywest.com. The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished
pursuant to Sections 13(a) and 15(d) of the Exchange Act. Other information related to the Company is available free of charge through this website as soon as reasonably practicable after it has been electronically filed or furnished to the
Securities Exchange Commission (“SEC”). The SEC maintains an Internet site, http://www.sec.gov, in which all forms filed electronically may be accessed. The Company’s internet website and the information contained therein are not intended to be
incorporated in this Form 10-K. In addition, copies of the Company’s annual report will be made available, free of charge, upon written request.
| ITEM 1A. |
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties, are discussed below
and elsewhere in this Form 10-K. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition.
Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business risks such as theft, loss of market share and
disasters, the Company is subject to special types of risk due to the nature of its business. See additional discussions about credit, interest rate, market, and litigation risks in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section of this Form 10-K beginning on page 19 and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section beginning on page 43.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business results of operations and
financial condition, and such efforts will depend on future developments, which are highly uncertain and are difficult to predict.
In December 2019, a novel coronavirus was reported in China, and, in March 2020 the World Health Organization declared a pandemic. On March 12, 2020, the President of the
United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses
to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of people have filed claims for unemployment, and
stock markets have fluctuated in value and, in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to
0.25% and yields on 10 and 30-year treasury notes have declined to historic lows. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislature to provide relief from reporting
loan classifications due to modifications related to the COVID-19 outbreak.
Finally, the spread of coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical
participations in meetings, events, and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, clients, and business partners. There is no certainty
that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. In addition, the success of our operations substantially depends on the management skills of our executive
officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our
business strategy.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The United States government
has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a
timely fashion. The extent of such impact from the COVID-19 outbreak and related mitigation efforts will depend on future developments, which remain uncertain, including but not limited to, the duration and spread of the outbreak, its severity, the
actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. As the result, we could be subject to any of the following risks, any of which could have a material, adverse
effect on our business, financial condition, liquidity, and results of operations:
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demand for our products and services may decline, making it difficult to grow assets and income;
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if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced
income;
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| • |
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
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our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
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| • |
the net worth and liquidity of our loan guarantors may decline, impairing their ability to honor commitments to us;
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as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to greater extent than the cost of interest-bearing liabilities, reducing our net interest margin and spread and
reducing our income;
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a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
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an increase in information security risk, with exploitation of clients and added risks of remote work;
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we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
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| • |
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
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Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects. Even after the
COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that
has occurred or may occur in the future.
Risks Relating to the Bank and to the Business of Banking in General
Our business may be adversely affected by downturns in the national economy and in the economies in our market
areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of
Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.
While real estate values and unemployment rates remain stable, a deterioration in economic conditions in the market areas we serve could result in the
following consequences, any of which could have a materially adverse impact on our business, financial condition, and results of operations:
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loan delinquencies, problem assets and foreclosures may increase;
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| • |
the sale of foreclosed assets may slow;
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| • |
demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;
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collateral for loans made could decline in value, exposing us to increased risk in our loans, reducing clients’ borrowing power, and reducing the value of assets and collateral associated with existing loans;
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| • |
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
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| • |
the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely affected.
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A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial
institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
COVID-19 pandemic
The COVID-19 pandemic, first identified in the United States during the first quarter of 2020, has had significant adverse effects on the economy in the
United States, generally, and in our service area, in particular. The assistance the government supported programs under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including the Paycheck Protection Program (PPP), have
lessened the disruptive effects of the COVID-19 pandemic. CWB has actively worked to assist customers in applying for and receiving assistance through the PPP, and CWB has implemented a distinct COVID-19 relief program of payment deferrals, fee
waivers and suspension of residential property foreclosures. While the origination fees recognized by CWB in providing these loans have been beneficial to CWB and, in turn CWBC, the full impact of the COVID-19 pandemic is not known at this time and
the extent to which the COVID-19 pandemic will continue to negatively affect our customers and our business will depend on future developments, which are highly uncertain. These include the scope and duration of the pandemic, the effectiveness of
vaccines and other therapies in treating and preventing the disease, the financial impact of the pandemic on our employees, customers, vendors, and services area, and what further actions the Federal and state governments and other third parties may
take in response to the pandemic. The clients in our service area have experienced increased unemployment, business closures, and slowdowns, especially in the retail, healthcare, hospitality, schools, and energy industries. All of this may lead to
increased credit ratings downgrades, loan delinquencies, defaults, reductions in asset values, and foreclosures any of which could have an adverse effect on our business, financial condition, and results of operations.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce
demand for our products and services, which could have an adverse effect on our results of operations.
A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in
which we do business, the value of our loans and investments, and our ongoing operations, costs, and profitability. Declines in real estate value and sales volumes and high unemployment levels may result in higher-than-expected loan delinquencies
and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, had among other things, kept interest rates
low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve Board increased the federal funds rate by 25 basis points in December 2016, 75 basis points in 2017, and 100 basis
points in 2018, decreased the federal funds rate by 75 basis points in 2019 and decreased the federal funds rate by 150 basis points in 2020 to help stimulate the economy. The potential for further changes in the federal funds rate exists in the near
future. Market rates of interest tend to follow the federal funds rate, and decreasing rates tend to enhance borrowing and stimulate housing markets and the U.S. economic conditions.
Reserve for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our financial
condition and/or results of operations. The Company maintains a reserve for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date. Provisions are taken from earnings and applied to
the loan loss reserves as the risk of loss in the loan and commitment portfolios increases. Conversely, credits to earnings from the loan loss reserves are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and
commitment portfolios. As of December 31, 2020, the Company’s allowance for loan losses was $10.2 million, or 1.23% of loans held for investment. In addition, as of December 31, 2020, we had $3.9 million in loans on nonaccrual, $0.2 million of which
are government guaranteed. In determining the level of the reserve for loan losses, management makes various assumptions and judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss
experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information known to Management at the time of the analysis. If
Management’s assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could have a material adverse effect on the Company’s financial condition and/or results of operations. While the allowance for loan
losses was determined to be adequate at December 31, 2020, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk,
the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, life insurance, and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional
measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to
repay loans in accordance with their original terms and, if not, the cumulative effect may have an adverse effect on our financial condition and/or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2020, approximately $472.2 million, or 55%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate. A decline in
current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. The real estate
securing our loan portfolio is concentrated in California. A decline in the real estate market could materially and adversely affect the business of CWB because a significant portion of its loans are secured by real estate. The ability to recover
on defaulted loans by selling the real estate collateral would then be diminished and CWB would be more likely to suffer losses on loans. Substantially all of the real property collateral is located in California. If there is decline in real
estate values, especially in California, the collateral for their loans would provide less security. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale
volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to California.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate
governance, executive compensation and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect clients, depositors,
consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or
distributions that the Company can pay, restrict the ability of institutions to guarantee the Company's debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or
reductions in our capital than accounting principles generally accepted in the United States (“GAAP”). Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We
are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and
regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, and other penalties, any of which could adversely affect our results of operations,
capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the
findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result
of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our
operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound”
practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change
the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent
risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
CWBC is subject to regulation and supervision by the FRB and CWB is subject to supervision and regulation by the OCC and the FDIC with applicable laws and regulations
governing the types, amounts and terms of investments and loans we make, disclosures of products and services we offer to our clients, the levels of capital we must maintain, and the rates of interest we may pay. Those regulations continuously
change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. While legislation enacted in 2018 was designed to reduce some of the obligations imposed by the Dodd-Frank Act, no assurances can
be given that such modifications will be implemented and that future changes in applicable laws and regulations like the enactment of the Anti-Money Laundering Act of 2020 would not impose regulatory restrictions resulting in a negative impact on
CWBC. For further discussion, see “SUPERVISION AND REGULATION” herein.
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to affect the implementation of the Basel
III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the
capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. For a further discussion of the capital rules, see “SUPERVISION AND REGULATION” herein.
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and
the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have
the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to
small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to
medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s
service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s results of operations and financial condition may be adversely affected.
CWBC and CWB have liquidity risk.
Liquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans
and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on liquidity. Access to funding
sources in amounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include
a decrease in the level of business activity due to a market downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors that are not specific to CWB, such as a
severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial
institutions and having back-up access to the brokered Certificate of Deposits “CD’s” markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources to pay its operating expenses and dividends to its
shareholders. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory, and regulatory constraints
on the Bank may restrict or totally preclude the payment of dividends by the Bank to CWBC, thereby negatively impacting its separate liquidity.
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and
there can be no assurance these programs will be available as needed.
As of December 31, 2020, the Company has borrowings from the FHLB of San Francisco of $105.0 million and no borrowings from the FRB. The Company in the
recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing
capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. Any change or termination could have an adverse effect on the Company’s liquidity and profitability.
The Company is exposed to risk of environmental liabilities with respect to properties to which we obtain title.
Approximately 55% of the Company’s loan portfolio at December 31, 2020 was secured by real estate. In the course of our business, the Company may
foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury,
investigation, and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and prospects.
Changes in interest rates could adversely affect the Company’s profitability, business, and prospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates and can impact
the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an adverse affect on the Company’s business, asset quality and prospects. The Company’s operating income and
net income depend to a great extent on its net interest margin. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and the interest rates paid on interest-bearing deposits,
borrowings, and other liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions, and monetary and fiscal policies of various governmental and regulatory
authorities, including the Federal Reserve. If the rate of interest paid on interest-bearing deposits, borrowings and other liabilities increases more than the rate of interest received on loans, securities and other earning assets increases, the
Company’s net interest income, and therefore earnings, would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other
liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan
originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan prepayment rates will decline and in falling interest rate environments, loan prepayment rates will
increase. The Company cannot guarantee that it will be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of
their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market
interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, financial condition, results of operations and cash flows.
We may be impacted by the transition from LIBOR as a reference rate.
The London Interbank Offered Rate (LIBOR) is used extensively in the United States and globally as a reference rate for various commercial and financial
contracts, including adjustable-rate mortgages, corporate debt, interest rate swaps and other derivatives. In November 2020, the Federal Reserve Board issued a statement supporting the release of a proposal and supervisory statements designed to
provide a clear end date for U.S. Dollar LIBOR (USD LIBOR), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the
date LIBOR ceases to be issued. It is uncertain at this time the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or other alternative
benchmarks or have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding when LIBOR ceases to exist.
The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large financial institutions,
is considering replacing USD LIBOR with a new index calculated by short-term repurchase agreements, backed by United States Treasury securities, otherwise known as the Secured Overnight Financing Rate (SOFR). SOFR is observed and backward looking,
which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government
securities, it will be a rate that does not consider bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. The extent to which
SOFR attains traction as a LIBOR replacement tool is not known, although transactions using SOFR have been completed, including by Fannie Mae. Both Fannie Mae and Freddie Mac ceased accepting adjustable-rate mortgages tied to LIBOR and began
accepting mortgages based on SOFR in 2020, and many issuers are now utilizing SOFR.
The Company is monitoring the LIBOR transition process and has identified all LIBOR-related contracts and determined which will require amended language
to incorporate a substitute reference rate. The Company continues to consider a replacement index for 2021 and beyond.
Until this replacement rate is identified, and all agreements have been addressed, we will continue to have a few loans and investment securities with attributes that are directly or
indirectly dependent on LIBOR. The transition from LIBOR could create additional costs or risk for us. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing
LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, our failure to adequately manage this transition process with our clients
could impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, any market-wide transition away from LIBOR could adversely affect our business, financial condition, and results
of operations.
The Company’s future success will depend on our ability to compete effectively in a highly competitive market.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including commercial
banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks,
Fintech companies, and other financial institutions, compete with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we conduct our businesses from many local commercial banks as well
as numerous national commercial banks and regionally based commercial banks. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of
scale and may offer a broader range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected.
In order to remain competitive in our industry and provide our clients with the latest products and services, we must be able to keep up with the changes in technology. Many
of the financial institutions and the financial technology companies with whom we compete, have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse
effect on our client relations and, in turn, our financial condition and results of operations.
Some of the financial services organizations with whom we compete are not subject to the same degree of regulation as is imposed on bank holding
companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very
competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial
statements on a timely basis could be impaired, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over
financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate NASDAQ listing standards. There could also be a negative reaction in the financial markets due
to a loss of investor confidence in us and the reliability of our financial statements. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal
control conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within our company will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely
basis, which could adversely affect our ability to operate our business, which could result in regulatory action and which could require us to restate our financial statements. Any such restatement could result in a loss of public confidence in the
reliability of our financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies
could adversely affect our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies
require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective, and complex judgments about matters
that are inherently uncertain. If those assumptions, estimates, or judgments were incorrectly made, we could be required to correct and restate prior period financial statements. Accounting standard-setters and those who interpret the accounting
standards (such as the Financial Accounting Standards Board, the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should
be applied. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new revised standard retroactively, resulting
in the need to revise and republish prior period financial statements.
One change is ASU 2016-13, which was released by the Financial Accounting Standards Board in 2016 and must be adopted by the Company by no later than
January 1, 2023. Currently, the impairment model used by financial institutions to assess the adequacy of the reserve for loan losses is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future
cash flows will be collected in full under the originally contracted terms. This model will be replaced by the current expected credit loss ("CECL") model, in which financial institutions will be required to use historical information, current
conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will necessitate significantly greater data requirements and changes to methodologies to accurately account for expected
losses over the life of a loan. There can be no assurance that we will not be required to increase reserves and the allowance for loan losses as a result of the implementation of CECL. Increased provisions for loan losses may adversely affect the
results of operations and our financial condition.
Natural disasters, severe weather, terrorist attacks, and threats of war or actual war may impact
all aspects of our operations, revenues, costs, and stock price in unpredictable ways
In the last few years, California has experienced extensive wildfires that have burned millions of acres, destroyed thousands of homes and commercial properties, and resulted
in the loss of life not only in California generally but also directly in our market area. Such natural disasters sometimes were followed by significant rains resulting in further loss of property. Also, in recent years, California has experienced
a drought, which if prolonged could negatively affect our clients. As of December 31, 2020, CWB had $51.0 million of agricultural loans. The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty
and a substantial portion of our clients’ businesses and residences are located in areas susceptible to such events as earthquakes, floods, droughts, and wildfires. The occurrence of such events could adversely impact our clients’ and their
businesses and ability to repay their loans all of which could have a material adverse effect on CWBC.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet, and telecommunications
systems. These risks may manifest themselves in the form of fraud by employees, by clients, other outside entities targeting us and/or our clients that use our internet banking, electronic banking, or some other form of our telecommunications
systems. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems
in place, which losses could adversely affect the Company and its financial condition.
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in the security of these systems
could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security
breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or
security breaches of these information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have
a material adverse effect on our financial condition and results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third-party
vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial
losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods,
there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also
experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information on our computer systems and
networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of the Company’s and our clients’ information across all geographic and product lines, and endeavor to modify these protective
measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software, and networks and those of our clients may be vulnerable to unauthorized access, loss, or destruction of data (including
confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber attacks and other events that could have an adverse security impact and result in significant losses by us and/or our
clients. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and
outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can
be discovered and rectified.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business
activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data, or infrastructure. In addition, as
interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance
that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued
uncertain global economic environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information
security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with
similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or
more of our or a third party’s systems failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees, especially
seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level.
In particular, our relative success to date has been partly the result of the skills of our senior management and management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their
communities. These professionals bring with them valuable client relationships and have been integral in our ability to attract loans and deposits, and to expand our market share. From time to time, the Company recruits or utilizes the services of
employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit clients of that employer. If the Company is unable to hire or retain qualified
employees, it may not be able to successfully execute its business strategy. If the Company or its employee is found to have violated any nonsolicitation or other restrictions applicable to it or its employees, the Company or its employee could
become subject to litigation or other proceedings.
We may be required to raise capital in the future, but that capital may not be available or may not be on
acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations. We may need to raise additional capital in the future to achieve and maintain those adequate capital levels. Our ability to raise additional capital is
dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously
required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.
Risks Relating to our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.
Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends and continue with share repurchases is subject to restrictions.
As a holding company with no significant assets other than the Bank, CWBC is dependent on dividends from the Bank to fund operating expenses and estimated tax payments. The
ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions is
subject to the restrictions of the National Bank Act. In addition, it is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound
practice. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation
buffer, as further described under “Item 7 - Management's Discussion and Analysis of Operations - Regulatory Matters- Dividends” in this Form 10-K.
In the event the Bank is unable to pay dividends to CWBC, it is likely that CWBC, in turn, would have to discontinue cash dividends and share repurchases and may have
difficulty meeting its other financial obligations. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock.
For the year ended December 31, 2020, the Bank paid approximately $1.2 million in dividends to CWBC. No assurances can be given that future performances will justify the
payment of dividends in any particular year. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code.
Issuance of additional common stock or other equity securities in the future could dilute the ownership interest of existing
shareholders.
In order to maintain capital at desired or regulatory-required levels, or to fund future growth, the board of directors may decide from time to time to issue additional
shares of common stock, or securities convertible into, exchangeable for, or representing rights to acquire shares of the common stock. The sale of these shares may significantly dilute ownership interests of shareholders. New investors in the future
may also have rights, preferences and privileges senior to current shareholders, which may adversely impact current shareholders.
| ITEM 1B. |
Not applicable.
| ITEM 2. |
The Company is headquartered at 445 Pine Avenue in Goleta, California. This facility houses the Company's corporate offices and the manufactured housing
lending division. The Company operates seven domestic branch locations, two of which are owned. All other properties are leased by the Company, including the corporate headquarters.
The Company continually evaluates the suitability and adequacy of its offices. Management believes that the existing facilities are adequate for its
present and anticipated future use.
| ITEM 3. |
From time to time, the Company may be involved in various litigation matters of a routine nature in the ordinary course of the Company’s business. In the
opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters are not expected to have a material impact on the Company’s financial position or results of operations.
| ITEM 4. |
Not applicable.
PART II
| ITEM 5. |
Market Information
The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC. The following table sets forth the high and low sales
prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:
|
2020 Quarters
|
2019 Quarters
|
|||||||||||||||||||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||||||||||||||
|
Range of stock prices:
|
||||||||||||||||||||||||||||||||
|
High
|
$
|
9.28
|
$
|
8.75
|
$
|
9.24
|
$
|
11.50
|
$
|
11.86
|
$
|
9.96
|
$
|
10.28
|
$
|
10.65
|
||||||||||||||||
|
Low
|
8.03
|
7.65
|
5.36
|
5.27
|
9.78
|
9.60
|
9.54
|
9.77
|
||||||||||||||||||||||||
|
Cash Dividends Declared:
|
$
|
0.050
|
$
|
0.045
|
$
|
0.045
|
$
|
0.055
|
$
|
0.06
|
$
|
0.06
|
$
|
0.06
|
$
|
0.05
|
||||||||||||||||
Holders
As of February 26, 2021, the closing price of our common stock on NASDAQ was $9.88 per share. As of that date the Company had approximately 201 holders
of record of its common stock. The Company has a greater number of beneficial owners of our common stock who own their shares through brokerage firms and institutional accounts.
Common Stock Dividends
It is the Company’s intention to review its dividend policy on a quarterly basis. As a holding company with limited significant assets other than the
capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB. CWB’s ability to pay dividends to the Company is limited by the National Bank Act. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation – CWBC – Limitations on Dividend Payments.”
Repurchases of Securities
Common
On February 28, 2019, the Board of Directors extended the repurchase program and increased the common stock repurchases to $4.5 million until August 31,
2021. Under this program, as of December 31, 2020, the Company has repurchased 350,189 common stock shares for $3.1 million at an average price of $8.71 per share. During 2020, the Company did not repurchase any shares and has $1.4 million available
under the program.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2020:
|
Plan Category
|
Number of securities to be
issued
upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise
price
of outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance under
equity
compensation plans
(excluding securities
reflected in column (a))
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Plans approved by shareholders
|
1,231,700
|
$
|
8.53
|
550,700
|
||||||||
|
Plans not approved by shareholders
|
—
|
—
|
—
|
|||||||||
|
Total
|
1,231,700
|
$
|
8.53
|
550,700
|
||||||||
For material features of the plans, see “Item 8. Financial Statements and Supplementary Data - Note 11. Stockholders' Equity.”
| ITEM 6. |
The following summary presents selected financial data as of and for the periods indicated. You should read the selected financial data presented below
in conjunction with “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||
|
(in thousands, except ratios and per share amounts)
|
||||||||||||||||||||
|
Results of Operations:
|
||||||||||||||||||||
|
Interest income
|
$
|
43,854
|
$
|
45,739
|
$
|
42,631
|
$
|
37,391
|
$
|
32,216
|
||||||||||
|
Interest expense
|
7,265
|
11,382
|
8,988
|
4,729
|
3,127
|
|||||||||||||||
|
Net interest income
|
36,589
|
34,357
|
33,643
|
32,662
|
29,089
|
|||||||||||||||
|
Provision (credit) for loan losses
|
1,223
|
(165
|
)
|
14
|
411
|
(48
|
)
|
|||||||||||||
|
Net interest income after provision for loan losses
|
35,366
|
34,522
|
33,629
|
32,251
|
29,137
|
|||||||||||||||
|
Non-interest income
|
3,912
|
3,607
|
2,628
|
2,757
|
2,253
|
|||||||||||||||
|
Non-interest expenses
|
27,523
|
26,755
|
26,039
|
24,545
|
22,548
|
|||||||||||||||
|
Income before income taxes
|
11,755
|
11,374
|
10,218
|
10,463
|
8,842
|
|||||||||||||||
|
Provision for income taxes
|
3,510
|
3,411
|
2,809
|
5,548
|
3,613
|
|||||||||||||||
|
Net income
|
8,245
|
7,963
|
7,409
|
4,915
|
5,229
|
|||||||||||||||
|
Net income available to common stockholders
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
$
|
4,915
|
$
|
5,229
|
||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
Income per common share - basic
|
$
|
0.97
|
$
|
0.94
|
$
|
0.89
|
$
|
0.60
|
$
|
0.64
|
||||||||||
|
Income per common share - diluted
|
$
|
0.97
|
$
|
0.93
|
$
|
0.88
|
$
|
0.57
|
$
|
0.62
|
||||||||||
|
Weighted average shares outstanding - basic
|
8,473
|
8,470
|
8,288
|
8,146
|
8,114
|
|||||||||||||||
|
Weighted average shares outstanding - diluted
|
8,543
|
8,579
|
8,451
|
8,589
|
8,444
|
|||||||||||||||
|
Shares outstanding at period end
|
8,473
|
8,472
|
8,533
|
8,193
|
8,096
|
|||||||||||||||
|
Dividends declared per common share
|
$
|
0.195
|
$
|
0.215
|
$
|
0.190
|
$
|
0.155
|
$
|
0.135
|
||||||||||
|
Dividend payout ratio
|
20.04
|
%
|
22.87
|
%
|
21.35
|
%
|
25.83
|
%
|
21.09
|
%
|
||||||||||
|
Book value per common share
|
$
|
10.50
|
$
|
9.68
|
$
|
8.92
|
$
|
8.55
|
$
|
8.07
|
||||||||||
|
Selected Balance Sheet Data:
|
||||||||||||||||||||
|
Net loans
|
847,383
|
766,846
|
759,552
|
726,189
|
623,355
|
|||||||||||||||
|
Allowance for loan losses
|
10,194
|
8,717
|
8,691
|
8,420
|
7,464
|
|||||||||||||||
|
Total assets
|
975,435
|
913,870
|
877,291
|
833,315
|
710,572
|
|||||||||||||||
|
Total deposits
|
766,185
|
750,934
|
716,006
|
699,684
|
612,236
|
|||||||||||||||
|
Total liabilities
|
886,428
|
831,892
|
801,140
|
763,245
|
645,236
|
|||||||||||||||
|
Total stockholders' equity
|
89,007
|
81,978
|
76,151
|
70,070
|
65,336
|
|||||||||||||||
|
Selected Financial and Liquidity Ratios:
|
||||||||||||||||||||
|
Net interest margin
|
3.89
|
%
|
4.06
|
%
|
4.07
|
%
|
4.34
|
%
|
4.60
|
%
|
||||||||||
|
Return on average assets
|
0.85
|
%
|
0.91
|
%
|
0.88
|
%
|
0.64
|
%
|
0.81
|
%
|
||||||||||
|
Return on average stockholders' equity
|
9.70
|
%
|
10.15
|
%
|
10.02
|
%
|
7.16
|
%
|
8.19
|
%
|
||||||||||
|
Equity to assets ratio
|
9.12
|
%
|
8.97
|
%
|
8.68
|
%
|
8.41
|
%
|
9.19
|
%
|
||||||||||
|
Loan to deposit ratio
|
111.92
|
%
|
103.30
|
%
|
106.08
|
%
|
104.99
|
%
|
103.04
|
%
|
||||||||||
|
Capital Ratios:
|
||||||||||||||||||||
|
Tier 1 leverage ratio (1)
|
9.57
|
%
|
9.33
|
%
|
8.96
|
%
|
8.72
|
%
|
9.64
|
%
|
||||||||||
|
Community Banking Leverage Ratio (2)
|
9.29
|
%
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Common Equity Tier 1 ratio (1)
|
11.40
|
%
|
10.60
|
%
|
10.10
|
%
|
9.96
|
%
|
10.57
|
%
|
||||||||||
|
Tier 1 risk-based capital ratio (1)
|
11.40
|
%
|
10.60
|
%
|
10.10
|
%
|
9.96
|
%
|
10.57
|
%
|
||||||||||
|
Total risk-based capital ratio (1)
|
12.65
|
%
|
11.73
|
%
|
11.26
|
%
|
11.17
|
%
|
11.80
|
%
|
||||||||||
|
Selected Asset Quality Ratios:
|
||||||||||||||||||||
|
Net charge-offs (recoveries) to average loans
|
(0.03
|
)%
|
(0.02
|
)%
|
(0.03
|
)%
|
(0.08
|
)%
|
(0.10
|
)%
|
||||||||||
|
Allowance for loan losses to total loans
|
1.19
|
%
|
1.12
|
%
|
1.13
|
%
|
1.15
|
%
|
1.18
|
%
|
||||||||||
|
Allowance for loan losses to nonaccrual loans
|
263.27
|
%
|
325.38
|
%
|
139.59
|
%
|
123.03
|
%
|
239.46
|
%
|
||||||||||
|
Nonaccrual loans to gross loans
|
0.45
|
%
|
0.35
|
%
|
0.81
|
%
|
0.93
|
%
|
0.49
|
%
|
||||||||||
|
Nonaccrual loans and repossessed assets to total loans
|
0.76
|
%
|
0.67
|
%
|
0.81
|
%
|
0.98
|
%
|
0.52
|
%
|
||||||||||
|
Loans past due 90 days or more and still accruing interest to total loans
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||||||||
| (1) |
Effective 2015, CWB was subject to Basel III regulatory capital guidelines. CWBC as a small bank holding company is not subject to the Basel III capital reporting requirements. The 2020, 2019, 2018, 2017 and
2016 ratios were the estimated consolidated capital ratios under Basel III.
|
| (2) |
Bank only ratio
|
| ITEM 7. |
The following discussion and analysis should be read in conjunction with “Item 8–Financial Statements and Supplementary Data.” This discussion and
analysis contain forward-looking statements that involve risk, uncertainties, and assumptions. Certain risks, uncertainties, and other factors, including but not limited to those set forth under “ Forward-Looking Statements,” on page 3 of this Form
10-K, may cause actual results to differ materially from those projected in the forward-looking statements.
Financial Overview and Highlights
Community West Bancshares (“CWBC”, or “Company”) is a bank holding company headquartered in Goleta, California that provides full-service banking and
lending through its wholly-owned subsidiary Community West Bank (“CWB”, or “Bank”), which has seven California branch banking offices located in Goleta, Oxnard, Paso Robles, San Luis Obispo, Santa Barbara, Santa Maria, and Ventura.
Financial Result Highlights of 2020
Net income available to common stockholders was $8.2 million, or $0.97 per diluted share for 2020, compared to $8.0 million, or $0.93 per diluted share
for 2019, and $7.4 million or $0.88 per diluted share for 2018.
The significant factors impacting the Company during 2020 were:
| • |
net interest income was $36.6 million for the year ended 2020, compared to $34.4 million for 2019;
|
| • |
net interest margin was 3.89% for 2020, compared to 4.06% for 2019;
|
| • |
total deposits were $766.2 million at December 31, 2020, compared to $750.9 million at December 31, 2019;
|
| • |
total demand deposits represented 75.7% of total deposits at December 31, 2020, compared to 56.6% at December 31, 2019;
|
| • |
total loans were $857.6 million at December 31, 2020, compared to $775.6 million at December 31, 2019;
|
| • |
book value per common share increased to $10.50 at December 31, 2020, compared to $9.68 at December 31, 2019;
|
| • |
provision for loan losses of $1.2 million for the year ended 2020, compared to a provision (credit) for loan losses of ($165,000) for the year ended 2019;
|
| • |
the Bank’s community bank leverage ratio (CBLR) was 9.29% at December 31, 2020. The CBLR ratio was adopted on January 1, 2020 and did not apply at December 31, 2019;
|
| • |
net non-accrual loans were $3.7 million at December 31, 2020, compared to $2.4 million at December 31, 2019; and
|
| • |
other assets acquired through foreclosure, net, was $2.6 million at December 31, 2020 compared to $2.5 million at December 31, 2019.
|
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 year ended December 31, 2020 throughout the analysis sections of this Form 10-K. Please refer to prior year’s Form 10-K for comparative analysis of years 2019 and 2018.
A summary of our results of operations and financial condition and select metrics is included in the following table:
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands, except per share amounts)
|
||||||||||||
|
Net income available to common stockholders
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
|
Basic earnings per share
|
0.97
|
0.94
|
0.89
|
|||||||||
|
Diluted earnings per share
|
0.97
|
0.93
|
0.88
|
|||||||||
|
Total assets
|
975,435
|
913,870
|
877,291
|
|||||||||
|
Gross loans
|
857,577
|
775,563
|
768,243
|
|||||||||
|
Total deposits
|
766,185
|
750,934
|
716,006
|
|||||||||
|
Net interest margin
|
3.89
|
%
|
4.06
|
%
|
4.07
|
%
|
||||||
|
Return on average assets
|
0.85
|
%
|
0.91
|
%
|
0.88
|
%
|
||||||
|
Return on average stockholders' equity
|
9.70
|
%
|
10.15
|
%
|
10.02
|
%
|
||||||
|
Dividend payout ratio
|
20.04
|
%
|
22.87
|
%
|
21.35
|
%
|
||||||
|
Equity to assets ratio
|
9.12
|
%
|
8.97
|
%
|
8.68
|
%
|
||||||
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and its results of
operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery
payments received on previously charged-off loans. The following table summarizes these asset quality metrics:
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Non-accrual loans (net of guaranteed portion)
|
$
|
3,665
|
$
|
2,389
|
$
|
3,378
|
||||||
|
Non-accrual loans (net of guaranteed portion) to gross loans
|
0.43
|
%
|
0.31
|
%
|
0.44
|
%
|
||||||
|
Net charge-offs (recoveries) to average loans
|
(0.03
|
)%
|
(0.02
|
)%
|
(0.03
|
)%
|
||||||
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits. The ability to originate new loans and attract new deposits is
fundamental to the Company’s asset growth. Total assets increased to $975.4 million at December 31, 2020 from $913.9 million at December 31, 2019. Total loans including net deferred fees and unearned income increased by $82.0 million, or 10.6%, to
$857.6 million as of December 31, 2020 compared to $775.6 million as of December 31, 2019. Total deposits increased by 2.0%, to $766.2 million as of December 31, 2020 from $750.9 million as of December 31, 2019.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
|
Year Ended
December 31,
|
Increase
|
Year Ended
December 31,
|
Increase
|
|||||||||||||||||||||
|
2020
|
2019
|
(Decrease)
|
2019
|
2018
|
(Decrease)
|
|||||||||||||||||||
|
(in thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Consolidated Income Statement Data:
|
||||||||||||||||||||||||
|
Interest income
|
$
|
43,854
|
$
|
45,739
|
$
|
(1,885
|
)
|
$
|
45,739
|
$
|
42,631
|
$
|
3,108
|
|||||||||||
|
Interest expense
|
7,265
|
11,382
|
(4,117
|
)
|
11,382
|
8,988
|
2,394
|
|||||||||||||||||
|
Net interest income
|
36,589
|
34,357
|
2,232
|
34,357
|
33,643
|
714
|
||||||||||||||||||
|
Provision (credit) for loan losses
|
1,223
|
(165
|
)
|
1,388
|
(165
|
)
|
14
|
(179
|
)
|
|||||||||||||||
|
Net interest income after provision for loan losses
|
35,366
|
34,522
|
844
|
34,522
|
33,629
|
893
|
||||||||||||||||||
|
Non-interest income
|
3,912
|
3,607
|
305
|
3,607
|
2,628
|
979
|
||||||||||||||||||
|
Non-interest expenses
|
27,523
|
26,755
|
768
|
26,755
|
26,039
|
716
|
||||||||||||||||||
|
Income before provision for income taxes
|
11,755
|
11,374
|
381
|
11,374
|
10,218
|
1,156
|
||||||||||||||||||
|
Provision for income taxes
|
3,510
|
3,411
|
99
|
3,411
|
2,809
|
602
|
||||||||||||||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
282
|
$
|
7,963
|
$
|
7,409
|
$
|
554
|
||||||||||||
|
Earnings per share - basic
|
$
|
0.97
|
$
|
0.94
|
$
|
0.03
|
$
|
0.94
|
$
|
0.89
|
$
|
0.05
|
||||||||||||
|
Earnings per share - diluted
|
$
|
0.97
|
$
|
0.93
|
$
|
0.04
|
$
|
0.93
|
$
|
0.88
|
$
|
0.05
|
||||||||||||
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated:
|
Year Ended December 31,
|
||||||||||||||||||||||||
|
2020
|
2019
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
|||||||||||||||||||
|
Interest-Earning Assets
|
(in thousands)
|
|||||||||||||||||||||||
|
Federal funds sold and interest-earning deposits
|
$
|
80,864
|
$
|
285
|
0.35
|
%
|
$
|
33,587
|
$
|
648
|
1.93
|
%
|
||||||||||||
|
Investment securities
|
28,266
|
621
|
2.20
|
%
|
34,341
|
1,201
|
3.50
|
%
|
||||||||||||||||
|
Loans (1)
|
831,863
|
42,948
|
5.16
|
%
|
778,745
|
43,890
|
5.64
|
%
|
||||||||||||||||
|
Total earnings assets
|
940,993
|
43,854
|
4.66
|
%
|
846,673
|
45,739
|
5.40
|
%
|
||||||||||||||||
|
Nonearning Assets
|
||||||||||||||||||||||||
|
Cash and due from banks
|
3,286
|
2,431
|
||||||||||||||||||||||
|
Allowance for loan losses
|
(9,557
|
)
|
(8,787
|
)
|
||||||||||||||||||||
|
Other assets
|
37,297
|
32,192
|
||||||||||||||||||||||
|
Total assets
|
$
|
972,019
|
$
|
872,509
|
||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing demand deposits
|
314,659
|
2,111
|
0.67
|
%
|
289,798
|
3,531
|
1.22
|
%
|
||||||||||||||||
|
Savings deposits
|
17,419
|
105
|
0.60
|
%
|
15,650
|
125
|
0.80
|
%
|
||||||||||||||||
|
Time deposits
|
229,110
|
3,267
|
1.43
|
%
|
303,687
|
6,399
|
2.11
|
%
|
||||||||||||||||
|
Total interest-bearing deposits
|
561,188
|
5,483
|
0.98
|
%
|
609,135
|
10,055
|
1.65
|
%
|
||||||||||||||||
|
Other borrowings
|
139,795
|
1,782
|
1.27
|
%
|
51,045
|
1,327
|
2.60
|
%
|
||||||||||||||||
|
Total interest-bearing liabilities
|
700,983
|
7,265
|
1.04
|
%
|
660,180
|
11,382
|
1.72
|
%
|
||||||||||||||||
|
Noninterest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Noninterest-bearing demand deposits
|
169,696
|
116,887
|
||||||||||||||||||||||
|
Other liabilities
|
16,313
|
17,005
|
||||||||||||||||||||||
|
Stockholders' equity
|
85,027
|
78,437
|
||||||||||||||||||||||
|
Total Liabilities and Stockholders' Equity
|
$
|
972,019
|
$
|
872,509
|
||||||||||||||||||||
|
Net interest income and margin (2)
|
$
|
36,589
|
3.89
|
%
|
$
|
34,357
|
4.06
|
%
|
||||||||||||||||
|
Net interest spread (3)
|
3.62
|
%
|
3.68
|
%
|
||||||||||||||||||||
| (1) |
Includes nonaccrual loans.
|
| (2) |
Net interest margin is computed by dividing net interest income by total average earning assets.
|
| (3) |
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
|
|
Year Ended December 31,
|
||||||||||||||||||||||||
|
2019
|
2018
|
|||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
|||||||||||||||||||
|
Interest-Earning Assets
|
(in thousands)
|
|||||||||||||||||||||||
|
Federal funds sold and interest-earning deposits
|
$
|
33,587
|
$
|
648
|
1.93
|
%
|
$
|
36,275
|
$
|
641
|
1.77
|
%
|
||||||||||||
|
Investment securities
|
34,341
|
1,201
|
3.50
|
%
|
38,242
|
1,125
|
2.94
|
%
|
||||||||||||||||
|
Loans (1)
|
778,745
|
43,890
|
5.64
|
%
|
751,775
|
40,865
|
5.44
|
%
|
||||||||||||||||
|
Total earnings assets
|
846,673
|
45,739
|
5.40
|
%
|
826,292
|
42,631
|
5.16
|
%
|
||||||||||||||||
|
Nonearning Assets
|
||||||||||||||||||||||||
|
Cash and due from banks
|
2,431
|
3,201
|
||||||||||||||||||||||
|
Allowance for loan losses
|
(8,787
|
)
|
(8,535
|
)
|
||||||||||||||||||||
|
Other assets
|
32,192
|
21,510
|
||||||||||||||||||||||
|
Total assets
|
$
|
872,509
|
$
|
842,468
|
||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing demand deposits
|
289,798
|
3,531
|
1.22
|
%
|
265,974
|
2,100
|
0.79
|
%
|
||||||||||||||||
|
Savings deposits
|
15,650
|
125
|
0.80
|
%
|
14,458
|
124
|
0.86
|
%
|
||||||||||||||||
|
Time deposits
|
303,687
|
6,399
|
2.11
|
%
|
322,972
|
5,478
|
1.70
|
%
|
||||||||||||||||
|
Total interest-bearing deposits
|
609,135
|
10,055
|
1.65
|
%
|
603,404
|
7,702
|
1.28
|
%
|
||||||||||||||||
|
Other borrowings
|
51,045
|
1,327
|
2.60
|
%
|
46,014
|
1,286
|
2.79
|
%
|
||||||||||||||||
|
Total interest-bearing liabilities
|
660,180
|
11,382
|
1.72
|
%
|
649,418
|
8,988
|
1.38
|
%
|
||||||||||||||||
|
Noninterest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Noninterest-bearing demand deposits
|
116,887
|
111,246
|
||||||||||||||||||||||
|
Other liabilities
|
17,005
|
7,898
|
||||||||||||||||||||||
|
Stockholders' equity
|
78,437
|
73,906
|
||||||||||||||||||||||
|
Total Liabilities and Stockholders' Equity
|
$
|
872,509
|
$
|
842,468
|
||||||||||||||||||||
|
Net interest income and margin (2)
|
$
|
34,357
|
4.06
|
%
|
$
|
33,643
|
4.07
|
%
|
||||||||||||||||
|
Net interest spread (3)
|
3.68
|
%
|
3.78
|
%
|
||||||||||||||||||||
| (1) |
Includes nonaccrual loans.
|
| (2) |
Net interest margin is computed by dividing net interest income by total average earning assets.
|
| (3) |
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
|
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and
changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
|
Year Ended December 31, 2020 versus
2019 |
Year Ended December 31, 2019 versus
2018
|
|||||||||||||||||||||||
|
Increase (Decrease)
Due to Changes in (1)
|
Increase (Decrease)
Due to Changes in (1)
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|||||||||||||||||||
|
(in thousands)
|
(in thousands)
|
|||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
Investment securities
|
$
|
(134
|
)
|
$
|
(446
|
)
|
$
|
(580
|
)
|
$
|
(137
|
)
|
$
|
214
|
$
|
77
|
||||||||
|
Federal funds sold and other
|
168
|
(531
|
)
|
(363
|
)
|
(52
|
)
|
58
|
6
|
|||||||||||||||
|
Loans, net
|
2,796
|
(3,738
|
)
|
(942
|
)
|
1,521
|
1,504
|
3,025
|
||||||||||||||||
|
Total interest income
|
2,830
|
(4,715
|
)
|
(1,885
|
)
|
1,332
|
1,776
|
3,108
|
||||||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||
|
Interest checking
|
167
|
(1,587
|
)
|
(1,420
|
)
|
291
|
1,140
|
1,431
|
||||||||||||||||
|
Savings
|
11
|
(31
|
)
|
(20
|
)
|
10
|
(9
|
)
|
1
|
|||||||||||||||
|
Time deposits
|
(1,066
|
)
|
(2,066
|
)
|
(3,132
|
)
|
(407
|
)
|
1,328
|
921
|
||||||||||||||
|
Other borrowings
|
1,127
|
(672
|
)
|
455
|
131
|
(90
|
)
|
41
|
||||||||||||||||
|
Total interest expense
|
239
|
(4,356
|
)
|
(4,117
|
)
|
25
|
2,369
|
2,394
|
||||||||||||||||
|
Net increase
|
$
|
2,591
|
$
|
(359
|
)
|
$
|
2,232
|
$
|
1,307
|
$
|
(593
|
)
|
$
|
714
|
||||||||||
| (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 year ended December 31, 2020 was $43.9 million, an decrease from
$45.7 million and an increase from $42.6 million, respectively, for the years ended December 31, 2019 and 2018. The interest income was negatively impacted by decreased average earning assets and rates, primarily SBA PPP loans in 2020. Average loans
for the year increased 6.8% over 2019, and 10.7% over 2018. Average earning asset yields decreased by 74 basis points for 2020 compared to 2019.
Interest expense for the year ended December 31, 2020 decreased compared to 2019 by $4.1 million and decreased compared to 2018 by $1.7 million,
respectively, to $7.3 million. The decrease for 2020 compared to 2019 was mostly the result of the lower rates paid on wholesale funding deposits, interest-bearing demand deposits, and time deposits. The average cost of interest-bearing deposits
also decreased to 98 basis points in 2020 compared to 165 basis points in 2019. Total cost of funds decreased by 63 basis points for 2020 compared to 2019 and by 35 basis points compared to 2018.
The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities decreased the margin for 2020
compared to 2019. The net interest margin was 3.89% for 2020 compared to 4.06% for 2019 and 4.07% in 2018.
Net interest income increased by $2.2 million for 2020 compared to 2019, and $2.9 million compared to 2018.
Provision for loan losses
The provision for loan losses in each period is reflected as a charge against earnings in that period. The provision for loan losses is equal to the
amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio. The provision (credit) for loan losses was $1.2 million in 2020 compared to $(165,000) in 2019 and $14,000
in 2018. The provision for loan losses for 2020 resulted primarily from increased qualitative factors related to COVID-19. The provision for 2019 resulted primarily from loan growth and change in loan portfolio mix. As a result of the pandemic as it
relates to credit quality and proactive risk rating of our loan portfolio, the ratio of the allowance for loan losses to loans held for investment increased to 1.23% at December 31, 2020 from 1.19% at December 31, 2019.
The following table summarizes the provision (credit), charge-offs (recoveries) by loan category for the year ended December 31, 2020, 2019 and 2018:
|
For the Year Ended December 31,
|
||||||||||||||||||||||||||||||||
|
Manufactured
Housing
|
Commercial
Real Estate
|
Commercial
|
SBA
|
HELOC
|
Single Family
Real
Estate
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
2020
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,184
|
$
|
5,217
|
$
|
1,162
|
$
|
32
|
$
|
27
|
$
|
92
|
$
|
3
|
$
|
8,717
|
||||||||||||||||
|
Charge-offs
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Recoveries
|
27
|
80
|
133
|
7
|
6
|
1
|
—
|
254
|
||||||||||||||||||||||||
|
Net (charge-offs) recoveries
|
27
|
80
|
133
|
7
|
6
|
1
|
—
|
254
|
||||||||||||||||||||||||
|
Provision (credit)
|
401
|
653
|
84
|
79
|
(8
|
)
|
15
|
(1
|
)
|
1,223
|
||||||||||||||||||||||
|
Ending balance
|
$
|
2,612
|
$
|
5,950
|
$
|
1,379
|
$
|
118
|
$
|
25
|
$
|
108
|
$
|
2
|
$
|
10,194
|
||||||||||||||||
|
2019
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,196
|
$
|
5,028
|
$
|
1,210
|
$
|
79
|
$
|
90
|
$
|
88
|
$
|
—
|
$
|
8,691
|
||||||||||||||||
|
Charge-offs
|
—
|
—
|
(31
|
)
|
—
|
—
|
—
|
—
|
(31
|
)
|
||||||||||||||||||||||
|
Recoveries
|
54
|
52
|
60
|
50
|
5
|
1
|
—
|
222
|
||||||||||||||||||||||||
|
Net (charge-offs) recoveries
|
54
|
52
|
29
|
50
|
5
|
1
|
—
|
191
|
||||||||||||||||||||||||
|
Provision (credit)
|
(66
|
)
|
137
|
(77
|
)
|
(97
|
)
|
(68
|
)
|
3
|
3
|
(165
|
)
|
|||||||||||||||||||
|
Ending balance
|
$
|
2,184
|
$
|
5,217
|
$
|
1,162
|
$
|
32
|
$
|
27
|
$
|
92
|
$
|
3
|
$
|
8,717
|
||||||||||||||||
|
2018
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,180
|
$
|
4,844
|
$
|
1,133
|
$
|
73
|
$
|
92
|
$
|
98
|
$
|
—
|
$
|
8,420
|
||||||||||||||||
|
Charge-offs
|
(6
|
)
|
—
|
(127
|
)
|
—
|
—
|
—
|
—
|
(133
|
)
|
|||||||||||||||||||||
|
Recoveries
|
120
|
15
|
66
|
133
|
55
|
1
|
—
|
390
|
||||||||||||||||||||||||
|
Net (charge-offs) recoveries
|
114
|
15
|
(61
|
)
|
133
|
55
|
1
|
—
|
257
|
|||||||||||||||||||||||
|
Provision (credit)
|
(98
|
)
|
169
|
138
|
(127
|
)
|
(57
|
)
|
(11
|
)
|
—
|
14
|
||||||||||||||||||||
|
Ending balance
|
$
|
2,196
|
$
|
5,028
|
$
|
1,210
|
$
|
79
|
$
|
90
|
$
|
88
|
$
|
—
|
$
|
8,691
|
||||||||||||||||
The percentage of net non-accrual loans (net of government guarantees) to the total loan portfolio has increased to 0.43% as of December 31, 2020 from
0.31% at December 31, 2019 primarily due to an increase in nonaccrual SBA 504 loans.
The allowance for loan losses compared to net non-accrual loans has decreased to 278% as of December 31, 2020 from 365% as of December 31, 2019. Total
past due loans were $1.9 million as of December 31, 2020 and as of December 31, 2019.
Non-interest Income
The Company earned non-interest income primarily through fees related to services provided to loan and deposit clients.
The following tables present a summary of non-interest income for the periods presented:
|
Year Ended December 31,
|
Increase
|
Year Ended December 31,
|
Increase
|
|||||||||||||||||||||
|
2020
|
2019
|
(Decrease)
|
2019
|
2018
|
(Decrease)
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
Other loan fees
|
$
|
1,546
|
$
|
1,383
|
$
|
163
|
$
|
1,383
|
$
|
1,208
|
$
|
35
|
||||||||||||
|
Gains from loan sales, net
|
920
|
765
|
155
|
765
|
—
|
765
|
||||||||||||||||||
|
Document processing fees
|
513
|
423
|
90
|
423
|
489
|
(66
|
)
|
|||||||||||||||||
|
Service charges
|
354
|
567
|
(213
|
)
|
567
|
459
|
108
|
|||||||||||||||||
|
Other
|
579
|
469
|
110
|
469
|
472
|
137
|
||||||||||||||||||
|
Total non-interest income
|
$
|
3,912
|
$
|
3,607
|
$
|
305
|
$
|
3,607
|
$
|
2,628
|
$
|
979
|
||||||||||||
Total non-interest income increased $0.3 million for 2020 compared to 2019. The increase was mostly from increased other loan fees and gain from loan
sales. The increase was partially offset by a decrease in service charges. Service charges income declined primarily due to the Company’s adherence with the Cares Act initiative to waive certain transaction fees.
Non-Interest Expenses
The following tables present a summary of non-interest expenses for the periods presented:
|
Year Ended December 31,
|
Increase
|
Year Ended December 31,
|
Increase
|
|||||||||||||||||||||
|
2020
|
2019
|
(Decrease)
|
2019
|
2018
|
(Decrease)
|
|||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
Salaries and employee benefits
|
$
|
17,968
|
$
|
17,094
|
$
|
874
|
$
|
17,094
|
$
|
16,329
|
$
|
765
|
||||||||||||
|
Occupancy expense, net
|
3,036
|
3,088
|
(52
|
)
|
3,088
|
3,132
|
(44
|
)
|
||||||||||||||||
|
Professional services
|
1,801
|
1,679
|
122
|
1,679
|
1,356
|
323
|
||||||||||||||||||
|
Advertising and marketing
|
673
|
774
|
(101
|
)
|
774
|
685
|
89
|
|||||||||||||||||
|
Data processing
|
1,055
|
876
|
179
|
876
|
852
|
24
|
||||||||||||||||||
|
Depreciation
|
821
|
864
|
(43
|
)
|
864
|
764
|
100
|
|||||||||||||||||
|
FDIC assessment
|
565
|
427
|
138
|
427
|
770
|
(343
|
)
|
|||||||||||||||||
|
Stock based compensation expense
|
319
|
382
|
(63
|
)
|
382
|
478
|
(96
|
)
|
||||||||||||||||
|
Other
|
1,285
|
1,571
|
(286
|
)
|
1,571
|
1,673
|
(102
|
)
|
||||||||||||||||
|
Total non-interest expenses
|
$
|
27,523
|
$
|
26,755
|
$
|
768
|
$
|
26,755
|
$
|
26,039
|
$
|
716
|
||||||||||||
Total non-interest expenses for the year ended December 31, 2020 compared to 2019 increased by $0.8 million primarily due to additional salaries and
employee benefits, professional services, and FDIC assessment as a result of the Company's increased market share in the Northern and Southern regions, and addition of client relationships and support positions. Additionally, commissions expense
(included in salaries and employee benefits expense) increased $0.5 million in 2020 compared to 2019 primarily due to increased manufactured housing loan originations and relationship banking deposit originations through the pandemic.
Income Taxes
The income tax provision for 2020 was $3.5 million compared to $3.4 million in 2019 and $2.8 million in 2018. The effective income tax rate was 30.0%,
30.0%, and 27.5%, respectively, for 2020, 2019 and 2018, reflecting the federal corporate tax rate reduction implemented in 2018.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets of $4.0 million and $3.2 million at December 31, 2020 and December 31, 2019, respectively, 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 December 31, 2020 and 2019.
ASC 740 also prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the
Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December 31, 2020 and 2019.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of
tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 7 “Income Taxes” to the consolidated financial statements of Form 10-K beginning on page 87.
BALANCE SHEET
Total assets increased $61.6 million to $975.4 million at December 31, 2020 compared to $913.9 million at December 31, 2019. The majority of the increase
was $91.4 million in loans held for investment primarily from the SBA PPP loan program. Total SBA loans including SBA PPP increased $66.6 million to $81.3 at December 31, 2020. Total commercial real estate loans increased by 4.3% to $402.1 million at
December 31, 2020 compared to 2019, and comprised 46.9% of the total loan portfolio. Manufactured housing loans increased by 9.0% to $280.3 million at December 31, 2020 compared to 2019, and represented 32.7% of the total loan portfolio. Total
commercial loans including commercial agriculture loans decreased 20.3% to $80.9 million at December 31, 2020 compared to 2019, and represented 9.4% of the total loan portfolio.
Total liabilities increased $54.5 million, or 6.6% to $886.4 million at December 31, 2020 from $831.9 million at December 31, 2019. The majority of this
increase was due to deposit growth. Total deposits increased by $15.3 million, or 2.0% to $766.2 million at December 31, 2020 from $750.9 million at December 31, 2019. Non-interest bearing demand deposits increased by $71.0 million to $181.8 million
at December 31, 2020 from $110.8 million at December 31, 2019. Certificates of deposit decreased by $142.6 million to $167.5 million at December 31, 2020 compared to $310.1 million at December 31, 2019. Interest-bearing demand deposits increased by
$83.8 million to $398.1 million at December 31, 2020 compared to $314.3 million at 2019. Savings deposits increased slightly to $18.7 million at December 31, 2020 compared to $15.7 million at December 31, 2019. Other borrowings increased by $40.0
million to $105.0 million at December 31, 2020 compared to $65.0 million at December 31, 2019 due to increased FHLB advances.
Total stockholders’ equity increased to $89.0 million at December 31, 2020 from $82.0 million at December 31, 2019. This increase was primarily from 2020
net income of $8.2 million reduced by common stock dividends of $1.7 million.
The following tables present the Company’s average balances as of the dates indicated:
|
December 31,
|
||||||||||||||||||||||||
|
2020
|
2019
|
2018
|
||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
|
ASSETS:
|
(dollars in thousands)
|
|||||||||||||||||||||||
|
Cash and due from banks
|
$
|
3,286
|
0.3
|
%
|
$
|
2,431
|
0.3
|
%
|
$
|
3,201
|
0.4
|
%
|
||||||||||||
|
Interest-earning deposits in other institutions
|
80,864
|
8.3
|
%
|
33,582
|
3.8
|
%
|
36,265
|
4.3
|
%
|
|||||||||||||||
|
Federal funds sold
|
1
|
0.0
|
%
|
5
|
0.0
|
%
|
10
|
0.0
|
%
|
|||||||||||||||
|
Investment securities available-for-sale
|
18,053
|
1.9
|
%
|
23,426
|
2.7
|
%
|
26,961
|
3.2
|
%
|
|||||||||||||||
|
Investment securities held-to-maturity
|
5,415
|
0.6
|
%
|
6,827
|
0.5
|
%
|
7,304
|
0.9
|
%
|
|||||||||||||||
|
FRB and FHLB stock
|
4,663
|
0.5
|
%
|
4,087
|
0.0
|
%
|
3,637
|
0.4
|
%
|
|||||||||||||||
|
Loans, net
|
822,306
|
84.5
|
%
|
778,745
|
89.3
|
%
|
751,775
|
89.2
|
%
|
|||||||||||||||
|
Servicing assets
|
1,047
|
0.1
|
%
|
92
|
0.0
|
%
|
136
|
0.0
|
%
|
|||||||||||||||
|
Other assets acquired through foreclosure, net
|
2,681
|
0.3
|
%
|
378
|
0.0
|
%
|
170
|
0.0
|
%
|
|||||||||||||||
|
Premises and equipment, net
|
7,383
|
0.8
|
%
|
7,267
|
0.8
|
%
|
6,006
|
0.7
|
%
|
|||||||||||||||
|
Other assets
|
26,320
|
2.7
|
%
|
15,669
|
1.8
|
%
|
7,003
|
0.8
|
%
|
|||||||||||||||
|
TOTAL ASSETS
|
$
|
972,019
|
100.0
|
%
|
$
|
872,509
|
100.0
|
%
|
$
|
842,468
|
100.0
|
%
|
||||||||||||
|
LIABILITIES:
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Non-interest bearing demand
|
$
|
169,696
|
17.5
|
%
|
$
|
116,887
|
13.4
|
%
|
$
|
111,246
|
13.2
|
%
|
||||||||||||
|
Interest-bearing demand
|
314,659
|
32.3
|
%
|
289,798
|
33.2
|
%
|
265,974
|
31.6
|
%
|
|||||||||||||||
|
Savings
|
17,419
|
1.8
|
%
|
15,650
|
1.8
|
%
|
14,458
|
1.7
|
%
|
|||||||||||||||
|
Time certificates of $100,000 or more
|
82,583
|
8.5
|
%
|
144,711
|
16.6
|
%
|
181,472
|
21.5
|
%
|
|||||||||||||||
|
Other time certificates
|
146,527
|
15.1
|
%
|
158,976
|
18.2
|
%
|
141,501
|
16.8
|
%
|
|||||||||||||||
|
Total deposits
|
730,884
|
75.2
|
%
|
726,022
|
83.2
|
%
|
714,651
|
84.8
|
%
|
|||||||||||||||
|
Other borrowings
|
139,795
|
14.4
|
%
|
51,045
|
5.9
|
%
|
46,014
|
5.5
|
%
|
|||||||||||||||
|
Other liabilities
|
16,313
|
1.7
|
%
|
17,005
|
1.9
|
%
|
7,898
|
0.9
|
%
|
|||||||||||||||
|
Total liabilities
|
886,992
|
91.3
|
%
|
794,072
|
91.0
|
%
|
768,563
|
91.2
|
%
|
|||||||||||||||
|
STOCKHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
Common stock
|
42,747
|
4.4
|
%
|
42,426
|
4.9
|
%
|
42,996
|
5.1
|
%
|
|||||||||||||||
|
Retained earnings
|
42,340
|
4.4
|
%
|
36,113
|
4.1
|
%
|
31,013
|
3.7
|
%
|
|||||||||||||||
|
Accumulated other comprehensive income (loss)
|
(60
|
)
|
0.0
|
%
|
(102
|
)
|
0.0
|
%
|
(104
|
)
|
0.0
|
%
|
||||||||||||
|
Total stockholders' equity
|
85,027
|
8.8
|
%
|
78,437
|
9.0
|
%
|
73,905
|
8.8
|
%
|
|||||||||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
972,019
|
100.0
|
%
|
$
|
872,509
|
100.0
|
%
|
$
|
842,468
|
100.0
|
%
|
||||||||||||
Loan Portfolio
Market Summary
Total loans increased by $82.0 million during 2020 to $857.6 million. The
majority of this increase was driven by $66.6 million of growth in the SBA loan portfolio mostly due to SBA PPP loans. Total manufactured housing loans increased by $23.0 million and total commercial loans including commercial agriculture loans
decreased by $20.6 million. Commercial real estate loans increased by $16.5 million in 2020. Single family real estate loans decreased by $1.4 million. With the recent decrease in interest rates the
competition for quality loans has increased in our markets.
The table below summarizes the distribution of the Company’s loans (including loans held for sale) at the year-end:
|
December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Manufactured housing
|
$
|
280,284
|
$
|
257,247
|
$
|
247,114
|
$
|
223,115
|
$
|
194,222
|
||||||||||
|
Commercial real estate
|
402,148
|
385,642
|
365,809
|
354,617
|
272,142
|
|||||||||||||||
|
Commercial
|
80,851
|
101,485
|
118,517
|
111,459
|
105,290
|
|||||||||||||||
|
SBA
|
81,442
|
14,833
|
19,148
|
26,341
|
36,659
|
|||||||||||||||
|
HELOC
|
3,861
|
4,531
|
6,756
|
9,422
|
10,292
|
|||||||||||||||
|
Single family real estate
|
10,490
|
11,845
|
11,261
|
10,346
|
12,750
|
|||||||||||||||
|
Consumer
|
133
|
94
|
46
|
83
|
87
|
|||||||||||||||
|
Total loans
|
859,209
|
775,677
|
768,651
|
735,383
|
631,442
|
|||||||||||||||
|
Less:
|
||||||||||||||||||||
|
Allowance for loan losses
|
10,194
|
8,717
|
8,691
|
8,420
|
7,464
|
|||||||||||||||
|
Deferred fees (costs), net
|
1,583
|
58
|
337
|
652
|
453
|
|||||||||||||||
|
Discount on SBA loans
|
49
|
56
|
71
|
122
|
170
|
|||||||||||||||
|
Total loans, net
|
$
|
847,383
|
$
|
766,846
|
$
|
759,552
|
$
|
726,189
|
$
|
623,355
|
||||||||||
|
Percentage to Total Loans:
|
||||||||||||||||||||
|
Manufactured housing
|
32.6
|
%
|
33.2
|
%
|
32.1
|
%
|
30.3
|
%
|
30.8
|
%
|
||||||||||
|
Commercial real estate
|
46.8
|
%
|
49.7
|
%
|
47.6
|
%
|
48.2
|
%
|
43.1
|
%
|
||||||||||
|
Commercial
|
9.4
|
%
|
13.1
|
%
|
15.4
|
%
|
15.2
|
%
|
16.7
|
%
|
||||||||||
|
SBA
|
9.5
|
%
|
1.9
|
%
|
2.5
|
%
|
3.6
|
%
|
5.8
|
%
|
||||||||||
|
HELOC
|
0.4
|
%
|
0.6
|
%
|
0.9
|
%
|
1.3
|
%
|
1.6
|
%
|
||||||||||
|
Single family real estate
|
1.2
|
%
|
1.5
|
%
|
1.5
|
%
|
1.4
|
%
|
2.0
|
%
|
||||||||||
|
Consumer
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||||||
|
Total
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||||||
Commercial Loans
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants a
maximum loan amount, which remains available to the business during the loan term. The collateral for these loans typically are by Uniform Commercial Code (“UCC-1”) lien filings, real estate, and personal guarantees. The Company does not extend
material loans of this type in excess of five years.
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving, or constructing, commercial and industrial
properties. This loan category also includes SBA 504 loans and land loans.
Commercial and industrial real estate loans are primarily secured by nonresidential property. Office buildings or other commercial property primarily
secure these types of loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to a maximum of 75% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise,
these loans are generally restricted to 70% of appraised value of the underlying real property.
The Company makes real estate construction loans on commercial properties and single-family dwellings for speculative purposes. These loans are
collateralized by first and second trust deeds on real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 75%.
SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or acquire
machinery and equipment. The loan is structured with a conventional first trust deed provided by the Bank and a second trust deed which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50%
conventional first loan and 40% debenture. Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%. Conventional and investor loans are sometimes funded by our secondary-market partners
and CWB receives a premium for these transactions.
SBA Loans
SBA loans consist of SBA 7(a), Business and Industry loans (“B&I”), and SBA Paycheck Protection Program (PPP) loans. The SBA 7(a) loan
proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements, and debt refinancing. At present, the SBA guarantees as much as 85% on loans up to $150,000 and 75% on loans more than
$150,000. The SBA’s maximum exposure amount is $3,750,000. The Company may sell a portion of the loans, however, under the SBA 7(a) loan program;
the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
Under the CARES Act, CWB offered SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1%
for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds
to the lender or the date that is 10 months after the day of the covered period if the borrower does not apply for forgiveness within the 10 month period
B&I loans are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 60% to 80% depending on the size of the loan.
B&I loans are similar to the SBA 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.
In April of 2020, under the CARES Act, CWB began offering SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and
carry a fixed rate of 1% for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of
the forgiveness proceeds to the lender or the date that is 10 months after the day of the covered period if the borrower does not apply for forgiveness within the 10-month period.
Agricultural Loans for real estate and operating lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for
crops, equipment, and livestock. The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA B&I loan program. The FSA loans typically have a 90% guarantee
up to $1,776,000 (amount adjusted annually based on inflation) for up to 40 years, but not always. The Company had $69.8 million of commercial
agriculture loans at December 31, 2020, of which $31.6 million had FSA guarantees.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs. Under the Farmer Mac I program, loans are sourced by
CWB, underwritten, funded, and serviced by Farmer Mac. CWB receives an origination fee and an ongoing field servicing fee of 25 basis points to 115 basis points for maintaining the relationship with the borrower and performing certain loan
compliance monitoring, and other duties as directed by the Central Servicer. As of December 31, 2020, CWB was servicing $110.7 million of Famer Mac loans.
Manufactured Housing Loans
CWB originates loans secured by manufactured homes located in approved rental, co-operative ownership, condominium and planned unit development mobile
home parks in Santa Barbara, Ventura and San Luis Obispo Counties as well as along the California coast from San Diego to San Francisco. The loans are made to borrowers for purchasing or refinancing new or existing manufactured homes. The loans are
made under either fixed rate programs for terms of 10 to 20 years or adjustable-rate programs with terms of 25 to 30 years. The adjustable-rate loans generally have an initial fixed rate period of five years and then adjust annually subject to
interest rate caps.
HELOC
Home equity lines of credit (“HELOC”) held at the Bank are lines of credit collateralized by residential real estate. Typically, HELOCs are
collateralized by a second deed of trust. The combined loan-to-value, first trust deed and second trust deed, are not to exceed 75% on all HELOCs. The Bank is not actively originating new HELOCs.
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals. The Bank is not actively originating installment loans.
Single Family Real Estate Loans
Until the third quarter of 2015, the Company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-four
family homes. These loans were made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction or home improvement.
Loan Maturities and Sensitivity to Interest Rates
The following table sets forth the amount of loans outstanding by type of loan as of December 31, 2020 that were contractually due in one year or less,
more than one year and less than five years, and more than five years based on remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one
year or less. The tables also present an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment, refinancing or other
factors.
|
Due in One
Year or Less
|
Due After One
Year to Five Years
|
Due After
Five Years
|
Total
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Manufactured housing
|
||||||||||||||||
|
Floating rate
|
$
|
6,508
|
$
|
31,782
|
$
|
174,372
|
$
|
212,662
|
||||||||
|
Fixed rate
|
5,137
|
20,577
|
41,907
|
67,621
|
||||||||||||
|
Commercial real estate
|
||||||||||||||||
|
Floating rate
|
34,139
|
56,009
|
191,566
|
281,714
|
||||||||||||
|
Fixed rate
|
10,572
|
41,964
|
67,898
|
120,434
|
||||||||||||
|
Commercial
|
||||||||||||||||
|
Floating rate
|
7,516
|
15,905
|
42,041
|
65,462
|
||||||||||||
|
Fixed rate
|
3,636
|
11,444
|
309
|
15,389
|
||||||||||||
|
SBA
|
||||||||||||||||
|
Floating rate
|
1,052
|
74,168
|
6,223
|
81,443
|
||||||||||||
|
Fixed rate
|
—
|
—
|
—
|
—
|
||||||||||||
|
HELOC
|
||||||||||||||||
|
Floating rate
|
(8
|
)
|
3,752
|
117
|
3,861
|
|||||||||||
|
Fixed rate
|
—
|
—
|
—
|
—
|
||||||||||||
|
Single family real estate
|
||||||||||||||||
|
Floating rate
|
352
|
1,716
|
6,818
|
8,886
|
||||||||||||
|
Fixed rate
|
100
|
479
|
1,025
|
1,604
|
||||||||||||
|
Consumer
|
||||||||||||||||
|
Floating rate
|
—
|
—
|
—
|
—
|
||||||||||||
|
Fixed rate
|
24
|
3
|
106
|
133
|
||||||||||||
|
Total
|
$
|
69,028
|
$
|
257,799
|
$
|
532,382
|
$
|
859,209
|
||||||||
At December 31, 2020, total loans consisted of 76.1% with floating rates and 23.9% with fixed rates. Manufactured housing loans, which are generally
fixed rate for the first five years are included in floating rate loans during the fixed period.
The following table presents total gross loans based on remaining scheduled contractual repayments of principal as of the periods indicated:
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
Variable
Rate
|
Fixed
Rate
|
Variable
Rate
|
Fixed
Rate
|
Variable
Rate
|
Fixed
Rate
|
Variable
Rate
|
Fixed
Rate
|
Variable
Rate
|
|||||||||||||||||||||||||||||||
|
Less than one year
|
$
|
19,469
|
$
|
49,559
|
$
|
22,295
|
$
|
86,413
|
$
|
48,650
|
$
|
83,438
|
$
|
33,708
|
$
|
72,764
|
$
|
15,861
|
$
|
58,441
|
||||||||||||||||||||
|
One to five years
|
74,467
|
183,332
|
82,433
|
106,768
|
62,628
|
109,520
|
81,758
|
102,945
|
48,029
|
95,187
|
||||||||||||||||||||||||||||||
|
Over five years
|
111,245
|
421,137
|
59,767
|
418,001
|
56,598
|
407,817
|
54,233
|
389,975
|
44,041
|
369,883
|
||||||||||||||||||||||||||||||
|
Total
|
$
|
205,181
|
$
|
654,028
|
$
|
164,495
|
$
|
611,182
|
$
|
167,876
|
$
|
600,775
|
$
|
169,699
|
$
|
565,684
|
$
|
107,931
|
$
|
523,511
|
||||||||||||||||||||
|
Percentage of total
|
23.9
|
%
|
76.1
|
%
|
21.2
|
%
|
78.8
|
%
|
21.8
|
%
|
78.2
|
%
|
23.1
|
%
|
76.9
|
%
|
17.1
|
%
|
82.9
|
%
|
||||||||||||||||||||
COVID-19 Loan Modifications
In response to the COVID-19 pandemic, the Company has taken two primary approaches in assisting our clients by modifying terms of
existing loans and originating loans under the PPP. The Company has taken a proactive approach to assist its borrowers through individual evaluation and broad-based programs. Modifications granted to borrowers have been payment deferrals taking
the form of full payment deferrals. Based on the circumstances of the borrower, payments have been deferred either 90 days, with the option to extend, or 180 days. Consistent with the CARES Act provisions and Interagency Statement on "Loan
Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus," modifications granted to borrowers that are related to COVID-19 are not required to be evaluated as TDRs under ASC 310-40. These modified
loans are classified as performing and are not considered past due. Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no
longer considered short-term or the modification is deemed ineffective. The Company anticipates additional loans to be modified due to the effects of COVID-19 in the coming periods. At December 31, 2020, the Company had 13 COVID-19 related
modified loans with a total balance of $5.1 million. Through the date of this filing, the Company has not experienced any loan charge-offs caused by the
economic impact from COVID-19. Management has evaluated events related to COVID-19 that have occurred subsequent to December 31, 2020 and has concluded there are no matters that would require recognition in the accompanying consolidated financial statements.
The table below shows the breakdown of pandemic deferrals by loan segment:
|
December 31, 2020
|
September 30, 2020
|
June 30, 2020
|
||||||||||||||||||||||
|
Loan segment
|
Count
|
Balance
|
Count
|
Balance
|
Count
|
Balance
|
||||||||||||||||||
|
(in thousands)
|
(in thousands)
|
(in thousands)
|
||||||||||||||||||||||
|
Manufactured housing
|
8
|
$
|
1,261
|
116
|
$
|
15,984
|
142
|
$
|
19,903
|
|||||||||||||||
|
Commercial real estate
|
2
|
2,083
|
60
|
104,492
|
78
|
124,629
|
||||||||||||||||||
|
Commercial
|
3
|
1,767
|
24
|
8,520
|
36
|
10,825
|
||||||||||||||||||
|
SBA
|
—
|
—
|
—
|
—
|
1
|
17
|
||||||||||||||||||
|
HELOC
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Single family real estate
|
—
|
—
|
3
|
717
|
5
|
1,027
|
||||||||||||||||||
|
Consumer
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Total pandemic deferments
|
13
|
$
|
5,111
|
203
|
$
|
129,713
|
262
|
$
|
156,401
|
|||||||||||||||
High Risk Industries Impacted By COVID-19
The industries most heavily impacted include retail, healthcare, hospitality, schools, and energy. The Company’s management team has evaluated the loans related to the
affected industries and at December 31, 2020, the Bank’s loans to these industries were $179.2 million, which is 21.0% of our $857.6 million loan portfolio.
Importantly, of the selected industry loans, $3.0 million, or 1.66%, are on non-accrual. Also, for the impacted industries loans the classified loans are $16.9 million, or
9.43%. Lastly, the Bank has accommodated $2.1 million of these loans with payment deferrals, or 1.16% of the selected industries. Additional detail by industry is included in the table below.
As of 12/31/2020
(in thousands)
|
Loans Outstanding
(includes $11 million of
guarantees)
|
$ Non-
accrual
|
% Non-
accrual
|
$ Classified
|
%
Classified
|
$
Deferrals
|
%
Deferral
|
||||||||||||||||||||||
|
Healthcare
|
$
|
51,532
|
$
|
1,482
|
2.88
|
%
|
$
|
1,827
|
3.55
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Senior/Assisted Living Facilities
|
$
|
23,306
|
$
|
0
|
0.00
|
%
|
$
|
0
|
0.00
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Medical Offices
|
$
|
19,306
|
$
|
0
|
0.00
|
%
|
$
|
277
|
1.43
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
General Healthcare
|
$
|
8,920
|
$
|
1,482
|
16.63
|
%
|
$
|
1,550
|
17.38
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Hospitality
|
$
|
51,458
|
$
|
1,471
|
2.86
|
%
|
$
|
5,321
|
10.34
|
%
|
$
|
1,468
|
2.85
|
%
|
||||||||||||||
|
Lodging
|
$
|
40,546
|
$
|
1,469
|
3.62
|
%
|
$
|
2,593
|
6.39
|
%
|
$
|
1,468
|
3.62
|
%
|
||||||||||||||
|
Restaurants
|
$
|
10,912
|
$
|
2
|
0.02
|
%
|
$
|
2,728
|
25.00
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Retail Commercial Real Estate
|
$
|
56,692
|
$
|
16
|
0.03
|
%
|
$
|
9,610
|
16.95
|
%
|
$
|
614
|
1.08
|
%
|
||||||||||||||
|
Retail Services
|
$
|
17,628
|
$
|
0
|
0.00
|
%
|
$
|
18
|
0.10
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Schools
|
$
|
1,182
|
$
|
0
|
0.00
|
%
|
$
|
0
|
0.00
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Energy
|
$
|
680
|
$
|
0
|
0.00
|
%
|
$
|
114
|
16.74
|
%
|
$
|
0
|
0.00
|
%
|
||||||||||||||
|
Total
|
$
|
179,172
|
$
|
2,969
|
1.66
|
%
|
$
|
16,890
|
9.43
|
%
|
$
|
2,082
|
1.16
|
%
|
||||||||||||||
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the clients served in the market areas where the Company has branch offices in the Central Coast
of California. The Company monitors concentrations within selected categories such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate, and consumer loans to clients through branch
offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of
December 31, 2020 and 2019, manufactured housing loans comprised 32.6% and 33.2%, of total loans, respectively. As of December 31, 2020 and 2019, commercial real estate loans accounted for approximately 46.8% and 49.7% of total loans, respectively.
Approximately 28.9% and 31.9% of these commercial real estate loans were owner occupied at December 31, 2020 and 2019, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 53.8% and 54.8%
at December 31, 2020 and 2019, respectively. The Company was within established policy limits at December 31, 2020 and 2019.
Interest Reserves
Interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and
land development loan. The Company’s practice is to monitor the construction, sales and/or leasing progress to determine the feasibility of ongoing construction and development projects. If, at any time during the life of the loan, the project is
determined not to be viable, the Company discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and/or legal action as deemed appropriate. At December 31, 2020, the Company
had 5 loans with an outstanding balance of $13.0 million with available interest reserves of $1.1
million. Total construction and land loans are approximately 3% and 5% of the Company’s loan portfolio at December 31, 2020 and 2019, respectively.
Impaired loans
A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of
principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest
payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the
possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to
the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment. All other loans are measured for impairment based on the present value of future cash flows. Impairment is
measured on a loan-by-loan basis for all impaired loans in the portfolio.
A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial
difficulty. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans
are also considered impaired.
The recorded investment in loans that are considered impaired is as follows:
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Impaired loans with specific valuation allowances
|
$
|
5,081
|
$
|
6,172
|
$
|
9,744
|
$
|
12,352
|
$
|
4,463
|
||||||||||
|
Impaired loans without specific valuation allowances
|
7,418
|
6,656
|
14,159
|
8,275
|
13,080
|
|||||||||||||||
|
Specific valuation allowance related to impaired loans
|
(311
|
)
|
(352
|
)
|
(465
|
)
|
(524
|
)
|
(759
|
)
|
||||||||||
|
Impaired loans, net
|
$
|
12,188
|
$
|
12,476
|
$
|
23,438
|
$
|
20,103
|
$
|
16,784
|
||||||||||
|
Average investment in impaired loans
|
$
|
12,351
|
$
|
18,504
|
$
|
20,731
|
$
|
16,484
|
$
|
17,285
|
||||||||||
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 December 31, 2020:
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Recorded Investment:
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
4,402
|
$
|
230
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
449
|
$
|
—
|
$
|
5,081
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
2,294
|
1,468
|
1,504
|
292
|
—
|
1,860
|
—
|
7,418
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
6,696
|
1,698
|
1,504
|
292
|
—
|
2,309
|
—
|
12,499
|
||||||||||||||||||||||||
|
Related Allowance for Loan Losses
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
279
|
16
|
—
|
—
|
—
|
16
|
—
|
311
|
||||||||||||||||||||||||
|
Impaired loans with no allowance recorded
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
279
|
16
|
—
|
—
|
—
|
16
|
—
|
311
|
||||||||||||||||||||||||
|
Total impaired loans, net
|
$
|
6,417
|
$
|
1,682
|
$
|
1,504
|
$
|
292
|
$
|
—
|
$
|
2,293
|
$
|
—
|
$
|
12,188
|
||||||||||||||||
$0.7 million of the above impaired loans are government guaranteed.
|
Manufactured
Housing
|
Commercial
Real Estate
|
Commercial
|
SBA
|
HELOC
|
Single Family
Real
Estate
|
Consumer
|
Total
Loans
|
|||||||||||||||||||||||||
|
Impaired Loans as of December 31, 2019:
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Recorded Investment:
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
5,702
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
470
|
$
|
—
|
$
|
6,172
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
2,296
|
318
|
1,802
|
382
|
—
|
1,858
|
—
|
6,656
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
7,998
|
318
|
1,802
|
382
|
—
|
2,328
|
—
|
12,828
|
||||||||||||||||||||||||
|
Related Allowance for Loan Losses
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
334
|
—
|
—
|
—
|
—
|
18
|
—
|
352
|
||||||||||||||||||||||||
|
Impaired loans with no allowance recorded
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
334
|
—
|
—
|
—
|
—
|
18
|
—
|
352
|
||||||||||||||||||||||||
|
Total impaired loans, net
|
$
|
7,664
|
$
|
318
|
$
|
1,802
|
$
|
382
|
$
|
—
|
$
|
2,310
|
$
|
—
|
$
|
12,476
|
||||||||||||||||
$0.6 million of the above impaired loans are government guaranteed.
Total impaired loans decreased by $0.3 million at December 31, 2020 compared to December 31, 2019. The manufactured housing impaired loans decreased by
$1.3 million and commercial impaired loans decreased by $0.3 million in 2020 compared to 2019. SBA impaired loans decreased by $0.1 million in 2020 compared to 2019. These decreases were partially offset by one new SBA 504 impaired loan of $1.5
million. Impaired manufactured housing loans decreased mainly due to upgrades and payoffs of existing loans.
The following schedule reflects recorded investment in certain types of loans at the dates indicated:
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Total nonaccrual loans
|
$
|
3,872
|
$
|
2,679
|
$
|
6,226
|
$
|
6,844
|
$
|
3,117
|
||||||||||
|
Government guaranteed portion of loans included above
|
(207
|
)
|
(290
|
)
|
(2,848
|
)
|
(2,372
|
)
|
(742
|
)
|
||||||||||
|
Total nonaccrual loans without government guarantees
|
$
|
3,665
|
$
|
2,389
|
$
|
3,378
|
$
|
4,472
|
$
|
2,375
|
||||||||||
|
TDR loans, gross
|
$
|
11,141
|
$
|
10,774
|
$
|
16,749
|
$
|
16,603
|
$
|
14,437
|
||||||||||
|
Loans 30 through 89 days past due with interest accruing
|
$
|
1,889
|
$
|
1,947
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
Allowance for loan losses to gross loans held for investment
|
1.23
|
%
|
1.19
|
%
|
1.21
|
%
|
1.24
|
%
|
1.31
|
%
|
||||||||||
|
Interest income recognized on impaired loans
|
$
|
758
|
$
|
1,001
|
$
|
1,324
|
$
|
1,142
|
$
|
1,148
|
||||||||||
|
Interest income that would have been recorded under the original terms of nonaccrual loans
|
$
|
254
|
$
|
512
|
$
|
454
|
$
|
379
|
$
|
412
|
||||||||||
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 usually no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.
Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
The following table summarizes the composition of nonaccrual loans:
|
At December 31, 2020
|
At December 31, 2019
|
|||||||||||||||||||||||
|
Nonaccrual
Balance
|
%
|
Percent of
Total Loans
|
Nonaccrual
Balance
|
%
|
Percent of
Total Loans
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Manufactured housing
|
$
|
614
|
15.86
|
%
|
0.07
|
%
|
$
|
594
|
22.17
|
%
|
0.08
|
%
|
||||||||||||
|
Commercial real estate
|
1,469
|
37.94
|
%
|
0.17
|
%
|
84
|
3.14
|
%
|
0.01
|
%
|
||||||||||||||
|
Commercial
|
1,390
|
35.90
|
%
|
0.16
|
%
|
1,619
|
60.43
|
%
|
0.21
|
%
|
||||||||||||||
|
SBA
|
275
|
7.10
|
%
|
0.03
|
%
|
382
|
14.26
|
%
|
0.05
|
%
|
||||||||||||||
|
HELOC
|
—
|
0.00
|
%
|
0.00
|
%
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||||||
|
Single family real estate
|
124
|
3.20
|
%
|
0.01
|
%
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||||||
|
Consumer
|
—
|
0.00
|
%
|
0.00
|
%
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||||||
|
Total nonaccrual loans
|
$
|
3,872
|
100.00
|
%
|
0.44
|
%
|
$
|
2,679
|
100.00
|
%
|
0.35
|
%
|
||||||||||||
Total nonaccrual balances increased $1.2 million to $3.9 million at December 31, 2020, from $2.7 million at December 31, 2019. Nonaccrual balances
include $0.2 million and $0.3 million of loans that are government guaranteed at December 31, 2020 and 2019, respectively. Nonaccrual loans net of government guarantees increased $1.3 million or 54%, from $2.4 million at December 31, 2019 to $3.7
million at December 31, 2020. The percentage of nonaccrual loans to the total loan portfolio has increased to 0.43% as of December 31, 2020 from 0.31% at December 31, 2019.
CWB or the SBA repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days. After the foreclosure and
collection process is complete, the SBA reimburses CWB for this principal balance. Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.
Allowance for Loan Losses
The following table summarizes the activity in our allowance for loan losses for the periods indicated.
|
Year Ended December 31,
|
||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||
|
Allowance for loan losses:
|
(dollars in thousands)
|
|||||||||||||||||||
|
Balance at beginning of period
|
$
|
8,717
|
$
|
8,691
|
$
|
8,420
|
$
|
7,464
|
$
|
6,916
|
||||||||||
|
Provision (credit) charged to operating expenses:
|
||||||||||||||||||||
|
Manufactured housing
|
401
|
(66
|
)
|
(98
|
)
|
(44
|
)
|
(1,329
|
)
|
|||||||||||
|
Commercial real estate
|
653
|
137
|
169
|
888
|
1,722
|
|||||||||||||||
|
Commercial
|
84
|
(77
|
)
|
138
|
(269
|
)
|
166
|
|||||||||||||
|
SBA
|
79
|
(97
|
)
|
(127
|
)
|
(180
|
)
|
(490
|
)
|
|||||||||||
|
HELOC
|
(8
|
)
|
(68
|
)
|
(57
|
)
|
(26
|
)
|
(29
|
)
|
||||||||||
|
Single family real estate
|
15
|
3
|
(11
|
)
|
42
|
(87
|
)
|
|||||||||||||
|
Consumer
|
(1
|
)
|
3
|
—
|
—
|
(1
|
)
|
|||||||||||||
|
Total provision (credit)
|
1,223
|
(165
|
)
|
14
|
411
|
(48
|
)
|
|||||||||||||
|
Recoveries of loans previously charged-off:
|
||||||||||||||||||||
|
Manufactured housing
|
27
|
54
|
120
|
142
|
128
|
|||||||||||||||
|
Commercial real estate
|
80
|
52
|
15
|
249
|
132
|
|||||||||||||||
|
Commercial
|
133
|
60
|
66
|
161
|
136
|
|||||||||||||||
|
SBA
|
7
|
50
|
133
|
177
|
266
|
|||||||||||||||
|
HELOC
|
6
|
5
|
55
|
18
|
86
|
|||||||||||||||
|
Single family real estate
|
1
|
1
|
1
|
1
|
93
|
|||||||||||||||
|
Consumer
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Total recoveries
|
254
|
222
|
390
|
748
|
841
|
|||||||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Manufactured housing
|
—
|
—
|
6
|
119
|
123
|
|||||||||||||||
|
Commercial real estate
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Commercial
|
—
|
31
|
127
|
—
|
—
|
|||||||||||||||
|
SBA
|
—
|
—
|
—
|
30
|
121
|
|||||||||||||||
|
HELOC
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Single family real estate
|
—
|
—
|
—
|
54
|
—
|
|||||||||||||||
|
Consumer
|
—
|
—
|
—
|
—
|
1
|
|||||||||||||||
|
Total charged-off
|
—
|
31
|
133
|
203
|
245
|
|||||||||||||||
|
Net charge-offs (recoveries)
|
(254
|
)
|
(191
|
)
|
(257
|
)
|
(545
|
)
|
(596
|
)
|
||||||||||
|
Balance at end of period
|
$
|
10,194
|
$
|
8,717
|
$
|
8,691
|
$
|
8,420
|
$
|
7,464
|
||||||||||
|
Net charge-offs (recoveries) to average loans outstanding
|
(0.03
|
)%
|
(0.02
|
)%
|
(0.03
|
)%
|
(0.08
|
)%
|
(0.10
|
)%
|
||||||||||
|
Allowance for loan losses to gross loans including held for sale loans
|
1.19
|
%
|
1.12
|
%
|
1.13
|
%
|
1.15
|
%
|
1.18
|
%
|
||||||||||
The following table summarizes the allocation of allowance for loan losses by loan type. However, allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other categories:
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2020
|
2019
|
2018
|
2017
|
2016
|
||||||||||||||||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Amount
|
% of Loans in
Each Category
to Gross Loans
|
Amount
|
% of Loans in
Each Category
to Gross Loans
|
Amount
|
% of Loans in
Each Category
to Gross Loans
|
Amount
|
% of Loans in
Each Category
to Gross Loans
|
Amount
|
% of Loans in
Each Category
to Gross Loans
|
|||||||||||||||||||||||||||||||
|
Manufactured housing
|
$
|
2,612
|
32.6
|
%
|
$
|
2,184
|
33.2
|
%
|
$
|
2,196
|
32.1
|
%
|
$
|
2,180
|
30.3
|
%
|
$
|
2,201
|
30.8
|
%
|
||||||||||||||||||||
|
Commercial real estate
|
5,950
|
46.9
|
%
|
5,217
|
49.7
|
%
|
5,028
|
47.6
|
%
|
4,844
|
48.2
|
%
|
3,707
|
43.1
|
%
|
|||||||||||||||||||||||||
|
Commercial
|
1,379
|
9.4
|
%
|
1,162
|
13.1
|
%
|
1,210
|
15.4
|
%
|
1,133
|
15.2
|
%
|
1,241
|
16.7
|
%
|
|||||||||||||||||||||||||
|
SBA
|
118
|
9.5
|
%
|
32
|
1.9
|
%
|
79
|
2.5
|
%
|
73
|
3.6
|
%
|
106
|
5.8
|
%
|
|||||||||||||||||||||||||
|
HELOC
|
25
|
0.4
|
%
|
27
|
0.6
|
%
|
90
|
0.9
|
%
|
92
|
1.3
|
%
|
100
|
1.6
|
%
|
|||||||||||||||||||||||||
|
Single family real estate
|
108
|
1.2
|
%
|
92
|
1.5
|
%
|
88
|
1.5
|
%
|
98
|
1.4
|
%
|
109
|
2.0
|
%
|
|||||||||||||||||||||||||
|
Consumer
|
2
|
0.0
|
%
|
3
|
0.0
|
%
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
|||||||||||||||||||||||||
|
Total
|
$
|
10,194
|
100.0
|
%
|
$
|
8,717
|
100.0
|
%
|
$
|
8,691
|
100.0
|
%
|
$
|
8,420
|
100.0
|
%
|
$
|
7,464
|
100.0
|
%
|
||||||||||||||||||||
Total allowance for loan losses increased by $1.5 million to $10.2 million at December 31, 2020 compared to the prior year. In addition, the Company had
net recoveries of $0.3 million in 2020 compared to net recoveries of $0.2 million in 2019.
Potential Problem Loans
The Company classifies loans consistent with federal banking regulations. These loan grades are described in further detail in “Item 8. Note 1, Summary
of Significant Accounting Policies” of this Form 10-K. The following table presents information regarding potential problem loans consisting of loans graded Special Mention or worse, but still performing:
|
December 31, 2020
|
||||||||||||||||
|
Number
of Loans
|
Loan
Balance (1)
|
Percent
|
Percent of
Total Loans
|
|||||||||||||
|
(dollars in thousands)
|
||||||||||||||||
|
Manufactured housing
|
6
|
$
|
370
|
1.28
|
%
|
0.04
|
%
|
|||||||||
|
Commercial real estate
|
25
|
21,984
|
76.20
|
%
|
2.56
|
%
|
||||||||||
|
Commercial
|
13
|
5,645
|
19.57
|
%
|
0.66
|
%
|
||||||||||
|
SBA
|
4
|
845
|
2.93
|
%
|
0.10
|
%
|
||||||||||
|
HELOC
|
—
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||
|
Single family real estate
|
1
|
5
|
0.02
|
%
|
0.00
|
%
|
||||||||||
|
Consumer
|
—
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||
|
Total
|
49
|
$
|
28,849
|
100.00
|
%
|
3.36
|
%
|
|||||||||
| (1) |
Loan balance includes $2.1 million guaranteed by government agencies.
|
|
December 31, 2019
|
||||||||||||||||
|
Number
of Loans
|
Loan
Balance (1)
|
Percent
|
Percent of
Total Loans
|
|||||||||||||
|
(dollars in thousands)
|
||||||||||||||||
|
Manufactured housing
|
2
|
$
|
163
|
1.92
|
%
|
0.02
|
%
|
|||||||||
|
Commercial real estate
|
5
|
5,824
|
68.60
|
%
|
0.75
|
%
|
||||||||||
|
Commercial
|
2
|
1,699
|
20.01
|
%
|
0.22
|
%
|
||||||||||
|
SBA
|
5
|
799
|
9.41
|
%
|
0.10
|
%
|
||||||||||
|
HELOC
|
—
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||
|
Single family real estate
|
1
|
5
|
0.06
|
%
|
0.00
|
%
|
||||||||||
|
Consumer
|
—
|
—
|
0.00
|
%
|
0.00
|
%
|
||||||||||
|
Total
|
15
|
$
|
8,490
|
100.00
|
%
|
1.09
|
%
|
|||||||||
| (1) |
Loan balance includes $1.5 million guaranteed by government agencies.
|
Investment Securities
Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including
asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale
securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale
securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits and to manage
liquidity, capital, and interest rate risk.
The carrying value of investment securities for the years indicated was as follows:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
U.S. government agency notes
|
$
|
6,472
|
$
|
8,048
|
$
|
12,070
|
||||||
|
U.S. government agency mortgage-backed securities ("MBS")
|
4,586
|
6,132
|
7,301
|
|||||||||
|
U.S. government agency collateralized mortgage obligations ("CMO")
|
7,785
|
11,216
|
12,861
|
|||||||||
|
Other securities
|
3,051
|
—
|
—
|
|||||||||
|
Equity securities: Farmer Mac class A stock
|
149
|
167
|
121
|
|||||||||
|
Total
|
$
|
22,043
|
$
|
25,563
|
$
|
32,353
|
||||||
The weighted average yields of investment securities by maturity period were as follows at December 31, 2020:
|
December 31, 2020
|
||||||||||||||||||||||||||||||||||||||||
|
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
|
$
|
—
|
—
|
$
|
784
|
0.6
|
%
|
$
|
5,688
|
1.7
|
%
|
$
|
—
|
—
|
$
|
6,472
|
1.2
|
%
|
||||||||||||||||||||||
|
U.S. government agency CMO
|
820
|
1.7
|
%
|
5,832
|
0.6
|
%
|
1,133
|
0.8
|
%
|
—
|
—
|
7,785
|
2.3
|
%
|
||||||||||||||||||||||||||
|
Other securities
|
—
|
—
|
3,051
|
4.8
|
%
|
—
|
—
|
—
|
—
|
3,051
|
4.8
|
%
|
||||||||||||||||||||||||||||
|
Total
|
$
|
820
|
—
|
$
|
9,667
|
1.9
|
%
|
$
|
6,821
|
1.5
|
%
|
$
|
—
|
—
|
$
|
17,308
|
1.6
|
%
|
||||||||||||||||||||||
|
Securities held-to-maturity
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. government agency MBS
|
$
|
—
|
—
|
$
|
3,821
|
2.8
|
%
|
$
|
765
|
3.6
|
%
|
$
|
—
|
—
|
$
|
4,586
|
2.9
|
%
|
||||||||||||||||||||||
|
Total
|
$
|
—
|
—
|
$
|
3,821
|
2.8
|
%
|
$
|
765
|
3.6
|
%
|
$
|
—
|
—
|
$
|
4,586
|
2.9
|
%
|
||||||||||||||||||||||
|
Securities measured at fair value
|
||||||||||||||||||||||||||||||||||||||||
|
Farmer Mac class A stock
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
149
|
—
|
|||||||||||||||||||||||||
|
Total
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
149
|
—
|
|||||||||||||||||||||||||
Expected maturities may differ from contractual maturities because borrowers or issuers have the right to call or prepay certain investment securities.
Changes in interest rates may also impact prepayment or call options.
The Company does not own any subprime mortgage-backed securities (“MBS”) in its investment portfolio. Gross unrealized losses at December 31, 2020 are
primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has reviewed all securities on which there was an unrealized loss in accordance with its accounting policy for other than
temporary impaired (“OTTI”) described in “Item 8. Note 2 in this Form 10-K, “Investment Securities” and determined no impairment was required. At December 31, 2020, the Company had the intent and the ability to retain its investments for a period of
time sufficient to allow for any anticipated recovery in fair value.
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Balance, beginning of period
|
$
|
2,524
|
$
|
—
|
$
|
372
|
||||||
|
Additions
|
106
|
3,401
|
174
|
|||||||||
|
Proceeds from dispositions
|
—
|
(844
|
)
|
(484
|
)
|
|||||||
|
Gains (losses) on sales, net
|
(16
|
)
|
(33
|
)
|
(62
|
)
|
||||||
|
Balance, end of period
|
$
|
2,614
|
$
|
2,524
|
$
|
—
|
||||||
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets
(primarily manufactured housing) are classified as other real estate owned and other repossessed assets and are reported at fair value at the time of foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets
are capitalized and costs related to holding the assets are charged to expense. At December 31, 2020 and 2019, the Company had $0.1 million and $0.2 million valuation allowance on foreclosed assets, respectively. At December 31, 2018, the Company
had no valuation allowance on foreclosed assets.
Deposits
The average balances by deposit type as of the dates presented below:
|
Year Ended December 31,
|
||||||||||||||||||||||||
|
2020
|
2019
|
2018
|
||||||||||||||||||||||
|
Average
Balance
|
Percent of
Total
|
Average
Balance
|
Percent of
Total
|
Average
Balance
|
Percent of
Total
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Non-interest-bearing demand deposits
|
$
|
169,696
|
23.2
|
%
|
$
|
116,887
|
16.1
|
%
|
$
|
111,246
|
15.6
|
%
|
||||||||||||
|
Interest-bearing demand deposits
|
314,659
|
43.1
|
%
|
289,798
|
39.9
|
%
|
265,974
|
37.2
|
%
|
|||||||||||||||
|
Savings
|
17,419
|
2.4
|
%
|
15,650
|
2.2
|
%
|
14,458
|
2.0
|
%
|
|||||||||||||||
|
Time deposits of $100,000 or more
|
82,583
|
11.3
|
%
|
144,711
|
19.9
|
%
|
181,472
|
25.4
|
%
|
|||||||||||||||
|
Other time deposits
|
146,527
|
20.0
|
%
|
158,976
|
21.9
|
%
|
141,501
|
19.8
|
%
|
|||||||||||||||
|
Total deposits
|
$
|
730,884
|
100.0
|
%
|
$
|
726,022
|
100.0
|
%
|
$
|
714,651
|
100.0
|
%
|
||||||||||||
Total deposits increased to $766.2 million at December 31, 2020 from $750.9 million at December 31, 2019, an increase of $15.3 million.
Non-interest-bearing demand deposits increased by $71 million to $181.8 million at December 31, 2020 compared to December 31, 2019. Interest-bearing demand deposits increased by $83.8 million to $398.1 million at December 31, 2020 compared to $314.3
million at December 31, 2019. Certificates of deposits decreased by $142.6 million to $167.5 million at December 31, 2020 compared to $310.1 million at December 31, 2019. In addition, the Bank is a member of Certificate of Deposit Account Registry
Service (“CDARS”) and Insured Cash Sweep ("ICS") services. Both CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits. At December 31, 2020 and 2019, the Company had $24.7 million and $28.7 million, respectively of CDARS
deposits. At December 31, 2020 and 2019, the Company had $77.2 million and $54.5 million, respectively of ICS deposits.
Time Certificates of Deposits
The following table presents TCD maturities:
|
December 31,
|
||||||||||||||||
|
2020
|
2019
|
|||||||||||||||
|
TCDs Over
$ 100,000
|
Other
TCDs
|
TCDs Over
$ 100,000
|
Other
TCDs
|
|||||||||||||
|
Less than three months
|
$
|
38,332
|
$
|
66,504
|
$
|
62,802
|
$
|
12,623
|
||||||||
|
Three to six months
|
17,404
|
1,896
|
70,761
|
46,010
|
||||||||||||
|
Six to twelve months
|
16,839
|
1,938
|
33,630
|
46,698
|
||||||||||||
|
Over twelve months
|
22,798
|
1,800
|
21,831
|
15,769
|
||||||||||||
|
Total TCDs
|
$
|
95,373
|
$
|
72,138
|
$
|
189,024
|
$
|
121,100
|
||||||||
The Company’s deposits may fluctuate as a result of local and national economic conditions. Management does not believe that deposit levels are
influenced by seasonal factors.
The Company utilizes money desk and brokered deposits in accordance with strategic and liquidity planning.
Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
FHLB and FRB PPPLF Advances
|
(in thousands)
|
|||||||||||
|
Maximum month-end balance
|
$
|
200,103
|
$
|
65,000
|
$
|
75,000
|
||||||
|
Balance at year end
|
105,000
|
65,000
|
70,000
|
|||||||||
|
Average balance
|
132,855
|
49,414
|
40,551
|
|||||||||
|
Other Borrowings
|
||||||||||||
|
Maximum month-end balance
|
10,000
|
5,750
|
6,843
|
|||||||||
|
Balance at year end
|
—
|
—
|
5,000
|
|||||||||
|
Average balance
|
6,940
|
1,631
|
5,463
|
|||||||||
|
Total borrowed funds
|
$
|
105,000
|
$
|
65,000
|
$
|
75,000
|
||||||
|
Weighted average interest rate at end of year
|
1.03
|
%
|
2.29
|
%
|
2.77
|
%
|
||||||
|
Weighted average interest rate during the year
|
1.27
|
%
|
2.48
|
%
|
2.41
|
%
|
||||||
FHLB and FRB Advances
The Company utilizes borrowed funds to support liquidity needs. The Company’s borrowing capacity at FHLB and FRB is determined based on collateral
pledged, generally consisting of securities and loans. At December 31, 2020, no advances were outstanding from the FRB.
Other Borrowing
The Company has a revolving line of credit agreement for up to $10.0 million. The line of credit matures July 30, 2022. The Company must maintain a compensating deposit with
the lender of 25% of the outstanding principal balance in a non-interest-bearing deposit account. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a minimum total risked
based capital ratio of 10.0%. At December 31, 2020, the line of credit balance was zero.
Preferred Stock
There are no shares of the Company's preferred stock outstanding as of December 31, 2020 and 2019.
Capital Resources
The federal banking agencies have adopted risk-based capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank
holding companies and banks. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015 and ending January 1,
2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amended the
regulatory risk-based capital rules applicable to the Company. Basel III redefined the regulatory capital elements and minimum capital ratios, introduced regulatory capital buffers above those minimums, revised rules for calculating risk-weighted
assets and added a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community
bank leverage ratio framework. The final rule was effective January 1, 2020. Under this framework, the Bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined
as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A
CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020.
The following table illustrates the Bank’s regulatory ratios and the current adequacy guidelines as of December 31, 2020 and 2019. The fully-phased in
guidelines applicable on January 1, 2019 are also summarized.
|
Total
Capital
(To Risk-
Weighted
Assets)
|
Tier 1
Capital
(To Risk-
Weighted
Assets)
|
Common
Equity
Tier 1
(To Risk-
Weighted
Assets)
|
Leverage
Ratio/Tier 1
Capital
(To Average
Assets)
|
Community
Banking
Leverage
Ratio
|
||||||||||||||||
|
December 31, 2020
|
||||||||||||||||||||
|
CWB's actual regulatory ratios
|
12.27
|
%
|
11.02
|
%
|
11.02
|
%
|
9.29
|
%
|
9.29
|
%
|
||||||||||
|
Minimum capital requirements
|
8.00
|
%
|
6.00
|
%
|
4.50
|
%
|
4.00
|
%
|
8.00
|
%
|
||||||||||
|
Well-capitalized requirements
|
10.00
|
%
|
8.00
|
%
|
6.50
|
%
|
N/A
|
8.00
|
%
|
|||||||||||
|
Minimum capital requirements including fully-phased in capital conservation buffer
|
10.50
|
%
|
8.50
|
%
|
7.00
|
%
|
N/A
|
N/A
|
||||||||||||
|
December 31, 2019
|
||||||||||||||||||||
|
CWB's actual regulatory ratios
|
11.41
|
%
|
10.28
|
%
|
10.28
|
%
|
9.06
|
%
|
||||||||||||
|
Minimum capital requirements
|
8.00
|
%
|
6.00
|
%
|
4.50
|
%
|
4.00
|
%
|
||||||||||||
|
Well-capitalized requirements
|
10.00
|
%
|
8.00
|
%
|
6.50
|
%
|
N/A
|
|||||||||||||
|
Minimum capital requirements including fully-phased in capital conservation buffer
|
10.50
|
%
|
8.50
|
%
|
7.00
|
%
|
N/A
|
|||||||||||||
Contractual Obligations and Off-Balance Sheet Arrangements
The Company enters into contracts for services in the ordinary course of business that may require payment for services to be provided in the future and
may contain penalty clauses for early termination of the contracts. To meet the financing needs of clients, the Company has financial instruments with off-balance sheet risk, including commitments to extend credit and standby letters of credit. The
Company does not believe that these off-balance sheet arrangements have or are reasonably likely to have a material effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources. However, there can be no assurance that such arrangements will not have a future effect.
The following table sets forth our significant contractual obligations as of December 31, 2020.
|
Payments Due by Period
|
||||||||||||||||||||
|
Total
|
Less Than 1
Year
|
1 to 3
Years
|
3 to 5
Years
|
After 5
Years
|
||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||
|
Time deposit maturities
|
$
|
167,511
|
$
|
142,914
|
$
|
21,677
|
$
|
2,920
|
$
|
—
|
||||||||||
|
FHLB advances
|
105,000
|
15,000
|
45,000
|
45,000
|
—
|
|||||||||||||||
|
Other borrowings
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||
|
Purchase obligations
|
6,017
|
2,925
|
2,600
|
492
|
—
|
|||||||||||||||
|
Operating lease obligations
|
6,867
|
992
|
1,700
|
1,589
|
2,586
|
|||||||||||||||
|
Total
|
$
|
287,873
|
$
|
162,477
|
$
|
71,284
|
$
|
51,526
|
$
|
2,586
|
||||||||||
Purchase obligations primarily related to contracts for software licensing and maintenance and outsourced service providers. Off-balance sheet
commitments associated with outstanding letters of credit, commitments to extend credit, and overdraft lines as of December 31, 2020 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire
unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.
|
Amount of Commitment by Period of Expiration
|
||||||||||||||||||||
|
Total
Commitments
|
Less Than
1 Year
|
1 to 3
Years
|
3 to 5
Years
|
After 5
Years
|
||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||
|
Commitments to extend credit
|
$
|
61,022
|
$
|
35,954
|
$
|
16,681
|
$
|
4,802
|
$
|
3,585
|
||||||||||
|
Standby letters of credit
|
51
|
51
|
—
|
—
|
—
|
|||||||||||||||
|
Total
|
$
|
61,073
|
$
|
36,005
|
$
|
16,681
|
$
|
4,802
|
$
|
3,585
|
||||||||||
Critical Accounting Policies
The Notes to Consolidated Financial Statements contain a discussion of our significant accounting policies, including information regarding recently
issued accounting pronouncements, our adoption of such policies and the related impact of their adoption. We believe that certain of these policies, along with various estimates that we are required to make in recording our financial transactions,
are important to have a complete understanding of our financial position. In addition, these estimates require us to make complex and subjective judgments, many of which include matters with a high degree of uncertainty. See “Item 8. Financial
Statements and Supplementary Data - Note 1. Summary of Significant Accounting Policies for a discussion of these critical accounting policies and significant estimates.
Liquidity
Liquidity for a bank is the ongoing ability to fund asset growth and business operations, to accommodate liability maturities and deposit withdrawals and
meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in
asset and liability levels due to changes in our business operations or unanticipated events.
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors, and
regulators. CWB's available liquidity, represented by cash and amounts due from banks, federal funds sold and non-pledged marketable securities. CWB manages its liquidity risk through operating, investing, and financing activities. In order to ensure
funds are available when necessary, on at least a quarterly basis, CWB projects the amount of funds that will be required and strive to maintain relationships with a diversified client base. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets. The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. In addition, loans and securities are pledged to the FHLB providing $81.4 million in available borrowing
capacity as of December 31, 2020. Loans pledged to the FRB discount window provided $102.7 million in borrowing capacity. As of December 31, 2020, there were no outstanding borrowings from the FRB.
The Bank 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. CWB’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 Bank has asset/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues.
The Company through CWB has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans
and securities. Total FHLB advances were $105.0 million and $65.0 million at December 31, 2020 and 2019, respectively, borrowed at fixed rates. At December 31, 2020, CWB had pledged to FHLB, securities of $18.9 million at carrying value and loans of
$304.7 million. At December 31, 2019, the Company had pledged to FHLB, securities of $25.6 million at carrying value and loans of $324.2 million, and had $60.5 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. There were no advances
outstanding as of December 31, 2020 and unused borrowing capacity was $102.7 million.
The Company also maintains federal funds purchased lines with a total borrowing capacity of $20.0 million. There was no amount outstanding as of December
31, 2020 and 2019.
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core
deposits. The liquidity ratio of the Bank was 14% and 15%, at December 31, 2020 and December 31, 2019, respectively. The Bank’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and
due from banks, deposits in other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources for its
liquidity. CWBC’s routine funding requirements primarily consisted of certain operating expenses, common stock dividends and interest payments on the other borrowings. CWBC obtains funding to meet its obligations from dividends collected from CWB
and fees charged for services provided to CWB and has the capability to issue equity and debt securities. Federal banking laws and regulatory requirements regulate the amount of dividends that may be paid by a banking subsidiary without prior
approval.
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include lag, repricing, basis, and prepayment risk.
Lag risk results from the inherent timing difference between the repricing of the Company’s adjustable-rate assets and liabilities. For instance, certain
loans tied to the prime rate index may only reprice on a quarterly basis. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.
Repricing risk is caused by the mismatch in the maturities or repricing periods between interest-earning assets and interest-bearing liabilities. If CWB
was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This happens because loans tend to reprice more quickly than funding sources.
Basis risk is due to item pricing tied to different indices which tend to react differently. CWB’s variable products are mainly priced off the treasury
and prime rates.
Prepayment risk results from borrowers paying down or paying off their loans prior to maturity. Prepayments on fixed-rate products increase in falling
interest rate environments and decrease in rising interest rate environments. A majority of CWB’s loans have adjustable rates and are reset based on changes in the treasury and prime rates.
The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. In addition, increases in
interest rates may reduce the amount of loan and commitment fees received by CWB.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as funding sources. CWB can sell a portion of its FSA and SBA loan originations. While the Company has some
interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. The Company has not used derivative instruments to help manage risk, but will consider such instruments in the future
if the perceived need should arise.
For further discussion regarding the impact to the Company of interest rate changes, see “Item 7A. Quantitative and Qualitative Disclosure about Market
Risk.”
Litigation
See “Part 1. Item 3: Legal Proceedings” of this Form 10-K.
SUPERVISION AND REGULATION
Introduction
CWBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and examined by
the Board of Governors of the Federal Reserve System (the “FRB”). In addition to the regulation of the Company by the FRB, CWB is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency
(“OCC”). The Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain prescribed limits. The Company is also subject to jurisdiction of the Securities and Exchange Commission ("SEC") and to the disclosure and
regulatory requirements of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), and through the listing of the common stock on the NASDAQ Capital Select Market, the Company is subject to the
rules of NASDAQ.
Banking is a complex, highly regulated industry. The primary goals of the rules and regulations are to maintain a safe and sound banking system, protect
depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern
banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by Management decisions and general economic conditions, but also by the requirements of
applicable state and federal statues, regulations, and the policies of various governmental regulatory authorities.
From time-to-time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting, or expanding the scope of
permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations of banks and bank holding companies are frequently
made in Congress and by various bank and other regulatory agencies. Future changes in the laws, regulations or polices that impact CWBC and CWB cannot necessarily be predicted, but they may have a material effect on the business and earnings of the
Company.
Securities Registration and Listing
CWBC’s common stock is registered with the SEC under the Exchange Act and, therefore, is subject to the information, proxy solicitation, insider trading,
corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act both administered by the SEC. CWBC is required to file annual, quarterly, and other current reports with the SEC. The SEC
maintains an Internet site, http://www.sec.gov, at which CWBC’s filings with the SEC may be accessed. CWBC’s SEC filings are also available on its website at www.communitywest.com.
CWBC’s common stock is listed on the NASDAQ Capital Market and trade under the symbol “CWBC.” As a company listed on the NASDAQ Capital Market, CWBC is
subject to NASDAQ standards for listed companies. CWBC is also subject to certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”), the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”), and other federal and state laws and regulations that govern financial presentations, corporate governance requirements for board audit and compensation committees and their members, and disclosure
of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are
intended to allow shareholders and investors to monitor the performance of companies and their directors more easily and efficiently.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act was signed into law in 2010 to affect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank
Act created the Financial Stability Oversight Council to identify systemic risks in the financial system and oversee and coordinate the actions of the U.S. financial regulatory agencies.
The Dodd-Frank Act and the regulations promulgated thereunder require, among other things, that: (i) the consolidated capital requirements of depository
holding companies must be not less stringent than those applied to depository institutions; (ii) the reserve ratio of the Deposit Insurance Fund must increase from 1.15% to 1.35%; (iii) publicly traded companies, such as CWBC, must provide their
stockholders with a non-binding vote on executive compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (iv) the deposit
insurance amounts for banks, savings institutions and credit unions be permanently increased to $250,000 per qualified depositor; (v) authority is given to the federal banking regulators to prohibit extensive compensation to executives of depository
institutions and their holding companies with assets in excess of $1.0 billion; (vi) Section 23A of the Federal Reserve Act is broadened and prohibits a depository institution from purchasing an asset from or selling an asset to an insider unless the
transaction is on market terms and if representing more than 10% of capital, is approved by the disinterested directors; (vii) interstate branching rights are expanded; and (viii) bank entities, under the (“Volker Rule”), are prohibited from
conducting certain investment activities that are considered proprietary trading with their own accounts.
2018 Regulatory Reform - The EGRRCPA
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), was enacted to modify or remove certain financial reform
rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small
depository institutions with assets of less than $10 billion, such as CWB, and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as CWB.
The EGRRCPA, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the
regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between
8-10%. Any qualifying depository institution or its holding company that exceeds the “Community Bank Leverage Ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying
depository institution that exceeds the new ratio will be considered to be "well capitalized" under the prompt corrective action rules. The EGRRCPA also expands the category of holding companies that may rely on the “Small Bank Holding Company and
Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements
of the Dodd-Frank Act. In addition, the EGRRCPA includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real
estate loans.
The EGRRCPA requires the enactment of a number of implementing regulations, the details of which may have a material effect on the ultimate impact of the
law. It is difficult at this time to predict when or how any new standards under the EGRRCPA will ultimately be applied to us or what specific impact the EGRRCPA, and the yet-to-be-written implementing rules and regulations, will have on community
banks.
Financial Institutions Capital Rules
In addition to the Dodd-Frank Act, the international oversight body of the Basel Committee on Banking Supervision, or Basel III, reached agreements that introduced a minimum
common equity tier 1 capital requirement of 4.50 percent, along with a capital conservation buffer of 2.50 percent to bring total common equity capital requirements to 7.00 percent. The federal banking agencies issued final rules that implemented
Basel III and certain other revisions to the Basel capital framework, as well as the minimum leverage and risk-based capital requirements of Dodd Frank Act. Federal regulators periodically propose amendments to the risk-based capital guidelines and
the related regulatory framework and consider changes to the capital standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form, and effect of any such proposed
amendments cannot be determined at this time.
Basel III, among other things: (i) implemented increased capital levels for CWBC and CWB; (ii) introduced a new capital measure of common equity Tier 1 capital known as “
CET1” and related regulatory capital ratio of CET1 to risk-weighted assets; (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iv) mandated that most
deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (v) expanded the scope of the deductions from and adjustments to capital. Under Basel III, for most banking organizations the most
common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to Basel III
specific requirements.
Under Basel III, the minimum capital ratios are as follows: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to
risk-weighted assets; (iii) 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and (iv) 4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage
ratio”). The Basel III new capital conservation buffer is designed to absorb losses and protect the financial institution during periods of economic difficulties. Banking institutions with a ratio of CET1 to risk-weighted assets, Tier 1 to
risk-weighted assets or total capital to risk-weighted assets above the minimum but below the capital conservation buffer will face limitations on their ability to pay dividends, repurchase shares or pay discretionary bonuses based on the amount of
the shortfall and the institution’s “eligible retained income. As of January 1, 2019, the capital conservation buffer is fully phased-in and CWBC and CWB are required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively
resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%.
Basel III provides for a number of deductions from and adjustments to CET1. These include the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and
significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Basel III provides a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and
100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, resulting in higher risk weights for a
variety of asset classes.
CWBC
General. As a bank holding company, CWBC is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to regulation by the FRB. According to FRB Policy, CWBC is expected to
act as a source of financial strength for CWB, to commit resources to support it in circumstances where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to periodic examination by the FRB. CWBC is also required to file periodic
reports of its operations and any additional information regarding its activities and those of its subsidiaries as may be required by the FRB.
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct from CWB. CWBC has the ability to raise capital on its own behalf or borrow from external sources, CWBC may also
obtain additional funds from dividends paid by, and fees charged for services provided to, CWB. However, regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC.
Transactions with Affiliates and Insiders. CWBC and any subsidiaries it may purchase or organize are deemed to be affiliates of CWB within the meaning of Sections 23A and 23B of the Federal Reserve Act,
and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans by CWB to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of CWB’s capital,
in the case of any one affiliate, and is limited to 20% of CWB’s capital, in the case of all affiliates. In addition, transactions between CWB and other affiliates must be on terms and conditions that are consistent with safe and sound banking
practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from
borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. CWBC and CWB are also subject to certain restrictions with respect to engaging in the underwriting, public
sale, and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s
executive officers, directors, and principal shareholders; any company controlled by any such executive officer, director, or shareholder; or any political or campaign committee controlled by such executive officer, director, or principal
shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits; require prior full board approval when aggregate extensions of credit to the person exceed specified amounts; must be made on substantially
the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; must not involve more than the normal risk of repayment or present other unfavorable features; and
must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities. Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or
control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is
prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank
holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which
require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so
closely related to banking as to be a proper incident thereto.” CWBC, therefore, is permitted to engage in a variety of banking-related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including
insurance, securities, and merchant banking. CWBC has not elected to qualify for these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, for example, CWB may not extend credit, lease, or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:
| • |
the client must obtain or provide some additional credit, property, or services from or to CWB other than a loan, discount, deposit, or trust services;
|
| • |
the client must obtain or provide some additional credit, property, or service from or to CWBC or any subsidiaries; or
|
| • |
the client must not obtain some other credit, property, or services from competitors, except reasonable requirements to assure soundness of credit extended.
|
Capital Adequacy. Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company,
among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “Supervision and Regulation – CWB – Regulatory
Capital Guidelines,” assign various risk percentages to different categories of assets and capital is measured as a percentage of risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines
based both on total risk assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles
of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities, or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers under the Gramm-Leach-Bliley Act,
would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500 allows CWBC to pay a dividend to its shareholders only to the extent that CWBC has retained earnings and, after the
dividend, CWBC’s:
| • |
assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income, and other deferred credits); and
|
| • |
current assets would be at least equal to current liabilities.
|
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which
can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that
represent unsafe or unsound practices or violations of applicable statutes and regulations.
The Sarbanes-Oxley Act of 2002 (“SOX”). SOX provides a permanent framework that improves the quality of independent audits and accounting services, improves the quality of financial reporting,
strengthens the independence of accounting firms, and increases the responsibility of management for corporate disclosures and financial statements.
SOX provisions are significant to all companies that have a class of securities registered under Section 12 of the Exchange Act or are otherwise
reporting to the SEC (or the appropriate federal banking agency) pursuant to Section 15(d) of the Exchange Act, including CWBC. In addition to SEC rulemaking to implement SOX, NASDAQ has adopted corporate governance rules intended to allow
shareholders to monitor the performance of companies and directors more easily and effectively.
As a result of SOX and its regulations, CWBC has incurred substantial cost to interpret and ensure compliance with the law and its regulations including,
without limitation, increased expenditures by CWBC in auditors’ fees, attorneys’ fees, outside advisors’ fees, and increased errors and omissions insurance premium costs. Future changes in the laws, regulation, or policies that impact CWBC cannot
necessarily be predicted and may have a material effect on the business and earnings of CWBC.
CWB
General. CWB, as a national banking association which is a member of the Federal Reserve System, is subject to regulation, supervision and regular examination by the OCC and FDIC. CWB’s deposits are
insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of CWB's business and establish a comprehensive framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital
that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and
off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified
under several risk categories, with each category assigned a particular risk weighting from 0% to 150%.
The following table sets forth the regulatory capital for CWB and CWBC (on a consolidated basis) at December 31, 2020.
|
Adequately
Capitalized
|
Well
Capitalized
|
Capital Conservation Buffer Fully Phased-In
|
CWB
|
CWBC
(consolidated)
|
||||||||||||||||
|
Total risk-based capital
|
8.00
|
%
|
10.00
|
%
|
10.50
|
%
|
12.27
|
%
|
11.73
|
%
|
||||||||||
|
Tier 1 risk-based capital ratio
|
6.00
|
%
|
8.00
|
%
|
8.50
|
%
|
11.02
|
%
|
10.60
|
%
|
||||||||||
|
Common Equity Tier 1
|
4.50
|
%
|
6.50
|
%
|
7.00
|
%
|
11.02
|
%
|
10.60
|
%
|
||||||||||
|
Tier 1 leverage capital ratio
|
4.00
|
%
|
N/A
|
N/A
|
9.29
|
%
|
9.33
|
%
|
||||||||||||
|
Community Banking Leverage Ratio
|
8.00
|
%
|
N/A
|
9.29
|
%
|
N/A
|
||||||||||||||
Prompt Corrective Action Authority. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has
issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
| • |
“well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital measure;
|
| • |
“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and
does not meet the definition of “well capitalized”;
|
| • |
“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain
circumstances)
|
| • |
“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and
|
| • |
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%
|
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and
bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be
“undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit
acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors,
forcing divestiture by its holding company, if any, requiring management changes and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these
banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
Based upon its capital levels, a bank that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though
it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a
bank that otherwise meets the capital levels to be categorized as “well capitalized,” will be deemed to be “adequately capitalized,” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each
successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal
banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or
restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
The OCC, as the primary regulator for national banks, also has a broad range of enforcement measures, from cease-and-desist powers and the imposition of
monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Limitations on Dividend Payments. CWB
is a national bank, governed by the National Bank Act and the rules and regulations of the OCC. National banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent the approval of the OCC, if the total amount
of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. A dividend in excess of that
amount constitutes a reduction in permanent capital and requires the prior approval of the OCC and the approval of two-thirds of the bank’s shareholders.
Brokered Deposit Restrictions. Well-capitalized banks are not subject to limitations on brokered deposits, while an adequately capitalized bank is able to accept, renew or roll over brokered deposits only
with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized banks are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2020, CWB is deemed to be
“well capitalized” and, therefore, is eligible to accept brokered deposits.
FDIC Insurance and Insurance Assessments. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on
capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to consider and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s
performance.
As previously noted, the Dodd-Frank Act requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund
from 1.15% to 1.35% of insured deposits by September 30, 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10
billion. The Dodd-Frank Act also broadened the base for FDIC insurance assessments so that assessments are based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured
deposits. The Deposit Insurance Fund reserve ratio actually reached 1.36% on September 30, 2018, ahead of the September 30, 2020 deadline. As a result, small banks received assessment credits for the portion of their assessment that contributed to
the growth in the reserve ratio between 1.15% and 1.35%.
The FDIC may terminate its insurance of deposits if it finds that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.
The Coronavirus Aid, Relief, and Economic Security Act
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, to
provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance
adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the
ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific
recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. For example, the Economic Aid
to Hard-Hit Small Businesses, Nonprofits and Venues Act (the Economic Aid Act) passed on December 27, 2020, allocated additional funding to the PPP, which funds can be used not only by small businesses who have yet to receive a PPP loan but also by
some small businesses who may be eligible to receive a second PPP loan. The Economic Aid Act also significantly revised various aspects of the PPP terms and conditions, including certain aspects of the forgiveness process. The Company continues to
assess the impact of the CARES Act, the Economic Aid Act and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. The CARES Act amended the SBA’s loan program, in which the Bank
participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program, or PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. In June 2020, the Paycheck
Protection Program Flexibility Act was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, additional legislation was
enacted authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and
supervisory developments related thereto.
Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under U.S. generally accepted accounting principles, or GAAP, for loan modifications to borrowers affected by COVID-19 that would otherwise be
characterized as troubled debt restructurings and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and December 31, 2020 and (ii) the applicable loan was not more than 30 days past due as of
December 31, 2019. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.
Temporary Community Bank Leverage Ratio Relief. Pursuant to the CARES Act, the federal
banking agencies adopted an interim rule, effective until December 31, 2020, to (i) reduce the minimum Community Bank Leverage Ratio from 9% to 8% percent for 2020, increasing to 8.5% for 2021 and returning to 9% thereafter; and (ii) give community
banks two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.
Temporary Regulatory Capital Relief related to Impact of CECL. Concurrent with enactment of
the CARES Act, federal banking agencies issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of the current expected credit loss model, or CECL, for determining credit loss estimates. The
interim final rule provides banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred
loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The federal banking agencies have since issued a final rule that makes certain technical
changes to the interim final rule. The changes in the final rule apply only to those banking organizations that elect the CECL transition relief provided under the rule. The Company did not elect this option.
For more information regarding the CARES Act and related COVID-19 relief programs, see Item 1 - Business - General
for more information.
Anti-Money Laundering and OFAC Regulation.
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The
Currency and Foreign Transactions Reporting Act of 1970 (“BSA”) and subsequent laws and regulations requires CWB to take steps to prevent the use of it or its systems from facilitating the flow of illegal or illicit money and to file suspicious
activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring, and reporting capabilities, ensuring adequate training, and establishing a
comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new compliance and
due diligence obligations, creating new crimes and penalties, and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as
standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures, and controls
to aid the process of preventing, detecting, and reporting money laundering and terrorist financing.
CWB must provide BSA/AML training to employees, designate a BSA compliance officer and annually audit the BSA/AML program to assess its effectiveness.
The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign
countries, nationals, and others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms.
Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and
prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially
designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e. g., property and bank deposits)
cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
Failure of CWB to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have
serious legal and reputational consequences for the institution. CWB has augmented its systems and procedures to accomplish this. CWB believes that the ongoing cost of compliance with the BSA, AML and OFAC programs is not likely to be material to
CWB.
Anti-Money Laundering Act of 2020
The Anti-Money Laundering Act of 2020 (the “AML Act”) was enacted effective January 1, 2021 and presents the most comprehensive revisions and
enhancements to anti-money laundering and counter terrorism laws since the BSA and the Patriot Act. The impact of the new legislation will not be fully known until required regulations are adopted and implemented, but the AML Act represents
significant changes and reaffirms and broadens the government’s oversight and commitment to addressing the illicit activities and financing of terrorism.
Many of the provisions of the AML Act deal with the operations of the federal agencies primarily responsible for addressing terrorism financing and the
safeguarding of the national security of the United States, such as the U.S. Treasury and its Financial Crimes Enforcement Network (“FinCEN”), including the requirement for FinCEN to engage AML and terrorist financing investigations experts and the
requirement to facilitate information sharing with other federal and state and even foreign law enforcement agencies. The AML Act also expands the reach of federal AML laws by extending their applicability to a broader range of industries, such as
entities involved in futures, precious metals, precious stones and jewels, antiquities, and cryptocurrency.
The AML Act aims to balance the burdens imposed by reporting on financial institutions and the benefits derived by Federal law enforcement agencies. The
AML Act requires a review of currency transaction and suspicious activity reports submitted by financial institutions to determine to what extent the reporting can be streamlined and made more useful. Included is the obligation to review the dollar
thresholds for reporting currency transactions and to establish automated processes for filing simple, noncomplex categories of reports. It calls for greater integration between financial institution systems and the electronic filing system to allow
for automatic population of report fields and the submission of transaction data.
Other provisions of the AML Act enhance enforcement. One section provides protection for financial institutions keeping open a customer’s account or
transaction at the request of a federal law enforcement agency or at the request of a state or local agency with the concurrence of FinCEN. Other sections increase civil penalties for financial institutions and persons violating the recordkeeping
and reporting obligations. Persons found to have committed repeated “egregious violations” may be barred from serving on boards of directors of financial institutions and fined in an amount that is equal to the profit gained by such person by reason
of such violation. If that person is a partner, director, officer, or employee of a financial institution, that person may be ordered to repay any bonus paid to that person, irrespective of the amount of the bonus or how it was calculated.
New criminal penalties have been created for concealing from or misrepresenting to a financial institution any material facts concerning: (i) the
ownership or control of assets involved in a monetary transaction involving a senior foreign political figure in amounts exceeding $1 million; or (ii) the source of funds in a monetary transaction involving an entity found to be a primary money
laundering concern.
Other enforcement enhancement provisions in the AML Act authorize the Treasury to pay whistleblower awards leading to fines or forfeitures of at least
$50,000 up to the lower of $150,000 or 25% of the fine or forfeiture and allows for the payment to whistleblowers of up to 30% of the fine or forfeiture.
One of the most significant portions of the AML Act is The Corporate Transparency Act (“CTA”), which will require the reporting of certain information
regarding “beneficial owners” of “reporting companies” to a confidential database to be established by FinCEN. Reporting companies are defined as any corporation, limited liability company or other entity formed in the U.S. under the laws of a state
or Indian Tribe or registered as a foreign entity to do business in the U.S., other than those specifically excluded, such as: (i) companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934; (ii) banks,
bank holding companies, and credit unions; (iii) money transmitters, registered broker‑dealers, registered investment advisors, and investment companies; (iv) public utilities and insurance companies; (v) 503(c)(3) entities; (vi) entities that employ
more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5.0 million in the prior year, and have an operating presence in the U.S.; and (vii) certain “inactive” entities.
A beneficial owner is any individual who directly or indirectly exercises substantial control over an entity or owns or controls 25 percent or more of
the ownership interest of an entity. The reporting company will be required to provide FinCEN with the legal name, date of birth, current resident or business address, and an acceptable identification number of the beneficial owner.
Under the CTA, the Treasury is to minimize the burden on reporting companies and ensure the information deposited in the database is maintained in the
strictest confidence and made available for inspection or disclosure by FinCEN only for the purposes set forth in the AML Act and only to: (i) federal agencies engaged in national security, intelligence or law enforcement; (ii) state, local or Tribal
law enforcement agencies, subject to authorization by a court of competent jurisdiction; (iii) financial institutions subject to customer due diligence requirements with the consent of the reporting company; (iv) requests by a federal or other
appropriate regulatory agency; (v) certain Treasury officials for tax administration purposes; and (vi) authorized federal agencies on behalf of a properly recognized foreign authority.
The foregoing is only a summary of selected provisions of the AML Act. Given that regulations implementing the new AML Act have not been adopted or
implemented, CWBC cannot determine at this time the effect, if any, the AML Act will have on CWBC’s future results of operations or financial condition.
Community Reinvestment Act. The
Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in
examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further
requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers, or acquisitions or holding company
formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation
system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural
requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.”
CWB had a CRA rating of “Outstanding” as of its most recent regulatory examination.
Safeguarding of Customer Information and Privacy. The bank regulatory agencies have adopted guidelines for safeguarding confidential, personal client information. These guidelines require financial institutions to create, implement and maintain a comprehensive written
information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to
or use of such information that could result in substantial harm or inconvenience to any customer. CWB has adopted a customer information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers
to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, are
prohibited from disclosing such information. CWB has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of CWB.
In June 2018, the California legislature passed the California Consumer Privacy Act of 2018 (the “CCPA”), which took effect on January 1, 2020. On
November 3, 2020, the CCPA was amended and expanded by the approval of California ballot initiative, Proposition 24, known as the California Privacy Rights Act (the “CPRA”). The CCPA, as amended, covers businesses that obtain or access personal
information on California residents, grants them enhanced privacy rights and control over their personal information, and imposes significant requirements on covered companies with respect to individual data privacy rights. Some of the rights
afforded to California residents also extend to California employees, though the CPRA amendments now exempt certain employee information and employer usage from some of the CPRA provisions until at least January 1, 2023. Other states have
implemented, or are considering, similar privacy laws.
Consumer Compliance and Fair Lending Laws. CWB is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax
Compliance Act, CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act. The enforcement of Fair Lending laws has been an
increasing area of focus for regulators, including the FDIC and the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the
ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance,
allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws (including California)
companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Safety and Soundness Standards. The federal banking agencies
have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to:
(i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees, and benefits. In addition, the federal banking agencies have
also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from
deteriorating.
Other Aspects of Banking Law. CWB is also subject to federal statutory and regulatory provisions covering, among other things, security procedures, insider and affiliated party transactions, management
interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future
which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject bank holding companies and banks to increased supervision and disclosure, compliance costs and reporting
requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends
identified in examinations, and this has resulted in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, BSA compliance, as well as other
safety and soundness concerns.
It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which CWB’s businesses would be affected
thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in CWB’s operations and increased compliance costs.
| ITEM 7A. |
The Company's primary market risk is interest rate risk (“IRR”). To minimize the volatility of net interest income at risk (“NII”) and the impact on
economic value of equity (“EVE”), the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by the Board’s Asset Liability Committee (“ALCO”). ALCO has the
responsibility for approving and ensuring compliance with asset/liability management policies, including IRR exposure.
To mitigate the impact of changes in interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the Company actively
manages the amounts and maturities. While the Company has some assets and liabilities in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative
instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.
The Company uses a simulation model, combined with downloaded detailed information from various application programs, and assumptions regarding interest
rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates. The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase and decrease
in interest rates compared to a flat interest rate scenario. The model assumes that the rate change shock occurs immediately.
The following table presents the impact of that analysis in dollars and percentages at December 31, 2020.
|
Sensitivity of Net Interest Income
|
||||||||||||||||||||||||||||
|
Interest Rate Scenario (change in basis point from Base)
|
||||||||||||||||||||||||||||
|
Down 100
|
Base
|
Up 100
|
Up 200
|
Up 300
|
Up 400
|
Up 500
|
||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||
|
Interest income
|
$
|
43,842
|
$
|
44,070
|
$
|
46,330
|
$
|
48,599
|
$
|
50,907
|
$
|
53,189
|
$
|
55,450
|
||||||||||||||
|
Interest expense
|
2,975
|
3,195
|
6,951
|
10,707
|
14,462
|
18,218
|
21,974
|
|||||||||||||||||||||
|
Net interest income
|
$
|
40,867
|
$
|
40,875
|
$
|
39,379
|
$
|
37,892
|
$
|
36,445
|
$
|
34,971
|
$
|
33,476
|
||||||||||||||
|
% change
|
0.0
|
%
|
(3.7
|
)%
|
(7.3
|
)%
|
(10.8
|
)%
|
(14.4
|
)%
|
(18.1
|
)%
|
||||||||||||||||
At December 31, 2019, the following table presents the impact of that analysis in dollars and percentages:
|
Sensitivity of Net Interest Income
|
||||||||||||||||||||||||||||
|
Interest Rate Scenario (change in basis point from Base)
|
||||||||||||||||||||||||||||
|
Down 100
|
Base
|
Up 100
|
Up 200
|
Up 300
|
Up 400
|
Up 500
|
||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||
|
Interest income
|
$
|
42,602
|
$
|
45,015
|
$
|
47,538
|
$
|
50,328
|
$
|
53,176
|
$
|
55,978
|
$
|
58,673
|
||||||||||||||
|
Interest expense
|
7,549
|
10,267
|
14,159
|
18,039
|
21,903
|
25,767
|
29,632
|
|||||||||||||||||||||
|
Net interest income
|
$
|
35,053
|
$
|
34,748
|
$
|
33,379
|
$
|
32,289
|
$
|
31,273
|
$
|
30,211
|
$
|
29,042
|
||||||||||||||
|
% change
|
0.9
|
%
|
(3.9
|
)%
|
(7.1
|
)%
|
(10.0
|
)%
|
(13.1
|
)%
|
(16.4
|
)%
|
||||||||||||||||
As of December 31, 2020 the Fed Funds target rate was a range of 0.00% to 0.25% and the prime rate was 3.25%. As of December 31, 2019, the Fed Funds
target rate was a range of 1.75% to 2.00% and the prime rate was 4.75%.
Economic Value of Equity. We measure the impact of market
interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance sheet items, defined as economic value of equity, using a simulation model. This simulation model assesses the changes in the
market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At December 31, 2020 and 2019, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the
current guidelines established by us. The following tables show projected change in economic value of equity for this set of rate shocks.
|
Economic Value of Equity
As of December 31, 2020
Interest Rate Scenario (change in basis point from Base)
|
||||||||||||||||||||||||||||
|
Down 100
|
Base
|
Up 100
|
Up 200
|
Up 300
|
Up 400
|
Up 500
|
||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||
|
Assets
|
$
|
1,010,690
|
$
|
989,020
|
$
|
967,417
|
$
|
946,600
|
$
|
928,481
|
$
|
911,381
|
$
|
894,280
|
||||||||||||||
|
Liabilities
|
900,742
|
888,092
|
867,107
|
847,223
|
828,375
|
810,506
|
792,637
|
|||||||||||||||||||||
|
Net present value
|
$
|
109,948
|
$
|
100,928
|
$
|
100,310
|
$
|
99,377
|
$
|
100,106
|
$
|
100,875
|
$
|
101,643
|
||||||||||||||
|
% change
|
8.9
|
%
|
(0.6
|
)%
|
(1.5
|
)%
|
(0.8
|
)%
|
(0.1
|
)%
|
0.7
|
%
|
||||||||||||||||
|
Economic Value of Equity
As of December 31, 2019
Interest Rate Scenario (change in basis point from Base)
|
||||||||||||||||||||||||||||
|
Down 100
|
Base
|
Up 100
|
Up 200
|
Up 300
|
Up 400
|
Up 500
|
||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||||||
|
Assets
|
$
|
933,368
|
$
|
908,364
|
$
|
888,642
|
$
|
870,519
|
$
|
853,961
|
$
|
837,636
|
$
|
819,847
|
||||||||||||||
|
Liabilities
|
853,908
|
836,330
|
824,925
|
814,210
|
804,128
|
794,629
|
785,667
|
|||||||||||||||||||||
|
Net present value
|
$
|
79,460
|
$
|
72,034
|
$
|
63,716
|
$
|
56,309
|
$
|
49,832
|
$
|
43,007
|
$
|
34,180
|
||||||||||||||
|
% change
|
10.3
|
%
|
(11.5
|
)%
|
(21.8
|
)%
|
(30.8
|
)%
|
(40.3
|
)%
|
(52.6
|
)%
|
||||||||||||||||
For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity Management - Interest Rate Risk.”
| ITEM 8. |
Our consolidated financial statements and supplementary data included in this Form 10-K begin on page 58 immediately following the index to consolidated
financial statements page to this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Community West Bancshares
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community West Bancshares and its subsidiary (the Company) as of
December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the Audit
Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in
any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses (allowance) is a valuation account that reflects the Company’s estimate of
known and inherent probable losses on existing loans held for investment. The allowance for loan losses was $10.2 million at December 31, 2020, which consists of two components: the valuation allowance for loans individually evaluated for
impairment (specific reserves), representing $0.3 million, and the valuation allowance for loans collectively evaluated for impairment (general reserves), representing $9.9 million.
The Company’s general reserves include a quantitative reserve based on historical experience and a qualitative reserve based on management’s evaluation of several internal and external
factors (qualitative factors). For Manufactured Housing loans, the quantitative general reserve is calculated on the basis of loss history. For all other loan types, migration analysis taking into account the risk rating of loans that are charged
off is used to determine the quantitative general reserve. The quantitative general reserves are then further adjusted based upon qualitative factors that affect the specific portfolios. These qualitative factors include the Company’s
concentrations of credit, international risk, trends in volume, maturity and composition of loans, volume and trend in delinquency, nonaccrual and classified assets, economic conditions, geographic distance, policy and procedures or underwriting
standards, staff experience and ability, value of underlying collateral, competition, legal or regulatory environment, and quality of loan review and Board oversight. The evaluation of these qualitative factors requires that management make
significant judgments regarding these factors, which may significantly impact the estimated allowance.
We identified the qualitative factors applied to the general reserve of the allowance as a critical audit matter as auditing management’s determination of qualitative general reserve
factors involved a high degree of auditor judgment given the highly subjective nature of management’s judgments.
Our audit procedures related to the Company’s qualitative factors applied to the general reserve of the allowance for loan losses included the following, among others:
• We tested management’s process and evaluated their judgments and assumptions used to establish the qualitative factors, which included:
|
−
|
Testing the completeness and accuracy of data used by management in determining the qualitative factors by agreeing them to internal and external source data.
|
|
−
|
Evaluating the reasonableness of management’s judgments and assumptions used in the development of the qualitative factors, including the directional consistency and magnitude of
the qualitative factors applied.
|
We have served as the Company’s auditor since 2015.
/s/ RSM US LLP
Las Vegas, Nevada
March 12, 2021
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
PAGE
|
|
|
Report of Independent Registered Public Accounting Firm
|
55
|
|
Consolidated Financial Statements
|
57
|
|
Consolidated Balance Sheets
|
58
|
|
Consolidated Income Statements
|
59
|
|
Consolidated Statements of Comprehensive Income
|
60
|
|
Consolidated Statements of Stockholders’ Equity
|
61
|
|
Consolidated Statements of Cash Flows
|
62
|
|
Notes to Consolidated Financial Statements
|
63
|
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands, except share amounts)
|
||||||||
|
Assets:
|
||||||||
|
Cash and due from banks
|
$
|
1,586
|
$
|
2,536
|
||||
|
Federal funds sold
|
1
|
3
|
||||||
|
Interest-earning demand in other financial institutions
|
58,953
|
80,122
|
||||||
|
Cash and cash equivalents
|
60,540
|
82,661
|
||||||
|
Investment securities - available-for-sale, at fair value; amortized cost of $17,266 at December 31, 2020 and $19,382 at December 31, 2019
|
17,308
|
19,264
|
||||||
|
Investment securities - held-to-maturity, at amortized cost; fair value of $4,854 at December 31, 2020 and $6,302 at December 31, 2019
|
4,586
|
6,132
|
||||||
|
Investment securities - measured at fair value
|
149
|
167
|
||||||
|
Federal Home Loan Bank stock, at cost
|
3,260
|
2,714
|
||||||
|
Federal Reserve Bank stock, at cost
|
1,373
|
1,373
|
||||||
|
Loans:
|
||||||||
|
Held for sale, at lower of cost or fair value
|
31,229
|
42,046
|
||||||
|
Held for investment, net of allowance for loan losses of $10,194 at December 31, 2020 and $8,717 at December 31, 2019
|
816,154
|
724,800
|
||||||
|
Total loans
|
847,383
|
766,846
|
||||||
|
Other assets acquired through foreclosure, net
|
2,614
|
2,524
|
||||||
|
Premises and equipment, net
|
7,154
|
7,655
|
||||||
|
Other assets
|
31,068
|
24,534
|
||||||
|
Total assets
|
$
|
975,435
|
$
|
913,870
|
||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest-bearing demand
|
$
|
181,837
|
$
|
110,843
|
||||
|
Interest-bearing demand
|
398,101
|
314,278
|
||||||
|
Savings
|
18,736
|
15,689
|
||||||
|
Certificates of deposit ($250,000 or more)
|
30,536
|
96,431
|
||||||
|
Other certificates of deposit
|
136,975
|
213,693
|
||||||
|
Total deposits
|
766,185
|
750,934
|
||||||
|
Other borrowings
|
105,000
|
65,000
|
||||||
|
Other liabilities
|
15,243
|
15,958
|
||||||
|
Total liabilities
|
886,428
|
831,892
|
||||||
|
Stockholders’ equity:
|
||||||||
|
Common stock — no par value, 60,000,000 shares authorized; 8,473,063 shares issued and outstanding at December 31, 2020 and 8,472,463 at December 31, 2019
|
42,909
|
42,586
|
||||||
|
Retained earnings
|
46,063
|
39,470
|
||||||
|
Accumulated other comprehensive income (loss)
|
35
|
(78
|
)
|
|||||
|
Total stockholders’ equity
|
89,007
|
81,978
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
975,435
|
$
|
913,870
|
||||
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Interest income:
|
(in thousands, except per share amounts)
|
|||||||||||
|
Loans, including fees
|
$
|
42,948
|
$
|
43,890
|
$
|
40,865
|
||||||
|
Investment securities and other
|
906
|
1,849
|
1,766
|
|||||||||
|
Total interest income
|
43,854
|
45,739
|
42,631
|
|||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
5,483
|
10,055
|
7,702
|
|||||||||
|
Other borrowings
|
1,782
|
1,327
|
1,286
|
|||||||||
|
Total interest expense
|
7,265
|
11,382
|
8,988
|
|||||||||
|
Net interest income
|
36,589
|
34,357
|
33,643
|
|||||||||
|
Provision (credit) for loan losses
|
1,223
|
(165
|
)
|
14
|
||||||||
|
Net interest income after provision for loan losses
|
35,366
|
34,522
|
33,629
|
|||||||||
|
Non-interest income:
|
||||||||||||
|
Other loan fees
|
1,546
|
1,383
|
1,208
|
|||||||||
|
Gains from loan sales, net
|
920
|
765
|
-
|
|||||||||
|
Document processing fees
|
513
|
423
|
489
|
|||||||||
|
Service charges
|
354
|
567
|
459
|
|||||||||
|
Other
|
579
|
469
|
472
|
|||||||||
|
Total non-interest income
|
3,912
|
3,607
|
2,628
|
|||||||||
|
Non-interest expenses:
|
||||||||||||
|
Salaries and employee benefits
|
17,968
|
17,094
|
16,329
|
|||||||||
|
Occupancy, net
|
3,036
|
3,088
|
3,132
|
|||||||||
|
Professional services
|
1,801
|
1,679
|
1,356
|
|||||||||
|
Advertising and marketing
|
673
|
774
|
685
|
|||||||||
|
Data processing
|
1,055
|
876
|
852
|
|||||||||
|
Depreciation
|
821
|
864
|
764
|
|||||||||
|
FDIC assessment
|
565
|
427
|
770
|
|||||||||
|
Stock based compensation
|
319
|
382
|
478
|
|||||||||
|
Other
|
1,285
|
1,571
|
1,673
|
|||||||||
|
Total non-interest expenses
|
27,523
|
26,755
|
26,039
|
|||||||||
|
Income before provision for income taxes
|
11,755
|
11,374
|
10,218
|
|||||||||
|
Provision for income taxes
|
3,510
|
3,411
|
2,809
|
|||||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$
|
0.97
|
$
|
0.94
|
$
|
0.89
|
||||||
|
Diluted
|
$
|
0.97
|
$
|
0.93
|
$
|
0.88
|
||||||
|
Weighted average number of common shares outstanding:
|
0
|
|||||||||||
|
Basic
|
8,473
|
8,470
|
8,288
|
|||||||||
|
Diluted
|
8,543
|
8,579
|
8,451
|
|||||||||
|
Dividends declared per common share
|
$
|
0.195
|
$
|
0.215
|
$
|
0.190
|
||||||
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
|
Other comprehensive income (loss), net:
|
||||||||||||
|
Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($47), ($44), $70 for each respective period presented)
|
113
|
63
|
(107
|
)
|
||||||||
|
Net other comprehensive income (loss)
|
113
|
63
|
(107
|
)
|
||||||||
|
Comprehensive income
|
$
|
8,358
|
$
|
8,026
|
$
|
7,302
|
||||||
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
Preferred Stock
|
Common Stock
|
Accumulated
Other
Comprehensive
|
Retained
|
Total
Stockholders'
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Income (Loss)
|
Earnings
|
Equity
|
||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2017:
|
—
|
$
|
—
|
8,193
|
$
|
42,604
|
$
|
25
|
$
|
27,441
|
$
|
70,070
|
||||||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
7,409
|
7,409
|
|||||||||||||||||||||
|
Exercise of stock options
|
—
|
—
|
102
|
551
|
—
|
—
|
551
|
|||||||||||||||||||||
|
Stock based compensation
|
—
|
—
|
—
|
478
|
—
|
—
|
478
|
|||||||||||||||||||||
|
Common stock repurchase
|
—
|
—
|
(63
|
)
|
(669
|
)
|
—
|
—
|
(669
|
)
|
||||||||||||||||||
|
Dividends on common stock
|
—
|
—
|
—
|
—
|
—
|
(1,581
|
)
|
(1,581
|
)
|
|||||||||||||||||||
|
Other comprehensive loss, net
|
—
|
—
|
—
|
—
|
(107
|
)
|
—
|
(107
|
)
|
|||||||||||||||||||
|
Impact of ASU 2016-01 and 2018-02 as of January 1, 2018
|
—
|
—
|
—
|
—
|
(59
|
)
|
59
|
—
|
||||||||||||||||||||
|
Conversion of common stock warrants
|
—
|
—
|
301
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
Balance, December 31, 2018:
|
—
|
—
|
8,533
|
42,964
|
(141
|
)
|
33,328
|
76,151
|
||||||||||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
7,963
|
7,963
|
|||||||||||||||||||||
|
Exercise of stock options
|
—
|
—
|
39
|
270
|
—
|
—
|
270
|
|||||||||||||||||||||
|
Stock based compensation
|
—
|
—
|
—
|
382
|
—
|
—
|
382
|
|||||||||||||||||||||
|
Common stock repurchase
|
—
|
—
|
(100
|
)
|
(1,030
|
)
|
—
|
—
|
(1,030
|
)
|
||||||||||||||||||
|
Dividends on common stock
|
—
|
—
|
—
|
—
|
—
|
(1,821
|
)
|
(1,821
|
)
|
|||||||||||||||||||
|
Other comprehensive income, net
|
—
|
—
|
—
|
—
|
63
|
—
|
63
|
|||||||||||||||||||||
|
Balance, December 31, 2019:
|
—
|
—
|
8,472
|
42,586
|
(78
|
)
|
39,470
|
81,978
|
||||||||||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
8,245
|
8,245
|
|||||||||||||||||||||
|
Exercise of stock options
|
—
|
—
|
1
|
4
|
—
|
—
|
4
|
|||||||||||||||||||||
|
Stock based compensation
|
—
|
—
|
—
|
319
|
—
|
—
|
319
|
|||||||||||||||||||||
|
Dividends on common stock
|
—
|
—
|
—
|
—
|
—
|
(1,652
|
)
|
(1,652
|
)
|
|||||||||||||||||||
|
Other comprehensive income, net
|
—
|
—
|
—
|
—
|
113
|
—
|
113
|
|||||||||||||||||||||
|
Balance, December 31, 2020:
|
—
|
$
|
—
|
8,473
|
$
|
42,909
|
$
|
35
|
$
|
46,063
|
$
|
89,007
|
||||||||||||||||
See the accompanying notes.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
|
Adjustments to reconcile net income to cash provided by operating activities:
|
||||||||||||
|
Provision (credit) for loan losses
|
1,223
|
(165
|
)
|
14
|
||||||||
|
Depreciation
|
821
|
864
|
764
|
|||||||||
|
Stock-based compensation
|
319
|
382
|
478
|
|||||||||
|
Deferred income taxes
|
(959
|
)
|
(328
|
)
|
(529
|
)
|
||||||
|
Net amortization of discounts and premiums for investment securities
|
82
|
107
|
100
|
|||||||||
|
(Gains) losses on:
|
||||||||||||
|
Sale of repossessed assets, net
|
—
|
33
|
62
|
|||||||||
|
Sale of loans, net
|
(920
|
)
|
(765
|
)
|
—
|
|||||||
|
Sale of assets, net
|
18
|
7
|
—
|
|||||||||
|
Loans originated for sale and principal collections, net
|
10,817
|
6,309
|
6,739
|
|||||||||
|
Changes in:
|
||||||||||||
|
Other assets
|
(2,787
|
)
|
1,641
|
(2,210
|
)
|
|||||||
|
Other liabilities
|
(401
|
)
|
(1,366
|
)
|
3,416
|
|||||||
|
Servicing assets, net
|
(615
|
)
|
(745
|
)
|
78
|
|||||||
|
Net cash provided by operating activities
|
15,843
|
13,937
|
16,321
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Principal pay downs and maturities of available-for-sale securities
|
5,069
|
5,686
|
3,436
|
|||||||||
|
Purchase of available-for-sale securities
|
(3,000
|
)
|
—
|
—
|
||||||||
|
Principal pay downs and maturities of held-to-maturity securities
|
1,511
|
1,151
|
1,040
|
|||||||||
|
Purchases of held-to-maturity securities
|
—
|
—
|
(794
|
)
|
||||||||
|
Loan originations and principal collections, net
|
(91,763
|
)
|
(16,074
|
)
|
(40,290
|
)
|
||||||
|
Purchase of bank owned life insurance
|
(2,500
|
)
|
—
|
—
|
||||||||
|
Purchase of restricted stock, net
|
(546
|
)
|
—
|
(367
|
)
|
|||||||
|
Purchase of premises and equipment, net
|
(338
|
)
|
(2,145
|
)
|
(1,564
|
)
|
||||||
|
Proceeds from sale of other real estate owned and repossessed assets, net
|
—
|
844
|
484
|
|||||||||
|
Net cash used in investing activities
|
(91,567
|
)
|
(10,538
|
)
|
(38,055
|
)
|
||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net increase in deposits
|
15,251
|
34,928
|
16,322
|
|||||||||
|
Net increase (decrease) in borrowings
|
40,000
|
(10,000
|
)
|
18,157
|
||||||||
|
Exercise of stock options
|
4
|
270
|
551
|
|||||||||
|
Cash dividends paid on common stock
|
(1,652
|
)
|
(1,821
|
)
|
(1,581
|
)
|
||||||
|
Common stock repurchase
|
—
|
(1,030
|
)
|
(669
|
)
|
|||||||
|
Net cash provided by financing activities
|
53,603
|
22,347
|
32,780
|
|||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(22,121
|
)
|
25,746
|
11,046
|
||||||||
|
Cash and cash equivalents at beginning of year
|
82,661
|
56,915
|
45,869
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
60,540
|
$
|
82,661
|
$
|
56,915
|
||||||
|
Supplemental disclosure:
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$
|
8,050
|
$
|
11,675
|
$
|
8,321
|
||||||
|
Income taxes
|
2,350
|
2,526
|
3,360
|
|||||||||
|
Non-cash investing and financing activity:
|
||||||||||||
|
Transfers to other assets acquired through foreclosure, net
|
106
|
3,401
|
174
|
|||||||||
|
Operating lease right-of-use asset
|
487
|
7,190
|
—
|
|||||||||
|
Operating lease liability
|
487
|
6,316
|
—
|
|||||||||
See the accompanying notes.
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full-service banking
through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”). These entities are collectively referred to herein as the “Company”.
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and
conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiary are included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and fair value of investment securities available for sale. Although Management believes these
estimates to be reasonable, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended December 31, 2019 and 2018 have been reclassified to conform to
the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Business Segments
Reportable business segments are determined using the “management approach” and are intended to present reportable segments consistent with how the chief
operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of December 31, 2020, 2019 and 2018, the Company had only one reportable business segment.
COVID-19 pandemic
The COVID-19 pandemic, first identified in the United States during the first quarter of 2020, has had significant adverse effects on the economy in the
United States, generally, and in our service area, in particular. The assistance the government supported programs under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including the Paycheck Protection Program (PPP), have
provided have lessened the disruptive effects of the COVID-19 pandemic. CWB has actively worked to assist customers in applying for and receiving assistance through the PPP, and CWB has implemented a distinct COVID-19 relief program of payment
deferrals, fee waivers and suspension of residential property foreclosures. While the origination fees recognized by CWB in providing these loans have been beneficial to CWB and, in turn CWBC, the full impact of the COVID-19 pandemic is not known at
this time and the extent to which the COVID-19 pandemic will continue to negatively affect our customers and our business will depend on future developments, which are highly uncertain. These include the scope and duration of the pandemic, the
effectiveness of vaccines and other therapies in treating and preventing the disease, the financial impact of the pandemic on our employees, customers, vendors, and services area, and what further actions the Federal and state governments and other
third parties may take in response to the pandemic. The customers in our service area have experienced increased unemployment, business closures, and slowdowns, especially in the restaurant, hospitality, and recreation industries. All of this may
lead to increased credit ratings downgrades, loan delinquencies, defaults, reductions in asset values, and foreclosures any of which could have an adverse effect on our business, financial condition, and results of operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of
clearing), and federal funds sold. Cash flows from loans originated by the Company and deposits are reported net.
The Company maintains amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses in such
accounts.
Cash Reserve Requirement
Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in cash or with the Federal Reserve Bank (“FRB”). The amount
of the reserve varies by bank as the bank is permitted to meet this requirement by maintaining the specified amount as an average balance over a two-week period. The Federal Reserve reduced the reserve requirement ratio to zero percent across all
deposit tiers as of March 26, 2020 to aid institutions impacted by COVID-19.
Investment Securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The appropriate classification is initially
decided at the time of purchase. Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic
conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification
and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of
AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest
income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and
regulatory capital considerations. The Company has its Federal Agricultular Mortgage Corporation (AGM) Stock securities classified as measured at fair value. The fair value changes are adjusted through non-interest income monthly.
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid
over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1) the length of time and the extent to which the fair
value has been less than amortized cost, 2) the financial condition and near term prospects of the issuer, 3) the impact of changes in market interest rates, and 4) the intent and ability of the Company to retain its investment for a period of time
sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.
For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be
required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) market or other factors is recognized in other
comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost. The fair value of the debt security then becomes the new cost basis.
For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the
other than temporary impairment is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in
earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
The Company’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”) system and maintains an investment in capital stock of the FHLB. The
bank also maintains an investment in FRB stock. These investments are considered equity securities with no actively traded market. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income
received from the stock is reported in interest income. We conduct a periodic review and evaluation of our FHLB stock to determine if any impairment exists. No impairment existed in the years ended December 31, 2020 or 2019.
Servicing Assets
The guaranteed portion of certain Small Business Administration (“SBA”) loans can be sold into the secondary market. Servicing assets are recognized as
separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment
experience in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair
value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing asset and resulting gain on sale for SBA loan sales are calculated based on the
difference between the best actual par and premium bids on an individual loan basis.
SBA servicing assets measured at fair value were $43,000 and $40,000 for the years ended 2020 and 2019, respectively. Changes in the fair values are
recorded in other non-interest income in the income statement.
SBA servicing assets measured under the amortization method were $27,000 and $41,000 for the years ended 2020 and 2019, respectively. Amortization
expenses are included in other non-interest income in the income statement.
CWB is an approved Federal Agricultural Mortgage Corporation ("Farmer Mac") seller/servicer. Servicing assets/liabilities are recognized as separate assets/liabilities as certain servicing
requirements are retained. Servicing assets are amortized over the period of, estimated net servicing income. CWB uses Farmer Mac prepayment statistics in estimating the expected life of the loans. Management evaluates its servicing assets for
impairment quarterly. Servicing assets are evaluated periodically for impairment based on the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis.
The initial servicing asset and resulting gain or calculated based on the contractual net servicing fees. Farmer Mac servicing assets are valued based on the net servicing fee, estimated life of seven years, and discounted by the respective US
Treasury 7-year rate at time of sale. Farmer Mac servicing assets measured under the amortization method were $1.4 million and $765,000 for the years ended 2020 and 2019, respectively.
|
Year Ended December 31,
|
||||||||
|
SBA servicing assets measured at fair value
|
2020
|
2019
|
||||||
|
(in thousands)
|
||||||||
|
Balance, beginning
|
40
|
49
|
||||||
|
New servicing assets
|
-
|
-
|
||||||
|
Amortization, net
|
-
|
-
|
||||||
|
Valuation adjustment
|
3
|
(9
|
)
|
|||||
|
Balance, ending
|
43
|
40
|
||||||
|
Year Ended December 31,
|
||||||||
|
SBA servicing assets measured under the amortization method
|
2020
|
2019
|
||||||
|
(in thousands)
|
||||||||
|
Balance, beginning
|
41
|
52
|
||||||
|
New servicing assets
|
-
|
-
|
||||||
|
Amortization, net
|
(14
|
)
|
(11
|
)
|
||||
|
Valuation adjustment
|
-
|
-
|
||||||
|
Balance, ending
|
27
|
41
|
||||||
|
Total SBA servicing assets, net
|
70
|
81
|
||||||
|
Year Ended December 31,
|
||||||||
|
Farmer Mac servicing assets measured under the amortization method
|
2020
|
2019
|
||||||
|
(in thousands)
|
||||||||
|
Balance, beginning
|
765
|
765
|
||||||
|
New servicing assets
|
920
|
-
|
||||||
|
Amortization, net
|
(294
|
)
|
-
|
|||||
|
Valuation adjustment
|
-
|
-
|
||||||
|
Total Farmer Mac servicing asset, net
|
1,391
|
765
|
||||||
|
Total servicing assets, net
|
1,461
|
846
|
||||||
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. The Company did not incur any lower of cost or fair value provision in the
years ended December 31, 2020, 2019 and 2018.
Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off. Unearned income includes
deferred loan origination fees reduced by loan origination costs. Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.
Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the
origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is
calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the
contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans
are accounted for though interest income.
Nonaccrual loans: For all loan types, when a borrower
discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest
income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more
than 90 days delinquent if they are well secured by collateral and in the process of collection. Other personal loans are typically charged off no later than 120 days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in
which the status is changed. Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are
again consistently received as contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.
Impaired loans: A loan is considered impaired when, based
on current information; it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower'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.
Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by banking regulators and titled “Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.
Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from
the period beginning March 1, 2020 until the earlier of January 1, 2022 ( the extension of the expiration date was passed as part of the Bipartisan-Bicameral Omnibus COVID Relief Deal on December 21, 2020) or the date that is 60 days after the date
on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in
response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extension of repayment terms, or other delays in payment that are
insignificant. As of December 31, 2020, the outstanding balance of these deferred loans was $5.1 million, or 0.6% of the Bank’s total loan portfolio.
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. 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 considers the risk
rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off. The following is a description of the characteristics of loan ratings. Loan ratings are reviewed as part of our normal loan
monitoring process, but, at a minimum, updated on an annual basis.
Substantially Risk Free – These borrowers have virtually no probability of
default or loss given default and present no identifiable or potential adverse risk to the Company. Documented repayment is either backed by the full faith and credit of the United States Government or secured by cash collateral at a ratio of 115%
of the principal borrowed. The collateral must be in the possession of the Company and free from potential claim. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.
Nominal Risk – This rating is for the highest quality borrowers with nominal probability of default or loss given default from the
transaction. Typically, this is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity, and excellent debt service ability. The Borrower’s financial outlook is stable due to a broad range of
operations or products and is able to weather an economic downturn without significant impact to liquidity or net worth. Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade. In addition,
these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations. Transaction can include marketable securities as collateral, properly margined.
Pass/Management Attention Risk – Loans from the three remaining pass category range from minimal risk to moderate risk to management attention risk. Loans
rated in the first two categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in the minimal and moderate risk categories are loans to quality borrowers with financial statements presenting
a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and
presenting a good primary source as well as an adequate secondary source of repayment. An asset in the management attention risk category indicates that although the borrower meets the criteria for a rating of acceptable risk or better, the credit
possesses an identified and elevated risk level that should be resolved in a short period of time. Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in the
submission of financial reporting or covenant violations that are not indicative of a protracted trend.
Special Mention - A Special Mention loan has potential weaknesses that require management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient
risk to warrant adverse classification.
Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the
collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due. They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s
deficiencies are not corrected.
Doubtful - A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably
specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or
liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.
This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this loan even though partial recovery may be realized in the future. Losses are taken in
the period in which they are considered uncollectible.
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans. The allowance is charged for losses when management believes
that full recovery on the loan is unlikely. The following is the Company’s policy regarding charging off loans.
Commercial, CRE and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible. A loan is considered impaired when, based on current information, it is
probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged down to the
fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists. In the event there is no perceived equity, the loan is charged-off in full. Unsecured loans which are delinquent over 90 days are also
charged-off in full.
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are
evaluated for impairment. Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists. In the event there is no perceived equity, the loan is generally
fully charged-off.
Consumer Loans
All consumer loans (excluding real estate mortgages, HELOCs and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.
The ALL calculation for the different loan portfolios is as follows:
| • |
Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required ALL for all
non-impaired loans. In addition, the migration results are adjusted based upon qualitative factors that affect the specific portfolio category. Reserves on impaired loans are determined based upon the individual characteristics of the loan.
|
| • |
Manufactured Housing – The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency. In addition, the loss results are adjusted based upon qualitative factors that
affect this specific portfolio.
|
The Company evaluates and individually assesses for impairment loans classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR or when other conditions exist
which lead management to review for possible impairment. Measurement of impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans. The amount of impairment is determined by
comparing the recorded investment in each loan with its value measured by one of three methods:
| • |
the expected future cash flows are estimated and then discounted at the effective interest rate.
|
| • |
the value of the underlying collateral net of selling costs. Selling costs are estimated based on industry standards, the Company’s actual experience or actual costs incurred as appropriate. When evaluating real
estate collateral, the Company typically uses appraisals or valuations, no more than twelve months old at time of evaluation. When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or
appraisals no more than twelve months old at time of evaluation. Additionally, for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
|
| • |
the loan’s observable market price.
|
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower
provides financial information to support maintaining the loan on accrual.
The Company determines the appropriate ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the
appropriate ALL and adjusted as deemed necessary. The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size, and composition of the loan portfolio, overall and
individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral. Additional factors
considered include geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.
Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on changes in any of the following
factors:
| • |
Concentrations of credit
|
| • |
International risk
|
| • |
Trends in volume, maturity, and composition of loans
|
| • |
Volume and trend in delinquency, nonaccrual, and classified assets
|
| • |
Economic conditions
|
| • |
Geographic distance
|
| • |
Policy and procedures or underwriting standards
|
| • |
Staff experience and ability
|
| • |
Value of underlying collateral
|
| • |
Competition, legal, or regulatory environment
|
| • |
Quality of loan review and Board oversight
|
Off Balance Sheet and Credit Exposure
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when the
Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to
extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The
Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit,
is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual
obligations. The estimate for loan losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is included in non-interest expense.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation, and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter. Generally, the estimated useful lives of other items of premises and equipment are as follows:
|
Years
|
|
|
Building and improvements
|
31.5
|
|
Furniture and equipment
|
5 – 10
|
|
Electronic equipment and software
|
3 – 5
|
Leases
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding Right of Use ("ROU")
asset and operating lease liability are recorded in separate line items on the Consolidated Balance Sheet. ROU assets represent the Company's right to use an underlying asset during the lease term and a lease liability represents the Company's
commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of
the operating lease ROU asset includes any lease payments made and is reduced by lease incentive that are paid or are payable to the Company. Variable lease payments that depend on an index are included in lease payments based on the rate in effect
at the commencement date of the lease. Lease payments are recognized on a straight-line basis as part of occupancy expense over the lease term.
As the rate implicit in the lease is not readily determinable, the Company's incremental borrowing rate is used to determine the present value of lease payments. This rate considers the applicable FHLB
collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less,
therefore, these leases are not recorded on the Company's Balance Sheet. Lease expense of these leases is recognized over the lease term on a straight-line basis. The Company's lease agreements may include options to extend or terminate the lease.
These options are included in the lease term when it is reasonably certain that the option will be exercised.
In addition to the package of practical expedients, the Company also elected the practical expedient that allows lessees to make an accounting policy election to not separate non-lease components from
the associated lease component, and instead account for them all together as part of the applicable lease component. The majority of the Company's non-lease components, such as common area maintenance and taxes, are variable and expensed as incurred.
Variable payment amounts are determined in arrears by the landlord depending on actual costs incurred. See ''Note 14. Leases" of these Notes to Consolidated Financial Statements for further disclosures required under the standard.
Foreclosed Real Estate and Repossessed Assets
Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of loan balance over the fair value less estimated
costs to sell of the other assets is charged-off against the allowance for loan losses. Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously
charged-off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets. Subsequent to the legal ownership date, the Company periodically performs a new valuation, and the asset is carried at the lower of carrying
amount or fair value less estimated costs to sell. Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
Income Taxes
The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated
financial statements. Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting. These items represent “temporary differences.” Deferred income taxes
are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not
be realized. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets net of deferred tax liabilities are included in other assets on the consolidated balance
sheets.
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s
historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the
determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes a more likely than not threshold for the financial statement
recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
Bank Owned Life Insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other non-interest income in the consolidated income statements. The cash surrender value of the underlying
policies was $9.6 million and $6.9 million as of December 31, 2020 and 2019, respectively and is recorded in other assets in the balance sheet. There are no loans offset against cash surrender values, and there are no restrictions as to the use of
proceeds.
Fair Value of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value Measurements and Disclosures
(“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the
measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
| • |
Level 1— Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
| • |
Level 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 December 31, 2020 or 2019. The estimated fair value amounts for December 31,
2020 and 2019 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments
subsequent to the reporting date may be different than the amounts reported at the period-end.
The information presented in Note 16, “Fair Value Measurements,” should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a
limited portion of the Company’s assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be
meaningful.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.
Investment securities
The fair value of Farmer Mac class a stock is based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.
The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield
curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.
FRB and FHLB stock
CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintain an investment in FRB stock. These investments are carried at cost since no ready market
exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.
Loans
Fair value for loans is estimated based on exit-pricing discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with
adjustments that the Company believes a market participant would consider in determining fair value based on a third-party independent valuation. As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values
of impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.
Deposit liabilities
The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the
cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date. The fair value measurement of deposit liabilities is
categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of borrowing arrangements. The other borrowings have been
categorized as Level 3 in the fair value hierarchy. The FHLB advances have been categorized as Level 2 in the fair value hierarchy.
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, considering
the remaining terms of the agreements and the counterparties’ credit standing.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income (loss) available to common shareholders. Diluted
earnings per share include the effect of all dilutive potential common shares for the period. Potentially dilutive common shares include stock options.
Recent Accounting Pronouncements
Effective January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update amends the accounting requirements for leases by requiring
recognition of lease liabilities and related right-of-use assets on the balance sheet. Lessees are required to recognize a lease liability measured on a discounted basis, which is the lessee’s right to use, or control the use of, a specified asset
for the lease term. We adopted Topic 842 using the modified retrospective approach. We have recorded the cumulative effects on our balance sheet as of the effective date. As a result of the adoption, there was no impact on net income. We recorded
operating lease right-of-use assets of $8.4 million and lease liabilities of $8.4 million upon adoption. As of December 31, 2020, the operating lease right-of-use assets was $5.9 million and lease liabilities of $6.0 million. As part of the adoption,
we elected the package of practical expedients permitted under the transition guidance within Topic 842, which among other things, allowed us to carry forward the historical lease classifications. Leases with a term of 12 months or less are not
recorded on the balance sheet. See Note 11, Leases for further information.
In June 2016, the FASB issued updated guidance codified within ASU-2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the
guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The guidance requires the use of the modified
retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2023. The Company is currently
evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.
In March 2017, the FASB issued updated guidance codified within ASU-2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20),” which is intended to enhance the accounting for the
amortization of premiums for purchased callable debt securities. The Company adopted this guidance as of January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2020, the FASB issued updated guidance codified within ASU-2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting," which provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to the risk of cessation of the London
Interbank Offered Rate ("LIBOR"), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable, or transaction based and less
susceptible to manipulation. As of December 31, 2020, the Company had $7.6 million of securities with rates tied to libor and is currently evaluating the impact of the amended guidance and has not yet determined the
effect of the standard on its ongoing financial reporting.
| 2. |
INVESTMENT SECURITIES
|
The amortized cost and estimated fair value of investment securities are as follows:
|
December 31, 2020
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized (Losses)
|
Fair
Value
|
|||||||||||||
|
Securities available-for-sale
|
(in thousands)
|
|||||||||||||||
|
U.S. government agency notes
|
$
|
6,501
|
$
|
1
|
$
|
(30
|
)
|
$
|
6,472
|
|||||||
|
U.S. government agency collateralized mortgage obligations ("CMO")
|
7,765
|
33
|
(13
|
)
|
7,785
|
|||||||||||
|
Other securities
|
3,000
|
53
|
(2
|
)
|
3,051
|
|||||||||||
|
Total
|
$
|
17,266
|
$
|
87
|
$
|
(45
|
)
|
$
|
17,308
|
|||||||
|
Securities held-to-maturity
|
||||||||||||||||
|
U.S. government agency mortgage-backed securities ("MBS")
|
$
|
4,586
|
$
|
269
|
$
|
(1
|
)
|
$
|
4,854
|
|||||||
|
Total
|
$
|
4,586
|
$
|
269
|
$
|
(1
|
)
|
$
|
4,854
|
|||||||
|
Securities measured at fair value
|
||||||||||||||||
|
Equity securities: Farmer Mac class A stock
|
$
|
66
|
$
|
83
|
$
|
—
|
$
|
149
|
||||||||
|
Total
|
$
|
66
|
$
|
83
|
$
|
—
|
$
|
149
|
||||||||
|
December 31, 2019
|
||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
(Losses)
|
Fair
Value
|
|||||||||||||
|
Securities available-for-sale
|
(in thousands)
|
|||||||||||||||
|
U.S. government agency notes
|
$
|
8,112
|
$
|
—
|
$
|
(64
|
)
|
$
|
8,048
|
|||||||
|
U.S. government agency collateralized mortgage obligations ("CMO")
|
11,270
|
23
|
(77
|
)
|
11,216
|
|||||||||||
|
Total
|
19,382
|
23
|
(141
|
)
|
19,264
|
|||||||||||
|
Securities held-to-maturity
|
||||||||||||||||
|
U.S. government agency mortgage-backed securities ("MBS")
|
$
|
6,132
|
$
|
189
|
$
|
(19
|
)
|
$
|
6,302
|
|||||||
|
Total
|
$
|
6,132
|
$
|
189
|
$
|
(19
|
)
|
$
|
6,302
|
|||||||
|
Securities measured at fair value
|
||||||||||||||||
|
Equity securities: Farmer Mac class A stock
|
$
|
66
|
$
|
101
|
$
|
—
|
$
|
167
|
||||||||
|
Total
|
$
|
66
|
$
|
101
|
$
|
—
|
$
|
167
|
||||||||
At December 31, 2020 and 2019, $18.9 million and $25.6 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future
advances.
The Company had no investment security sales in 2020 or 2019.
The maturity periods and weighted average yields of investment securities at December 31, 2020 and 2019 were as follows:
|
December 31, 2020
|
||||||||||||||||||||||||||||||||||||||||
|
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
|
$
|
—
|
—
|
$
|
784
|
0.6
|
%
|
$
|
5,688
|
1.7
|
%
|
$
|
—
|
—
|
$
|
6,472
|
1.2
|
%
|
||||||||||||||||||||||
|
U.S. government agency CMO
|
820
|
1.7
|
%
|
5,832
|
0.6
|
%
|
1,133
|
0.8
|
%
|
—
|
—
|
7,785
|
2.3
|
%
|
||||||||||||||||||||||||||
|
Other securities
|
—
|
—
|
3,051
|
4.8
|
%
|
—
|
0.0
|
%
|
—
|
—
|
3,051
|
4.8
|
%
|
|||||||||||||||||||||||||||
|
Total
|
$
|
820
|
1.7
|
%
|
$
|
9,667
|
1.9
|
%
|
$
|
6,821
|
1.5
|
%
|
$
|
—
|
—
|
$
|
17,308
|
1.6
|
%
|
|||||||||||||||||||||
|
Securities held-to-maturity
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. government agency MBS
|
$
|
—
|
—
|
$
|
3,821
|
2.8
|
%
|
$
|
765
|
3.6
|
%
|
$
|
—
|
—
|
$
|
4,586
|
2.9
|
%
|
||||||||||||||||||||||
|
Total
|
$
|
—
|
—
|
$
|
3,821
|
2.8
|
%
|
$
|
765
|
3.6
|
%
|
$
|
—
|
—
|
$
|
4,586
|
2.9
|
%
|
||||||||||||||||||||||
|
Securities measured at fair value
|
||||||||||||||||||||||||||||||||||||||||
|
Farmer Mac class A stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
149
|
—
|
||||||||||||||||||||||||||||||
|
Total
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
149
|
—
|
||||||||||||||||||||||||||||||
|
December 31, 2019
|
||||||||||||||||||||||||||||||||||||||||
|
Less than One
Year
|
One to Five
Years
|
Five to Ten
Years
|
Over Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
|
Securities available-for-sale
|
(dollars in thousands)
|
|||||||||||||||||||||||||||||||||||||||
|
U.S. government agency notes
|
$
|
—
|
—
|
$
|
1,094
|
2.3
|
%
|
$
|
6,955
|
2.8
|
%
|
$
|
—
|
—
|
$
|
8,049
|
2.8
|
%
|
||||||||||||||||||||||
|
U.S. government agency CMO
|
—
|
—
|
3,766
|
2.1
|
%
|
6,120
|
2.3
|
%
|
1,329
|
2.4
|
%
|
11,215
|
2.3
|
%
|
||||||||||||||||||||||||||
|
Total
|
$
|
—
|
—
|
$
|
4,860
|
2.2
|
%
|
$
|
13,075
|
2.6
|
%
|
$
|
1,329
|
2.4
|
%
|
$
|
19,264
|
2.5
|
%
|
|||||||||||||||||||||
|
Securities held-to-maturity
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. government agency MBS
|
$
|
—
|
—
|
$
|
2,465
|
4.2
|
%
|
$
|
2,887
|
2.9
|
%
|
$
|
780
|
3.6
|
%
|
$
|
6,132
|
3.5
|
%
|
|||||||||||||||||||||
|
Total
|
$
|
—
|
—
|
$
|
2,465
|
4.2
|
%
|
$
|
2,887
|
2.9
|
%
|
$
|
780
|
3.6
|
%
|
$
|
6,132
|
3.5
|
%
|
|||||||||||||||||||||
|
Securities measured at fair value
|
||||||||||||||||||||||||||||||||||||||||
|
Farmer Mac class A stock
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
167
|
—
|
||||||||||||||||||||||||||||||
|
Total
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
167
|
—
|
||||||||||||||||||||||||||||||
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
|
December 31,
|
||||||||||||||||
|
2020
|
2019
|
|||||||||||||||
|
Amortized
Cost
|
Estimated
Fair Value
|
Amortized
Cost
|
Estimated
Fair Value
|
|||||||||||||
|
Securities available for sale
|
(in thousands)
|
|||||||||||||||
|
Due in one year or less
|
$
|
817
|
$
|
820
|
$
|
—
|
$
|
—
|
||||||||
|
After one year through five years
|
9,594
|
9,667
|
4,884
|
4,860
|
||||||||||||
|
After five years through ten years
|
6,855
|
6,821
|
13,121
|
13,075
|
||||||||||||
|
After ten years
|
—
|
—
|
1,377
|
1,329
|
||||||||||||
|
Farmer Mac class A stock
|
—
|
—
|
—
|
—
|
||||||||||||
|
Total
|
$
|
17,266
|
$
|
17,308
|
$
|
19,382
|
$
|
19,264
|
||||||||
|
Securities held to maturity
|
||||||||||||||||
|
Due in one year or less
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||
|
After one year through five years
|
3,821
|
3,965
|
2,465
|
2,565
|
||||||||||||
|
After five years through ten years
|
765
|
889
|
2,887
|
2,892
|
||||||||||||
|
After ten years
|
—
|
—
|
780
|
845
|
||||||||||||
|
Total
|
$
|
4,586
|
$
|
4,854
|
$
|
6,132
|
$
|
6,302
|
||||||||
|
Securities measured at fair value
|
||||||||||||||||
|
Farmer Mac class A stock
|
$
|
66
|
$
|
149
|
$
|
66
|
$
|
167
|
||||||||
|
Total
|
$
|
66
|
$
|
149
|
$
|
66
|
$
|
167
|
||||||||
Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities. Changes in interest rates may also impact prepayments.
The following tables show all securities that are in an unrealized loss position:
|
December 31, 2020
|
||||||||||||||||||||||||
|
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
|
$
|
—
|
$
|
—
|
$
|
7
|
$
|
784
|
$
|
7
|
$
|
784
|
||||||||||||
|
U.S. government agency CMO
|
—
|
—
|
36
|
6,021
|
36
|
6,021
|
||||||||||||||||||
|
Other securities
|
2
|
1,498
|
—
|
—
|
2
|
1,498
|
||||||||||||||||||
|
Total
|
$
|
2
|
$
|
1,498
|
$
|
43
|
$
|
6,805
|
$
|
45
|
$
|
8,303
|
||||||||||||
|
Securities held-to-maturity
|
||||||||||||||||||||||||
|
U.S. Government-agency MBS
|
$
|
1
|
$
|
185
|
$
|
—
|
$
|
—
|
$
|
1
|
$
|
185
|
||||||||||||
|
Total
|
$
|
1
|
$
|
185
|
$
|
—
|
$
|
—
|
$
|
1
|
$
|
185
|
||||||||||||
|
Securities measured at fair value
|
||||||||||||||||||||||||
|
Equity securities: Farmer Mac class A stock
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
|
December 31, 2019
|
||||||||||||||||||||||||
|
Less Than Twelve
Months
|
More Than Twelve
Months
|
Total
|
||||||||||||||||||||||
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||||||||
|
Securities available-for-sale
|
(in thousands)
|
|||||||||||||||||||||||
|
U.S. government agency notes
|
$
|
3
|
$
|
1,126
|
$
|
61
|
$
|
6,922
|
$
|
64
|
$
|
8,048
|
||||||||||||
|
U.S. government agency CMO
|
25
|
5,275
|
52
|
2,264
|
77
|
7,539
|
||||||||||||||||||
|
Total
|
$
|
28
|
$
|
6,401
|
$
|
113
|
$
|
9,186
|
$
|
141
|
$
|
15,587
|
||||||||||||
|
Securities held-to-maturity
|
||||||||||||||||||||||||
|
U.S. Government-agency MBS
|
$
|
—
|
$
|
—
|
$
|
19
|
$
|
2,139
|
$
|
19
|
$
|
2,139
|
||||||||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
19
|
$
|
2,139
|
$
|
19
|
$
|
2,139
|
||||||||||||
|
Securities measured at fair value
|
||||||||||||||||||||||||
|
Equity securities: Farmer Mac class A stock
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
|
Total
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||||
As of December 31, 2020 and 2019, there were 13 and 20 securities, respectively, in an unrealized loss position. Declines in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair
value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired security and if it is not more likely than not it will be required to sell the security before the
recovery of its amortized basis.
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the
bonds approach their maturity date, repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2020 and 2019,
management believes the impairments detailed in the table above are temporary and no other than temporary impairment loss has been realized in the Company’s consolidated income statements.
| 3. |
LOANS HELD FOR SALE
|
SBA and Agriculture Loans
As of December 31, 2020 and 2019, the Company had approximately $8.3 million and $13.6 million, respectively, of SBA loans included in loans held for sale. As of December 31, 2020 and 2019, the
principal balance of SBA loans serviced for others was $4.0 million and $7.2 million, respectively.
The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. The primary products are
supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program.
As of December 31, 2020 and 2019, the Company had $22.9 million and $34.8 million of USDA loans included in loans held for sale, respectively. As of December 31, 2020 and 2019, the principal balance of
USDA loans serviced for others was $1.9 million and $2.0 million, respectively.
| 4. |
LOANS HELD FOR INVESTMENT
|
The composition of the Company’s loans held for investment loan portfolio follows:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Manufactured housing
|
$
|
280,284
|
$
|
257,247
|
||||
|
Commercial real estate
|
402,148
|
385,642
|
||||||
|
Commercial
|
57,933
|
69,843
|
||||||
|
SBA (1)
|
73,131
|
4,429
|
||||||
|
HELOC
|
3,861
|
4,531
|
||||||
|
Single family real estate
|
10,490
|
11,845
|
||||||
|
Consumer
|
133
|
94
|
||||||
|
827,980
|
733,631
|
|||||||
|
Allowance for loan losses
|
(10,194
|
)
|
(8,717
|
)
|
||||
|
Deferred fees, net
|
(1,583
|
)
|
(58
|
)
|
||||
|
Discount on SBA loans
|
(49
|
)
|
(56
|
)
|
||||
|
Total loans held for investment, net
|
$
|
816,154
|
$
|
724,800
|
||||
| (1) |
As of December 31, 2020, the SBA loan portfolio included $69.5 million of SBA PPP loans.
|
The following tables present the contractual aging of the recorded investment in past due held for investment loans by class of loans:
|
December 31, 2020
|
||||||||||||||||||||||||||||||||
|
Current
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
Over 90
Days
Past Due
|
Total
Past Due
|
Nonaccrual
|
Total
|
Recorded
Investment
Over 90
Days
and
Accruing
|
|||||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||||||
|
Manufactured housing
|
$
|
277,873
|
$
|
1,716
|
$
|
81
|
$
|
—
|
$
|
1,797
|
$
|
614
|
$
|
280,284
|
$
|
—
|
||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||
|
Commercial real estate
|
360,345
|
—
|
—
|
—
|
—
|
—
|
360,345
|
—
|
||||||||||||||||||||||||
|
SBA 504 1st trust deed
|
16,423
|
—
|
—
|
—
|
—
|
1,469
|
17,892
|
—
|
||||||||||||||||||||||||
|
Land
|
6,528
|
—
|
—
|
—
|
—
|
—
|
6,528
|
—
|
||||||||||||||||||||||||
|
Construction
|
17,383
|
—
|
—
|
—
|
—
|
—
|
17,383
|
—
|
||||||||||||||||||||||||
|
Commercial
|
56,451
|
92
|
—
|
—
|
92
|
1,390
|
57,933
|
—
|
||||||||||||||||||||||||
|
SBA
|
72,856
|
—
|
—
|
—
|
—
|
275
|
73,131
|
—
|
||||||||||||||||||||||||
|
HELOC
|
3,861
|
—
|
—
|
—
|
—
|
—
|
3,861
|
—
|
||||||||||||||||||||||||
|
Single family real estate
|
10,366
|
—
|
—
|
—
|
—
|
124
|
10,490
|
—
|
||||||||||||||||||||||||
|
Consumer
|
133
|
—
|
—
|
—
|
—
|
—
|
133
|
—
|
||||||||||||||||||||||||
|
Total
|
$
|
822,219
|
$
|
1,808
|
$
|
81
|
$
|
—
|
$
|
1,889
|
$
|
3,872
|
$
|
827,980
|
$
|
—
|
||||||||||||||||
|
December 31, 2019
|
||||||||||||||||||||||||||||||||
|
Current
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
Over 90
Days
Past Due
|
Total
Past Due
|
Nonaccrual
|
Total
|
Recorded
Investment
Over 90
Days
and
Accruing
|
|||||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||||||
|
Manufactured housing
|
$
|
256,251
|
$
|
156
|
$
|
246
|
$
|
—
|
$
|
402
|
$
|
594
|
$
|
257,247
|
$
|
—
|
||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||
|
Commercial real estate
|
327,255
|
—
|
—
|
—
|
—
|
84
|
327,339
|
—
|
||||||||||||||||||||||||
|
SBA 504 1st trust deed
|
17,151
|
1,401
|
—
|
—
|
1,401
|
—
|
18,552
|
—
|
||||||||||||||||||||||||
|
Land
|
4,457
|
—
|
—
|
—
|
—
|
—
|
4,457
|
—
|
||||||||||||||||||||||||
|
Construction
|
35,294
|
—
|
—
|
—
|
—
|
—
|
35,294
|
—
|
||||||||||||||||||||||||
|
Commercial
|
68,224
|
—
|
—
|
—
|
—
|
1,619
|
69,843
|
—
|
||||||||||||||||||||||||
|
SBA
|
3,935
|
112
|
—
|
—
|
112
|
382
|
4,429
|
—
|
||||||||||||||||||||||||
|
HELOC
|
4,531
|
—
|
—
|
—
|
—
|
—
|
4,531
|
—
|
||||||||||||||||||||||||
|
Single family real estate
|
11,813
|
32
|
—
|
—
|
32
|
—
|
11,845
|
—
|
||||||||||||||||||||||||
|
Consumer
|
94
|
—
|
—
|
—
|
—
|
—
|
94
|
—
|
||||||||||||||||||||||||
|
Total
|
$
|
729,005
|
$
|
1,701
|
$
|
246
|
$
|
—
|
$
|
1,947
|
$
|
2,679
|
$
|
733,631
|
$
|
—
|
||||||||||||||||
Allowance for Loan Losses
The following table summarizes the changes in the allowance for loan losses:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Beginning balance
|
$
|
8,717
|
$
|
8,691
|
$
|
8,420
|
||||||
|
Charge-offs
|
-
|
(31
|
)
|
(133
|
)
|
|||||||
|
Recoveries
|
254
|
222
|
390
|
|||||||||
|
Net recoveries
|
254
|
191
|
257
|
|||||||||
|
Provision (credit)
|
1,223
|
(165
|
)
|
14
|
||||||||
|
Ending balance
|
$
|
10,194
|
$
|
8,717
|
$
|
8,691
|
||||||
As of December 31, 2020 and 2019, the Company had reserves for credit losses on undisbursed loans of $92,000 and $85,000 which were included in Other liabilities.
The following tables summarize the changes in the allowance for loan losses by portfolio type:
|
For the Year Ended December 31,
|
||||||||||||||||||||||||||||||||
|
Manufactured
Housing
|
Commercial
Real Estate
|
Commercial
|
SBA
|
HELOC
|
Single
Family
Real
Estate
|
Consumer
|
Total
|
|||||||||||||||||||||||||
|
2020
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,184
|
$
|
5,217
|
$
|
1,162
|
$
|
32
|
$
|
27
|
$
|
92
|
$
|
3
|
$
|
8,717
|
||||||||||||||||
|
Charge-offs
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Recoveries
|
27
|
80
|
133
|
7
|
6
|
1
|
—
|
254
|
||||||||||||||||||||||||
|
Net recoveries
|
27
|
80
|
133
|
7
|
6
|
1
|
—
|
254
|
||||||||||||||||||||||||
|
Provision (credit)
|
401
|
653
|
84
|
79
|
(8
|
)
|
15
|
(1
|
)
|
1,223
|
||||||||||||||||||||||
|
Ending balance
|
$
|
2,612
|
$
|
5,950
|
$
|
1,379
|
$
|
118
|
$
|
25
|
$
|
108
|
$
|
2
|
$
|
10,194
|
||||||||||||||||
|
2019
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,196
|
$
|
5,028
|
$
|
1,210
|
$
|
79
|
$
|
90
|
$
|
88
|
$
|
—
|
$
|
8,691
|
||||||||||||||||
|
Charge-offs
|
—
|
—
|
(31
|
)
|
—
|
—
|
—
|
—
|
(31
|
)
|
||||||||||||||||||||||
|
Recoveries
|
54
|
52
|
60
|
50
|
5
|
1
|
—
|
222
|
||||||||||||||||||||||||
|
Net recoveries
|
54
|
52
|
29
|
50
|
5
|
1
|
—
|
191
|
||||||||||||||||||||||||
|
Provision (credit)
|
(66
|
)
|
137
|
(77
|
)
|
(97
|
)
|
(68
|
)
|
3
|
3
|
(165
|
)
|
|||||||||||||||||||
|
Ending balance
|
$
|
2,184
|
$
|
5,217
|
$
|
1,162
|
$
|
32
|
$
|
27
|
$
|
92
|
$
|
3
|
$
|
8,717
|
||||||||||||||||
|
2018
|
||||||||||||||||||||||||||||||||
|
Beginning balance
|
$
|
2,180
|
$
|
4,844
|
$
|
1,133
|
$
|
73
|
$
|
92
|
$
|
98
|
$
|
—
|
$
|
8,420
|
||||||||||||||||
|
Charge-offs
|
(6
|
)
|
—
|
(127
|
)
|
—
|
—
|
—
|
—
|
(133
|
)
|
|||||||||||||||||||||
|
Recoveries
|
120
|
15
|
66
|
133
|
55
|
1
|
—
|
390
|
||||||||||||||||||||||||
|
Net (charge-offs) recoveries
|
114
|
15
|
(61
|
)
|
133
|
55
|
1
|
—
|
257
|
|||||||||||||||||||||||
|
Provision (credit)
|
(98
|
)
|
169
|
138
|
(127
|
)
|
(57
|
)
|
(11
|
)
|
—
|
14
|
||||||||||||||||||||
|
Ending balance
|
$
|
2,196
|
$
|
5,028
|
$
|
1,210
|
$
|
79
|
$
|
90
|
$
|
88
|
$
|
—
|
$
|
8,691
|
||||||||||||||||
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 December 31, 2020:
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Recorded Investment:
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
4,402
|
$
|
230
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
449
|
$
|
—
|
$
|
5,081
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
2,294
|
1,468
|
1,504
|
292
|
—
|
1,860
|
—
|
7,418
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
6,696
|
1,698
|
1,504
|
292
|
—
|
2,309
|
—
|
12,499
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
273,588
|
400,450
|
56,429
|
72,839
|
3,861
|
8,181
|
133
|
815,481
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
280,284
|
$
|
402,148
|
$
|
57,933
|
$
|
73,131
|
$
|
3,861
|
$
|
10,490
|
$
|
133
|
$
|
827,980
|
||||||||||||||||
|
Unpaid Principal Balance
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
4,402
|
$
|
230
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
449
|
$
|
—
|
$
|
5,081
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
3,066
|
1,474
|
1,844
|
946
|
—
|
1,860
|
—
|
9,190
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
7,468
|
1,704
|
1,844
|
946
|
—
|
2,309
|
—
|
14,271
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
273,588
|
400,450
|
56,429
|
72,839
|
3,861
|
8,181
|
133
|
815,481
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
281,056
|
$
|
402,154
|
$
|
58,273
|
$
|
73,785
|
$
|
3,861
|
$
|
10,490
|
$
|
133
|
$
|
829,752
|
||||||||||||||||
|
Related Allowance for Loan Losses
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
279
|
$
|
16
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
16
|
$
|
—
|
$
|
311
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
279
|
16
|
—
|
—
|
—
|
16
|
—
|
311
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
2,333
|
5,934
|
1,379
|
118
|
25
|
92
|
2
|
9,883
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
2,612
|
$
|
5,950
|
$
|
1,379
|
$
|
118
|
$
|
25
|
$
|
108
|
$
|
2
|
$
|
10,194
|
||||||||||||||||
|
Manufactured
Housing
|
Commercial
Real Estate
|
Commercial
|
SBA
|
HELOC
|
Single Family
Real
Estate
|
Consumer
|
Total
Loans
|
|||||||||||||||||||||||||
|
Loans Held for Investment as of December 31, 2019:
|
(in thousands)
|
|||||||||||||||||||||||||||||||
|
Recorded Investment:
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
5,702
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
470
|
$
|
—
|
$
|
6,172
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
2,296
|
318
|
1,802
|
382
|
—
|
1,858
|
—
|
6,656
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
7,998
|
318
|
1,802
|
382
|
—
|
2,328
|
—
|
12,828
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
249,249
|
385,324
|
68,041
|
4,047
|
4,531
|
9,517
|
94
|
720,803
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
257,247
|
$
|
385,642
|
$
|
69,843
|
$
|
4,429
|
$
|
4,531
|
$
|
11,845
|
$
|
94
|
$
|
733,631
|
||||||||||||||||
|
Unpaid Principal Balance
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
5,702
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
470
|
$
|
—
|
$
|
6,172
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
3,134
|
384
|
2,156
|
736
|
—
|
1,858
|
—
|
8,268
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
8,836
|
384
|
2,156
|
736
|
—
|
2,328
|
—
|
14,440
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
249,249
|
385,324
|
68,041
|
4,047
|
4,531
|
9,517
|
94
|
720,803
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
258,085
|
$
|
385,708
|
$
|
70,197
|
$
|
4,783
|
$
|
4,531
|
$
|
11,845
|
$
|
94
|
$
|
735,243
|
||||||||||||||||
|
Related Allowance for Loan Losses
|
||||||||||||||||||||||||||||||||
|
Impaired loans with an allowance recorded
|
$
|
334
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
18
|
$
|
—
|
$
|
352
|
||||||||||||||||
|
Impaired loans with no allowance recorded
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||||
|
Total loans individually evaluated for impairment
|
334
|
—
|
—
|
—
|
—
|
18
|
—
|
352
|
||||||||||||||||||||||||
|
Loans collectively evaluated for impairment
|
1,850
|
5,217
|
1,162
|
32
|
27
|
74
|
3
|
8,365
|
||||||||||||||||||||||||
|
Total loans held for investment
|
$
|
2,184
|
$
|
5,217
|
$
|
1,162
|
$
|
32
|
$
|
27
|
$
|
92
|
$
|
3
|
$
|
8,717
|
||||||||||||||||
Included in impaired loans are $0.7 million and $0.6 million of loans guaranteed by government agencies at December 31, 2020 and 2019, respectively. A valuation allowance is established for an impaired
loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table
above as “Impaired loans without specific valuation allowance under ASC 310.” The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of December 31, 2020 and 2019.
The following table presents impaired loans by class:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Manufactured housing
|
$
|
6,696
|
$
|
7,998
|
||||
|
Commercial real estate :
|
||||||||
|
Commercial real estate
|
—
|
84
|
||||||
|
SBA 504 1st trust deed
|
1,698
|
234
|
||||||
|
Land
|
—
|
—
|
||||||
|
Construction
|
—
|
—
|
||||||
|
Commercial
|
1,504
|
1,802
|
||||||
|
SBA
|
292
|
382
|
||||||
|
HELOC
|
—
|
—
|
||||||
|
Single family real estate
|
2,309
|
2,328
|
||||||
|
Consumer
|
—
|
—
|
||||||
|
Total
|
$
|
12,499
|
$
|
12,828
|
||||
The following table summarizes the average investment in impaired loans by class and the related interest income recognized:
|
2020
|
2019
|
2018
|
||||||||||||||||||||||
|
Average
Investment
in Impaired
Loans
|
Interest
Income
|
Average
Investment
in Impaired
Loans
|
Interest
Income
|
Average
Investment
in Impaired
Loans
|
Interest
Income
|
|||||||||||||||||||
|
Manufactured housing
|
$
|
7,483
|
$
|
556
|
$
|
9,171
|
$
|
640
|
$
|
8,709
|
$
|
887
|
||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||
|
Commercial real estate
|
67
|
—
|
104
|
—
|
108
|
—
|
||||||||||||||||||
|
SBA 504 1st
|
527
|
71
|
190
|
27
|
341
|
19
|
||||||||||||||||||
|
Land
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Construction
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Commercial
|
1,660
|
7
|
5,491
|
164
|
7,520
|
245
|
||||||||||||||||||
|
SBA
|
335
|
1
|
970
|
32
|
874
|
18
|
||||||||||||||||||
|
HELOC
|
—
|
—
|
127
|
11
|
199
|
11
|
||||||||||||||||||
|
Single family real estate
|
2,279
|
123
|
2,451
|
127
|
2,298
|
144
|
||||||||||||||||||
|
Consumer
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
|
$
|
12,351
|
$
|
758
|
$
|
18,504
|
$
|
1,001
|
$
|
20,049
|
$
|
1,324
|
||||||||||||
The Company is not committed to lend significant additional funds on these impaired loans.
The following table reflects the recorded investment in certain types of loans at the periods indicated:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Nonaccrual loans
|
$
|
3,872
|
$
|
2,679
|
$
|
6,226
|
||||||
|
SBA guaranteed portion of loans included above
|
$
|
207
|
$
|
290
|
$
|
2,848
|
||||||
|
Troubled debt restructured loans, gross
|
$
|
11,141
|
$
|
10,774
|
$
|
16,749
|
||||||
|
Loans 30 through 89 days past due with interest accruing
|
$
|
1,889
|
$
|
1,947
|
$
|
—
|
||||||
|
Interest income recognized on impaired loans
|
$
|
758
|
$
|
1,001
|
$
|
1,324
|
||||||
|
Foregone interest on nonaccrual and troubled debt restructured loans
|
$
|
254
|
$
|
512
|
$
|
454
|
||||||
|
Allowance for loan losses to gross loans held for investment
|
1.23
|
%
|
1.19
|
%
|
1.21
|
%
|
||||||
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed
at that time. Thereafter, interest income is no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table presents the composition of nonaccrual loans by class of loans:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Manufactured housing
|
$
|
614
|
$
|
594
|
||||
|
Commercial real estate:
|
||||||||
|
Commercial real estate
|
—
|
84
|
||||||
|
SBA 504 1st trust deed
|
1,469
|
—
|
||||||
|
Land
|
—
|
—
|
||||||
|
Construction
|
—
|
—
|
||||||
|
Commercial
|
1,390
|
1,619
|
||||||
|
SBA
|
275
|
382
|
||||||
|
HELOC
|
—
|
—
|
||||||
|
Single family real estate
|
124
|
—
|
||||||
|
Consumer
|
—
|
—
|
||||||
|
Total
|
$
|
3,872
|
$
|
2,679
|
||||
Included in nonaccrual loans are $0.2 million and $0.3 million of loans guaranteed by government agencies at December 31, 2020 and 2019, respectively.
The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA directly. After the foreclosure and collection process is
complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA. Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore, a repurchase reserve has
not been established related to these loans.
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and
potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. For a detailed discussion on these risk classifications see “Note 1 Summary of Significant Accounting Policies – Allowance for Loan Losses and Provision for Loan
Losses” of this Form 10-K. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management’s close attention are deemed to be Special
Mention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not
expose an institution to sufficient risk to warrant adverse classification. Risk rates are updated as part of the normal loan monitoring process, at a minimum, annually.
The following tables present gross loans by risk rating:
|
December 31, 2020
|
||||||||||||||||||||
|
Pass
|
Special
Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Manufactured housing
|
$
|
278,826
|
$
|
—
|
$
|
1,458
|
$
|
—
|
$
|
280,284
|
||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Commercial real estate
|
340,391
|
6,265
|
12,362
|
—
|
359,018
|
|||||||||||||||
|
SBA 504 1st trust deed
|
14,877
|
—
|
3,015
|
—
|
17,892
|
|||||||||||||||
|
Land
|
6,528
|
—
|
—
|
—
|
6,528
|
|||||||||||||||
|
Construction
|
15,344
|
—
|
2,039
|
—
|
17,383
|
|||||||||||||||
|
Commercial
|
48,776
|
823
|
3,419
|
—
|
53,018
|
|||||||||||||||
|
SBA
|
2,554
|
34
|
263
|
—
|
2,851
|
|||||||||||||||
|
HELOC
|
3,861
|
—
|
—
|
—
|
3,861
|
|||||||||||||||
|
Single family real estate
|
10,361
|
—
|
129
|
—
|
10,490
|
|||||||||||||||
|
Consumer
|
133
|
—
|
—
|
—
|
133
|
|||||||||||||||
|
Total, net
|
$
|
721,651
|
$
|
7,122
|
$
|
22,685
|
$
|
—
|
$
|
751,458
|
||||||||||
|
Government guarantee
|
72,876
|
—
|
3,646
|
—
|
76,522
|
|||||||||||||||
|
Total
|
$
|
794,527
|
$
|
7,122
|
$
|
26,331
|
$
|
—
|
$
|
827,980
|
||||||||||
|
December 31, 2019
|
||||||||||||||||||||
|
Pass
|
Special
Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||
|
Manufactured housing
|
$
|
256,430
|
$
|
—
|
$
|
817
|
$
|
—
|
$
|
257,247
|
||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Commercial real estate
|
323,748
|
3,507
|
84
|
—
|
327,339
|
|||||||||||||||
|
SBA 504 1st trust deed
|
18,250
|
—
|
302
|
—
|
18,552
|
|||||||||||||||
|
Land
|
4,457
|
—
|
—
|
—
|
4,457
|
|||||||||||||||
|
Construction
|
33,280
|
—
|
2,014
|
—
|
35,294
|
|||||||||||||||
|
Commercial
|
66,525
|
170
|
1,619
|
—
|
68,314
|
|||||||||||||||
|
SBA
|
2,379
|
28
|
1,154
|
—
|
3,561
|
|||||||||||||||
|
HELOC
|
4,531
|
—
|
—
|
—
|
4,531
|
|||||||||||||||
|
Single family real estate
|
11,840
|
—
|
5
|
—
|
11,845
|
|||||||||||||||
|
Consumer
|
94
|
—
|
—
|
—
|
94
|
|||||||||||||||
|
Total, net
|
$
|
721,534
|
$
|
3,705
|
$
|
5,995
|
$
|
—
|
$
|
731,234
|
||||||||||
|
Government guarantee
|
—
|
1,530
|
867
|
—
|
2,397
|
|||||||||||||||
|
Total
|
$
|
721,534
|
$
|
5,235
|
$
|
6,862
|
$
|
—
|
$
|
733,631
|
||||||||||
Troubled Debt Restructured Loan (TDR)
A TDR is a loan on which the bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank would not otherwise consider. The loan terms that have
been modified or restructured due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a reduction
in the face amount of the debt, a reduction in the accrued interest, extensions, deferrals, renewals, and rewrites. The majority of the bank’s modifications are extensions in terms or deferral of payments which result in no lost principal or interest
followed by reductions in interest rates or accrued interest. A TDR is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years
subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
The following tables summarize the financial effects of TDR loans by class for the periods presented:
|
For the Year Ended December 31, 2020
|
||||||||||||||||||||||||
|
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
|
$
|
56
|
$
|
56
|
$
|
56
|
$
|
56
|
$
|
1
|
|||||||||||||
|
Commercial
|
1
|
1,469
|
1,469
|
—
|
—
|
33
|
||||||||||||||||||
|
SBA
|
1
|
17
|
17
|
—
|
—
|
—
|
||||||||||||||||||
|
Total
|
7
|
$
|
1,542
|
$
|
1,542
|
$
|
56
|
$
|
56
|
$
|
34
|
|||||||||||||
|
For the Year Ended December 31, 2019
|
||||||||||||||||||||||||
|
Number
of Loans
|
Pre-
Modification
Recorded
Investment
|
Post
Modification
Recorded
Investment
|
Balance of
Loans with
Rate
Reduction
|
Balance of
Loans with
Term
Extension
|
Effect on
Allowance
for
Loan
Losses
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Manufactured housing
|
1
|
$
|
25
|
$
|
25
|
$
|
25
|
$
|
25
|
$
|
2
|
|||||||||||||
|
SBA
|
1
|
48
|
48
|
48
|
—
|
—
|
||||||||||||||||||
|
Total
|
2
|
$
|
73
|
$
|
73
|
$
|
73
|
$
|
25
|
$
|
2
|
|||||||||||||
|
For the Year Ended December 31, 2018
|
||||||||||||||||||||||||
|
Number
of Loans
|
Pre-
Modification
Recorded
Investment
|
Post
Modification
Recorded
Investment
|
Balance of
Loans with
Rate
Reduction
|
Balance of
Loans with
Term
Extension
|
Effect on
Allowance
for
Loan
Losses
|
|||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
|
Manufactured housing
|
12
|
$
|
1,047
|
$
|
1,213
|
$
|
1,100
|
$
|
1,213
|
$
|
66
|
|||||||||||||
|
Commercial real estate
|
3
|
1,780
|
1,780
|
-
|
1,780
|
-
|
||||||||||||||||||
|
Total
|
15
|
$
|
2,827
|
$
|
2,993
|
$
|
1,100
|
$
|
2,993
|
$
|
66
|
|||||||||||||
The average rate concession was 100 basis points and 82 basis points for the twelve months ended December 31, 2020 and 2019, respectively. The average term extension in months was 181 and 147 for the
twelve months ended December 31, 2020 and 2019, respectively.
A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to repossessed assets. The Company had no TDR’s with payment
defaults for the twelve months ended December 31, 2020 or 2019.
At December 31, 2020, there were no material loan commitments outstanding on TDR loans.
Related Parties
Principal stockholders, directors, and executive officers of the Company, together with companies they control and family members, are considered to be related parties. In the ordinary course of
business, the Company has extended credit to these related parties. Federal banking regulations require that any such extensions of credit not be offered on terms more favorable than would be offered to non-related party borrowers of similar
creditworthiness.
The following table summarizes the aggregate activity in such loans:
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Balance, beginning
|
$
|
3,162
|
$
|
3,505
|
||||
|
New loans
|
—
|
—
|
||||||
|
Repayments and other
|
(173
|
)
|
(343
|
)
|
||||
|
Balance, ending
|
$
|
2,989
|
$
|
3,162
|
||||
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the
borrower. There were no loans to a related party that were considered classified loans at December 31, 2020 or 2019.
Unfunded loan commitments outstanding with related parties total approximately $0.8 million at December 31, 2020 and $0.3 million at December 31 2019.
| 5. |
PREMISES AND EQUIPMENT
|
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Bank premises and land
|
$
|
3,959
|
$
|
3,959
|
||||
|
Furniture, fixtures, and equipment
|
10,892
|
11,077
|
||||||
|
Leasehold improvements
|
4,986
|
5,106
|
||||||
|
Construction in progress
|
60
|
7
|
||||||
|
19,897
|
20,149
|
|||||||
|
Accumulated depreciation
|
(12,743
|
)
|
(12,494
|
)
|
||||
|
Premises and equipment, net
|
$
|
7,154
|
$
|
7,655
|
||||
Lease Obligations
The Company leases certain premises under non-cancelable operating leases expiring through 2028. The following is a schedule of future minimum rental payments under these leases at December 31, 2020:
|
(in thousands)
|
||||
|
2021
|
$
|
992
|
||
|
2022
|
887
|
|||
|
2023
|
813
|
|||
|
2024
|
821
|
|||
|
2025
|
768
|
|||
|
Thereafter
|
2,586
|
|||
|
Total
|
$
|
6,867
|
||
The Company leases the majority of its office locations and many of these leases contain multiple renewal options and provisions for increased rents. Total rent expense of $1.2 million, $1.3 million and
$1.2 million is included in occupancy expenses for the years ended December 31, 2020, 2019 and 2018, respectively. Total depreciation expense of $0.8 million, $0.9 million, and $0.8 million is included in occupancy expenses for the each of the years
ended December 31, 2020, 2019 and 2018, respectively.
| 6. |
OTHER ASSETS ACQUIRED THROUGH FORECLOSURE
|
The following table summarizes the changes in other assets acquired through foreclosure:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Balance, beginning of period
|
$
|
2,524
|
$
|
—
|
$
|
372
|
||||||
|
Additions
|
106
|
3,401
|
174
|
|||||||||
|
Proceeds from dispositions
|
—
|
(844
|
)
|
(484
|
)
|
|||||||
|
Gains (losses) on sales, net
|
(16
|
)
|
(33
|
)
|
(62
|
)
|
||||||
|
Balance, end of period
|
$
|
2,614
|
$
|
2,524
|
$
|
—
|
||||||
| 7. |
INCOME TAXES
|
The provision for income taxes consisted of the following:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Current:
|
(in thousands)
|
|||||||||||
|
Federal
|
$
|
2,874
|
$
|
2,402
|
$
|
2,130
|
||||||
|
State
|
1,595
|
1,337
|
1,208
|
|||||||||
|
4,469
|
3,739
|
3,338
|
||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(651
|
)
|
(242
|
)
|
(421
|
)
|
||||||
|
State
|
(308
|
)
|
(86
|
)
|
(108
|
)
|
||||||
|
(959
|
)
|
(328
|
)
|
(529
|
)
|
|||||||
|
Total provision for income taxes
|
$
|
3,510
|
$
|
3,411
|
$
|
2,809
|
||||||
The reconciliation between the statutory income tax rate and the Company’s effective tax rate follows:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Federal income tax at statutory rate
|
21.0
|
%
|
21.0
|
%
|
21.0
|
%
|
||||||
|
State franchise tax, net of federal benefit
|
8.6
|
%
|
8.6
|
%
|
8.6
|
%
|
||||||
|
Other
|
0.4
|
%
|
0.4
|
%
|
(2.1
|
)%
|
||||||
|
Tax law change
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||||
|
Total provision for income taxes
|
30.0
|
%
|
30.0
|
%
|
27.5
|
%
|
||||||
The cumulative tax effects of the primary temporary differences are as shown in the following table:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Deferred Tax Assets:
|
(in thousands)
|
|||||||
|
Allowance for loan losses
|
$
|
3,147
|
$
|
2,663
|
||||
|
Unrealized loss on AFS securities
|
—
|
14
|
||||||
|
Other
|
3,090
|
2,446
|
||||||
|
Total gross deferred tax assets
|
6,237
|
5,123
|
||||||
|
Total deferred tax assets
|
6,237
|
5,123
|
||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Deferred state taxes
|
(330
|
)
|
(266
|
)
|
||||
|
Depreciation
|
(609
|
)
|
(653
|
)
|
||||
|
Unrealized gain on AFS securities
|
(33
|
)
|
—
|
|||||
|
Other
|
(1,308
|
)
|
(1,032
|
)
|
||||
|
Total deferred tax liabilities
|
(2,280
|
)
|
(1,951
|
)
|
||||
|
Net deferred tax asset
|
$
|
3,957
|
$
|
3,172
|
||||
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including
operating losses and tax credit carryforwards. Net deferred tax assets of $4.0 million and $3.2 million at December 31, 2020 and December 31, 2019, respectively 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 December 31, 2020 or December 31, 2019.
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740). ASC 740 prescribes a more likely than not threshold for the financial statement
recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December
31, 2020.
The Company is subject to income taxation in the United States and certain state jurisdictions. The Company’s federal and state income tax returns are filed on a consolidated basis. The Company is
generally open to examination by tax authorities for the years 2015 and later. Although the Company is unable to determine the outcome under examination, it has evaluated whether there are any uncertain tax positions in accordance with ASC 740-10 and
concluded that there are no significant uncertain tax positions requiring recognition in the financial statements.
When tax returns are filed, it is highly certain that most positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the Consolidated Financial Statements in the period in which, based on all available evidence, management believes it is
more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. As of December 31, 2020 and 2019, the Company does not
have any uncertain tax positions.
| 8. |
DEPOSITS
|
The table below summarizes deposits by type:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Non-interest-bearing demand deposits
|
$
|
181,837
|
$
|
110,843
|
||||
|
Interest-bearing deposits:
|
||||||||
|
NOW accounts
|
35,414
|
25,523
|
||||||
|
Money market deposit account
|
362,687
|
288,755
|
||||||
|
Savings accounts
|
18,736
|
15,689
|
||||||
|
Time deposits of $250,000 or more
|
30,536
|
96,431
|
||||||
|
Other time deposits
|
136,975
|
213,693
|
||||||
|
Total deposits
|
$
|
766,185
|
$
|
750,934
|
||||
Of the total deposits at December 31, 2020 $598.7 million may be immediately withdrawn. Time certificates of deposit are the only deposits which have a specified maturity.
The summary of the contractual maturities for all time deposits is as follows:
|
(in thousands)
|
||||
|
2021
|
$
|
142,914
|
||
|
2022
|
15,888
|
|||
|
2023
|
5,789
|
|||
|
2024
|
1,800
|
|||
|
2025
|
1,120
|
|||
|
Thereafter
|
—
|
|||
|
Total
|
$
|
167,511
|
||
The Company through the bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep ("ICS") services, which provides Federal Deposit Insurance Corporation
(“FDIC”) insurance for large deposits. Federal banking law and regulation place restrictions on depository institutions regarding brokered deposits as they pose increased liquidity risk for institutions that gather significant amounts of brokered
deposits. At December 31, 2020 and 2019, the Company had $24.7 million and $28.7 million, respectively, of reciprocal CDARS deposits. At December 31, 2020 and 2019, the Company had $77.2 million and $54.5 million, respectively of ICS deposits.
The Company also accepts deposits from related parties which totaled $42.9 million at December 31, 2020 and $27.1 million at December 31, 2019.
| 9. |
OTHER BORROWINGS
|
The following table summarizes the Company’s FHLB advances by maturity date:
|
December 31,
|
||||||||||||||||
|
2020
|
2019
|
|||||||||||||||
|
Contractual Maturity Date
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
|
(dollars in thousands)
|
||||||||||||||||
|
March 30, 2020
|
$
|
—
|
—
|
$
|
5,000
|
2.56
|
%
|
|||||||||
|
April 3, 2020
|
—
|
—
|
15,000
|
2.54
|
%
|
|||||||||||
|
April 27, 2020
|
—
|
—
|
5,000
|
2.49
|
%
|
|||||||||||
|
May 29, 2020
|
—
|
—
|
5,000
|
2.35
|
%
|
|||||||||||
|
October 2, 2020
|
—
|
—
|
20,000
|
1.74
|
%
|
|||||||||||
|
April 5, 2021
|
10,000
|
2.65
|
%
|
10,000
|
2.65
|
%
|
||||||||||
|
May 10, 2021
|
5,000
|
2.44
|
%
|
5,000
|
2
|
%
|
||||||||||
|
March 28, 2022
|
30,000
|
0.82
|
%
|
—
|
—
|
|||||||||||
|
March 28, 2022
|
15,000
|
0.69
|
%
|
—
|
—
|
|||||||||||
|
April 15, 2025
|
39,000
|
0.78
|
%
|
—
|
—
|
|||||||||||
|
April 15, 2025
|
6,000
|
0.76
|
%
|
—
|
—
|
|||||||||||
|
Total FHLB advances
|
$
|
105,000
|
$
|
65,000
|
||||||||||||
|
Weighted average rate
|
1.03
|
%
|
2.29
|
%
|
||||||||||||
The Company, through the bank has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. Total FHLB advances were
$105.0 million and $65.0 million at December 31, 2020 and 2019, respectively, borrowed at fixed rates. The Company also had $38.0 million of letters of credit with FHLB at December 31, 2020 to secure public funds. At December 31, 2020, the Company
had pledged to the FHLB $18.9 million of securities and $304.7 million of loans. At December 31, 2020, the Company had $81.4 million available for additional borrowing. At December 31, 2019, the Company had pledged to the FHLB $25.6 million of
securities and $324.2 million of loans. At December 31, 2019, CWB had $60.5 million available for additional borrowing. Total FHLB interest expense for the years ended December 31, 2020, 2019 and 2018 was $1.4 million, $1.2 million and $1.0 million,
respectively.
Other Borrowing – In July of 2019, the Company entered into a change in terms on its revolving line of credit agreement for reducing the
maximum available to $10.0 million. The line of credit matures July 30, 2022. The Company must maintain a compensating deposit with the lender of 25% of the outstanding principal balance in a non-interest bearing deposit account. The required balance
was zero at December 31, 2019. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a minimum total risked based capital ratio of 10.0%. At December 31, 2020 and 2019, the
line of credit balance was zero.
Federal Reserve Bank –The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans
for up to 28 days. There were no outstanding FRB advances as of December 31, 2020 and 2019. Available borrowing capacity was $102.7 million and $108.6 million as of December 31, 2020 and 2019, respectively.
Federal Funds Purchased Lines– The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There was no amount outstanding as of
December 31, 2020 and 2019.
| 10. |
COMMITMENTS AND CONTINGENCIES
|
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrowers’ current financial condition may indicate less ability to pay than when the commitment was originally
made. In the case of standby letters of credit, the risk arises from the possibility of the failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to
pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan
to that customer.
Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. Typically, letters of credit issued have expiration
dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
|
Year Ended December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Commitments to extend credit
|
$
|
59,488
|
$
|
67,538
|
||||
|
Standby letters of credit
|
51
|
655
|
||||||
|
Total
|
$
|
59,539
|
$
|
68,193
|
||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit
losses related to these commitments are not included in the allowance for credit losses reported in Note 4, “Loans Held For Investment” of these Consolidated Financial Statements and are accounted for as a separate loss contingency as a liability.
This loss contingency for unfunded loan commitments and letters of credit was $92,000 and $85,000 as of December 31, 2020 and 2019, respectively. Changes to this liability are adjusted through other non-interest expense.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors
concentrations within selected categories such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate, and consumer loans to customers through branch offices located in the Company’s
primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2020 and 2019,
manufactured housing loans comprised 32.7% and 33.2%, respectively of total loans. As of December 31, 2020 and 2019, commercial real estate loans accounted for approximately 46.9% and 49.7% of total loans, respectively. Approximately 28.9% and 31.9%
of these commercial real estate loans were owner occupied at December 31, 2020 and 2019, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 53.8% and 54.3% at December 31, 2020 and 2019,
respectively. The Company was within established policy limits at December 31, 2020 and 2019.
Loan Sales and Servicing
The Company retains a certain level of risk relating to the servicing activities and retained interest in sold loans. In addition, during the period of time that the loans are held for sale, the Company
is subject to various business risks associated with the lending business, including borrower default, foreclosure, and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential
purchasers.
In connection with certain loan sales, the Company enters agreements which generally require the company to repurchase or substitute loans in the event of a breach of a representation or warranty made
by the Company to the loan purchaser, any misrepresentation during the loan origination process or, in some cases, upon any fraud or early default on such loans.
The Company has sold loans that are guaranteed or insured by government agencies for which the Company retained all servicing rights and responsibilities. The Company is required to perform certain
monitoring functions in connection with these loans to preserve the guarantee by the government agency and prevent loss to the Company in the event of nonperformance by the borrower. Management believes that the Company follows these requirements.
The outstanding balance of the loans serviced for others was approximately $116.6 million and $76.3 million at December 31, 2020 and 2019, respectively.
Salary Continuation
The Company has agreements with certain key officers, which provide for a monthly cash payment to the officers or beneficiaries in the event of death, disability, or retirement, beginning in the month
after the retirement date or death and extending for a period of fifteen years subject to vesting. The Company purchased life insurance policies of $7.5 million as an investment. The income from the policy investments will help fund this liability.
At December 31, 2020 and 2019, the Company had accrued salary continuation liability for these agreements of $1.0 million and $0.8 million, respectively included in other liabilities. The cash surrender
value of the life insurance policies was $9.6 million and $6.9 million at December 31, 2020 and December 31, 2019, respectively and is included in other assets.
Other
The Company is involved in various other litigation matters of a routine nature that are being handled and defended in the ordinary course of the Company’s business. In the opinion of Management, based
in part on consultation with legal counsel, the resolution of these litigation matters will not have a material impact on the Company’s financial position or results of operations.
| 11. |
STOCKHOLDERS’ EQUITY
|
Common Stock Warrant
The Warrant issued as part of the TARP provided 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 Warrants were exercised for
300,401 shares of common stock prior to expiration in the fourth quarter of 2018.
Common Stock
During the years ended December 31, 2020 and 2019, the Company recorded $1.7 million and $1.8 million, respectively of dividends on common stock.
On February 28, 2019, the Board of Directors extended the repurchase program and increased the common stock repurchases to $4.5 million until August 31, 2021. Under this program the Company has
repurchased 350,189 common stock shares for $3.1 million at an average price of $8.75 per share. There were no shares repurchased in 2020.
Equity Compensation Plans
The Company has two stock equity plans available for option grants and restricted stock grants. Stock options granted in 2020 generally have a vesting period of 5 years and a contractual life of 10
years. The Company recognizes compensation cost for options ratably over the requisite service period for all awards. As of December 31, 2020, 550,700 options were available for future grant. The Company had no outstanding restricted stock grants at
December 31, 2020. There were no shares repurchased in 2020.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. This model requires the input
of highly subjective assumptions, changes to which can materially affect the fair value estimate. The expected volatility is based on the historical volatility of the stock of the Company over the expected life of the options. The risk-free rate for
the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend rate assumption was the dividend yield at grant date. A summary of the assumptions used in calculating
the fair value of option awards during the years ended December 31, 2020, 2019 and 2018 are as follows:
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Expected life in years
|
6.3
|
6.2
|
6.3
|
|||||||||
|
Risk-free interest rate
|
0.66
|
%
|
2.41
|
%
|
2.85
|
%
|
||||||
|
Expected volatility
|
24.2
|
%
|
27.6
|
%
|
34.7
|
%
|
||||||
|
Annual dividend rate
|
2.54
|
%
|
2.00
|
%
|
1.64
|
%
|
||||||
A summary of option activity under the plan is presented below:
|
Year ended December 31, 2020
|
||||||||||||||||
|
Option
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
(in thousands, except exercise price and contractual terms)
|
||||||||||||||||
|
Outstanding options, beginning of period
|
731
|
$
|
8.74
|
|||||||||||||
|
Granted
|
84
|
7.89
|
||||||||||||||
|
Exercised
|
(1
|
)
|
6.78
|
|||||||||||||
|
Forfeited or expired
|
(83
|
)
|
9.70
|
|||||||||||||
|
Outstanding options, end of period
|
731
|
$
|
8.53
|
6.2
|
$
|
764
|
||||||||||
|
Options exercisable, end of period
|
494
|
$
|
7.93
|
5.5
|
$
|
677
|
||||||||||
|
Options expected to vest, end of period
|
674
|
$
|
8.42
|
6.1
|
$
|
745
|
||||||||||
|
Year Ended December 31, 2019
|
||||||||||||||||
|
Option
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
(in thousands, except exercise price and contractual terms)
|
||||||||||||||||
|
Outstanding options, beginning of period
|
679
|
$
|
8.32
|
|||||||||||||
|
Granted
|
126
|
10.19
|
||||||||||||||
|
Exercised
|
(39
|
)
|
6.92
|
|||||||||||||
|
Forfeited or expired
|
(35
|
)
|
7.81
|
|||||||||||||
|
Outstanding options, end of period
|
731
|
$
|
8.74
|
6.9
|
$
|
1,805
|
||||||||||
|
Options exercisable, end of period
|
394
|
$
|
7.77
|
5.9
|
$
|
1,337
|
||||||||||
|
Options expected to vest, end of period
|
644
|
$
|
8.52
|
6.7
|
$
|
1,721
|
||||||||||
|
Year Ended December 31, 2018
|
||||||||||||||||
|
Option
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
(in thousands, except exercise price and contractual terms)
|
||||||||||||||||
|
Outstanding options, beginning of period
|
680
|
$
|
7.21
|
|||||||||||||
|
Granted
|
136
|
11.61
|
||||||||||||||
|
Exercised
|
(102
|
)
|
5.39
|
|||||||||||||
|
Forfeited or expired
|
(35
|
)
|
8.16
|
|||||||||||||
|
Outstanding options, end of period
|
679
|
$
|
8.32
|
7.4
|
$
|
1,400
|
||||||||||
|
Options exercisable, end of period
|
340
|
$
|
7.39
|
6.6
|
$
|
945
|
||||||||||
|
Options expected to vest, end of period
|
588
|
$
|
8.08
|
7.2
|
$
|
1,318
|
||||||||||
As of December 31, 2020, 2019 and 2018, there was $0.4 million, $0.6 million and $0.7 million, respectively, of total unrecognized compensation cost related to unvested share-based compensation
arrangements granted under the Company’s plan. That cost is expected to be recognized over a weighted average period of 3.0 years, 3.0 years, and 3.2 years, respectively. The total intrinsic value of options exercised during the years ended December
31, 2020, 2019 and 2018, was $1,000, $0.1 million, and $0.6 million, respectively.
The following table summarizes the change in unvested stock option shares during the year ended December 31, 2020:
|
Number of
Option Shares
|
Weighted Average
Grant-Date Fair
Value
|
|||||||
|
(in thousands, except per share data)
|
||||||||
|
Unvested options, beginning of period
|
337
|
$
|
3.29
|
|||||
|
Granted
|
84
|
1.33
|
||||||
|
Vested
|
(125
|
)
|
2.89
|
|||||
|
Forfeited
|
(58
|
)
|
2.94
|
|||||
|
Unvested options, end of period
|
238
|
$
|
2.90
|
|||||
| 12. |
CAPITAL REQUIREMENTS
|
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. In July 2013, the federal banking agencies approved the
final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015 and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”)
regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III redefines the
regulatory capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted assets and adds a new component of Tier 1 capital called Common Equity Tier 1, which
includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. The final rule
was effective January 1, 2020. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined as having less than $10 billion in total
consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at
any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020.
The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of December 31, 2020 and 2019. The Federal Reserve’s fully phased-in guidelines
applicable in 2019 are also summarized.
|
Total Capital
(To Risk-
Weighted
Assets)
|
Tier 1
Capital
(To Risk-
Weighted
Assets)
|
Common
Equity Tier
1
(To Risk-
Weighted
Assets)
|
Leverage
Ratio/Tier1
Capital
(To
Average
Assets)
|
Community
Banking
Leverage
Ratio
|
||||||||||||||||
|
December 31, 2020
|
||||||||||||||||||||
|
CWB's actual regulatory ratios
|
12.27
|
%
|
11.02
|
%
|
11.02
|
%
|
9.29
|
%
|
9.29
|
%
|
||||||||||
|
Minimum capital requirements
|
8.00
|
%
|
6.00
|
%
|
4.50
|
%
|
4.00
|
%
|
8.00
|
%
|
||||||||||
|
Well-capitalized requirements
|
10.00
|
%
|
8.00
|
%
|
6.50
|
%
|
N/A
|
8.00
|
%
|
|||||||||||
|
Minimum capital requirements including fully-phased in capital conservation buffer (2019)
|
10.50
|
%
|
8.50
|
%
|
7.00
|
%
|
N/A
|
N/A
|
||||||||||||
|
Total Capital
(To Risk-
Weighted
Assets)
|
Tier 1 Capital
(To Risk-
Weighted
Assets)
|
Common
Equity Tier 1
(To Risk-
Weighted
Assets)
|
Leverage
Ratio/Tier1
Capital
(To Average
Assets)
|
|||||||||||||
|
December 31, 2019
|
||||||||||||||||
|
CWB's actual regulatory ratios
|
11.41
|
%
|
10.28
|
%
|
10.28
|
%
|
9.06
|
%
|
||||||||
|
Minimum capital requirements
|
8.00
|
%
|
6.00
|
%
|
4.50
|
%
|
4.00
|
%
|
||||||||
|
Well-capitalized requirements
|
10.00
|
%
|
8.00
|
%
|
6.50
|
%
|
N/A
|
|||||||||
|
Minimum capital requirements including fully-phased in capital conservation buffer (2019)
|
10.50
|
%
|
8.50
|
%
|
7.00
|
%
|
N/A
|
|||||||||
| 13. |
REVENUE RECOGNITION
|
The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 on January 1, 2018. The implementation of the new standard did not have a
material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606,
while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees
and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these income streams did
not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and
account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit related fees are largely transactional based and, therefore, the Company’s performance
obligation is satisfied, and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Exchange Fees and Other Service Charges
Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges. Debit and credit card income is primarily comprised of
interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card
transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks, and other
services. The Company’s performance obligation for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the
following month.
The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for periods indicated.
|
Non-interest income
|
Twelve Months Ended December 31,
|
|||||||||||
|
In-scope of Topic 606:
|
2020
|
2019
|
2018
|
|||||||||
|
Service charges on deposit accounts
|
$
|
298
|
$
|
507
|
$
|
369
|
||||||
|
Exchange fees and other service charges
|
157
|
159
|
186
|
|||||||||
|
Non-interest income (in-scope of Topic 606)
|
455
|
666
|
555
|
|||||||||
|
Non-interest income (out-of-scope of Topic 606)
|
3,457
|
2,941
|
2,073
|
|||||||||
|
Total
|
$
|
3,912
|
$
|
3,607
|
$
|
2,628
|
||||||
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A
contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on
transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers,
and therefore, does not experience significant contract balances. As of December 31, 2020 and December 31, 2019, the Company did not have any signficant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected
to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical
expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not
capitalize any contract acquisition cost.
| 14. |
LEASES
|
As described in Note 1 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, effective January 1, 2019, we adopted Topic 842. We have operating leases for office space. Our office leases
are typically for terms of between 2 and 10 years. Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments. When renewal options exist, we generally do not deem them to be
reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset. As part of the adoption, we elected the package of practical expedients permitted under the transition
guidance, but not the hindsight practical expedient. As of December 31, 2020, the balance of the right-of-use assets was $5.9 million, and the lease liabilities were $6.0 million. The right-of-use assets are included in other assets and the lease
liabilities are included in other liabilities in the accompanying Consolidated Balance Sheets.
|
Twelve Months Ended December
31,
|
||||||||
|
2020
|
2019
|
|||||||
|
Lease cost:
|
(in thousands)
|
|||||||
|
Operating lease cost
|
1,072
|
1,137
|
||||||
|
Sublease income
|
—
|
—
|
||||||
|
Total lease cost
|
1,072
|
1,137
|
||||||
|
Other information
|
||||||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
—
|
—
|
||||||
|
Operating cash flows from operating leases
|
1,042
|
1,117
|
||||||
|
Weighted average remaining lease term in years - operating leases
|
8.76
|
9.62
|
||||||
|
Weighted average discount rate - operating leases
|
3.23
|
%
|
3.23
|
%
|
||||
Future minimum operating lease payments:
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
2020
|
$
|
-
|
$
|
1,015
|
||||
|
2021
|
992
|
884
|
||||||
|
2022
|
887
|
779
|
||||||
|
2023
|
813
|
705
|
||||||
|
2024
|
821
|
713
|
||||||
|
2025
|
768
|
705
|
||||||
|
Thereafter
|
2,586
|
2,586
|
||||||
|
Total future minimum lease payments
|
$
|
6,867
|
$
|
7,387
|
||||
|
Less remaining imputed interest
|
912
|
1,071
|
||||||
|
Total lease liabilities
|
$
|
5,955
|
$
|
6,316
|
||||
| 15. |
EMPLOYEE BENEFIT PLANS
|
401(k) Plan:
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants are able to defer up to a maximum of $19,000 (for those under 50 years of age in 2020) of their annual
compensation. The Company may elect to match a discretionary amount each year, which was 3% of the participant’s eligible compensation. The Company’s total contribution was $0.4 million for the years ended December 31, 2020, 2019 and 2018,
respectively.
Deferred Compensation Plans:
A deferred compensation plan covers the executive officers. Under the plan, the Company pays each participant a percentage of their base salary plus interest. Vesting occurs at age 65. A liability is
accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was $0.3 million resulting in a deferred compensation liability of $1.7 million and $1.3 million as of the year-end 2020
and 2019, respectively.
The Company also provides an unfunded nonqualified deferred compensation arrangement to provide supplemental retirement benefits for the Participants which are a select group of management or highly
compensated employees of the Company. The Participants may defer up to 30% of their base salary and bonus each plan year. The 36-month certificate of deposit rate is paid on the vested balance.
| 16. |
FAIR VALUE MEASUREMENTS
|
The fair value of an asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction occurring in the principal market for such asset
or liability. ASC 820 establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy under ASC 820 and the methods and assumptions used by the Company in estimating the fair value of its financial
instruments are described in “Note 1. Summary of Significant Accounting Policies – Fair Value of Financial Instruments” of these Notes to the Consolidated Financial Statements.
The following tables summarize the fair value of assets measured on a recurring basis:
|
Fair Value Measurements at the End of the Reporting
Period Using:
|
||||||||||||||||
|
December 31, 2020
|
Quoted
Prices
in Active
Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Fair Value
|
||||||||||||
|
Assets:
|
(in thousands)
|
|||||||||||||||
|
Investment securities measured at fair value
|
$
|
149
|
$
|
—
|
$
|
—
|
$
|
149
|
||||||||
|
Investment securities available-for-sale
|
—
|
14,257
|
—
|
14,257
|
||||||||||||
|
Interest only strips
|
—
|
—
|
27
|
27
|
||||||||||||
|
Servicing assets
|
—
|
—
|
1,461
|
1,461
|
||||||||||||
|
$
|
149
|
$
|
12,759
|
$
|
2,986
|
$
|
15,894
|
|||||||||
|
Fair Value Measurements at the End of the Reporting
Period Using:
|
||||||||||||||||
|
December 31, 2019
|
Quoted
Prices
in Active
Markets
for Identical Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Fair Value
|
||||||||||||
|
Assets:
|
(in thousands)
|
|||||||||||||||
|
Investment securities measured at fair value
|
$
|
167
|
$
|
—
|
$
|
—
|
$
|
167
|
||||||||
|
Investment securities available-for-sale
|
—
|
19,264
|
—
|
19,264
|
||||||||||||
|
Interest only strips
|
—
|
—
|
41
|
41
|
||||||||||||
|
Servicing assets
|
—
|
—
|
846
|
846
|
||||||||||||
|
$
|
167
|
$
|
19,264
|
$
|
887
|
$
|
20,318
|
|||||||||
Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed
income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources
include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
On certain SBA loan sales, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the
stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. I/O strips are classified as level 3 in the fair value hierarchy. The fair value is determined on a
quarterly basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds. I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis
prepared by an independent third-party using industry prepayment speeds. In connection with the sale of certain SBA and USDA loans the Company recorded servicing assets and elected to measure those assets at fair value in accordance with ASC 825-10.
Significant assumptions in the valuation of servicing assets include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing assets are classified as Level 3 measurements due to the use of significant
unobservable inputs, as well as significant management judgment and estimation.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans held for sale, foreclosed real estate, and
repossessed assets and loans that are considered impaired per generally accepted accounting principles.
The following summarizes the fair value measurements of assets measured on a non-recurring basis:
|
Fair Value Measurements at the End of the
Reporting Period Using
|
||||||||||||||||
|
Total
|
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
|
Active
Markets
for
Similar
Assets
(Level 2)
|
Unobservable
Inputs
(Level 3)
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
As of December 31, 2020:
|
||||||||||||||||
|
Impaired loans
|
$
|
3,910
|
$
|
—
|
$
|
3,910
|
$
|
—
|
||||||||
|
Loans held for sale
|
34,383
|
—
|
34,383
|
—
|
||||||||||||
|
Foreclosed real estate and repossessed assets
|
2,614
|
—
|
2,614
|
—
|
||||||||||||
|
$
|
40,907
|
$
|
—
|
$
|
40,907
|
$
|
—
|
|||||||||
|
As of December 31, 2019:
|
||||||||||||||||
|
Impaired loans
|
$
|
2,334
|
$
|
—
|
$
|
2,334
|
$
|
—
|
||||||||
|
Loans held for sale
|
42,900
|
—
|
42,900
|
—
|
||||||||||||
|
Foreclosed real estate and repossessed assets
|
2,524
|
—
|
2,524
|
—
|
||||||||||||
|
$
|
47,758
|
$
|
—
|
$
|
47,758
|
$
|
—
|
|||||||||
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered impaired an allowance for a loan loss is established. The fair value measurement and disclosure
requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans. Impaired loans are measured at an observable market price, if available or at the fair value of the loan’s
collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation. When the fair value of the loan’s collateral is based on an observable market price or current appraised
value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy. For
loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar
characteristics or based on the agreed-upon sale price. As such, the Company classifies the fair value of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy. At December 31, 2020 and 2019, the Company had
loans held for sale with an aggregate carrying value of $31.2 million and $42.0 million, respectively.
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated costs to sell. Fair value is based upon independent market prices obtained from
certified appraisers or the current listing price, if lower. When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2. When a current
appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of the Company’s financial instruments are as follows:
|
December 31, 2020
|
||||||||||||||||||||
|
Carrying
Amount
|
Fair Value
|
|||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||||||
|
Financial assets:
|
(in thousands)
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
60,540
|
$
|
60,540
|
$
|
—
|
$
|
—
|
$
|
60,540
|
||||||||||
|
FRB and FHLB stock
|
4,633
|
—
|
4,633
|
—
|
4,633
|
|||||||||||||||
|
Investment securities
|
22,043
|
149
|
22,162
|
—
|
22,311
|
|||||||||||||||
|
Loans, net
|
847,383
|
—
|
845,302
|
8,278
|
853,580
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
766,185
|
—
|
765,565
|
—
|
765,565
|
|||||||||||||||
|
Other borrowings
|
105,000
|
—
|
106,051
|
—
|
106,051
|
|||||||||||||||
|
December 31, 2019
|
||||||||||||||||||||
|
Carrying
Amount
|
Fair Value
|
|||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||||||
|
Financial assets:
|
(in thousands)
|
|||||||||||||||||||
|
Cash and cash equivalents
|
$
|
82,661
|
$
|
82,661
|
$
|
—
|
$
|
—
|
$
|
82,661
|
||||||||||
|
FRB and FHLB stock
|
4,087
|
—
|
4,087
|
—
|
4,087
|
|||||||||||||||
|
Investment securities
|
25,563
|
167
|
25,399
|
—
|
25,566
|
|||||||||||||||
|
Loans, net
|
766,846
|
—
|
752,287
|
9,907
|
762,194
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Deposits
|
750,934
|
—
|
751,398
|
—
|
751,398
|
|||||||||||||||
|
Other borrowings
|
65,000
|
—
|
65,236
|
—
|
65,236
|
|||||||||||||||
Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the
Company’s financial instruments as well as its future net interest income will change when interest rate levels change, and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in the net portfolio value and net interest income resulting from hypothetical changes in
interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, the Board of Directors may direct management to
adjust the asset and liability mix to bring interest rate risk within board-approved limits. As of December 31, 2020, the Company’s interest rate risk profile was within Board-approved limits.
The Company’s subsidiary bank has an Asset and Liability Management Committee charged with managing interest rate risk within Board approved limits. Such limits are structured to prohibit an interest
rate risk profile that is significantly asset or liability sensitive.
Fair value of commitments
Loan commitments on which the committed interest rates were less than the current market rate are insignificant at December 31, 2020 and 2019.
| 17. |
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
The following table summarizes the changes in other comprehensive income by component, net of tax for the period indicated:
|
Year Ended December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
Unrealized holding gains (losses) on AFS
|
(in thousands)
|
|||||||||||
|
Beginning balance
|
$
|
(78
|
)
|
$
|
(141
|
)
|
$
|
25
|
||||
|
Other comprehensive income (loss) before reclassifications
|
113
|
63
|
(107
|
)
|
||||||||
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
—
|
—
|
(59
|
)
|
||||||||
|
Net current-period other comprehensive income (loss)
|
113
|
63
|
(166
|
)
|
||||||||
|
Ending Balance
|
$
|
35
|
$
|
(78
|
)
|
$
|
(141
|
)
|
||||
There were no reclassifications out of accumulated other comprehensive income for the years ended December 31, 2020, 2019 and 2018.
| 18. |
PARENT COMPANY FINANCIAL INFORMATION
|
The condensed financial statements of the holding company are presented in the following tables:
COMMUNITY WEST BANCSHARES
Condensed Balance Sheets
|
December 31,
|
||||||||
|
2020
|
2019
|
|||||||
|
(in thousands)
|
||||||||
|
Assets:
|
||||||||
|
Cash and cash equivalents (including interest-bearing deposits in other financial institutions)
|
$
|
73
|
$
|
972
|
||||
|
Investment in subsidiary
|
88,913
|
81,171
|
||||||
|
Other assets
|
169
|
168
|
||||||
|
Total assets
|
$
|
89,155
|
$
|
82,311
|
||||
|
Liabilities and Stockholders' Equity:
|
||||||||
|
Other liabilities
|
148
|
333
|
||||||
|
Total liabilities
|
148
|
333
|
||||||
|
Total stockholders' equity
|
89,007
|
81,978
|
||||||
|
Total liabilities and stockholders' equity
|
$
|
89,155
|
$
|
82,311
|
||||
COMMUNITY WEST BANCSHARES
Condensed Income Statements
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Interest income
|
$
|
3
|
$
|
227
|
$
|
264
|
||||||
|
Interest expense
|
296
|
111
|
329
|
|||||||||
|
Net interest expense
|
(293
|
)
|
116
|
(65
|
)
|
|||||||
|
Provision for loan losses
|
—
|
(145
|
)
|
60
|
||||||||
|
Net interest income after provision for loan losses
|
(293
|
)
|
261
|
(125
|
)
|
|||||||
|
Income from consolidated subsidiary
|
8,826
|
8,145
|
7,844
|
|||||||||
|
Total income
|
8,533
|
8,406
|
7,719
|
|||||||||
|
Total non-interest expenses
|
411
|
405
|
516
|
|||||||||
|
Income before income tax (benefit) expense
|
8,122
|
8,001
|
7,203
|
|||||||||
|
Income tax (benefit) expense
|
(123
|
)
|
38
|
(206
|
)
|
|||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
COMMUNITY WEST BANCSHARES
Condensed Statements of Cash Flows
|
December 31,
|
||||||||||||
|
2020
|
2019
|
2018
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$
|
8,245
|
$
|
7,963
|
$
|
7,409
|
||||||
|
Adjustments to reconcile net income to cash provided by (used in) operating activities:
|
||||||||||||
|
Equity in undistributed income from subsidiary
|
(8,826
|
)
|
(8,145
|
)
|
(7,844
|
)
|
||||||
|
Stock-based compensation
|
319
|
382
|
478
|
|||||||||
|
Changes in:
|
||||||||||||
|
Other assets
|
(1
|
)
|
72
|
(50
|
)
|
|||||||
|
Other liabilities
|
(185
|
)
|
161
|
157
|
||||||||
|
Net cash provided by (used in) operating activities
|
(448
|
)
|
433
|
150
|
||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Loan originations and principal collections, net
|
—
|
8,355
|
(3,440
|
)
|
||||||||
|
Net dividends from and investment in subsidiary
|
1,197
|
(534
|
)
|
6,158
|
||||||||
|
Net cash provided by (used in) investing activities
|
1,197
|
7,821
|
2,718
|
|||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net increase (decrease) from other borrowings
|
—
|
(5,000
|
)
|
(1,843
|
)
|
|||||||
|
Cash dividends paid on common stock
|
(1,652
|
)
|
(1,821
|
)
|
(1,581
|
)
|
||||||
|
Common stock repurchase
|
—
|
(1,030
|
)
|
(669
|
)
|
|||||||
|
Proceeds from issuance of common stock
|
4
|
270
|
551
|
|||||||||
|
Net cash used in financing activities
|
(1,648
|
)
|
(7,581
|
)
|
(3,542
|
)
|
||||||
|
Net (decrease) increase in cash and cash equivalents
|
(899
|
)
|
673
|
(674
|
)
|
|||||||
|
Cash and cash equivalents at beginning of year
|
972
|
299
|
973
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
73
|
$
|
972
|
$
|
299
|
||||||
| 19. |
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
December 31, 2020
|
||||||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||||||
|
(in thousands, except per share amounts)
|
||||||||||||||||||||
|
Interest income
|
$
|
10,975
|
$
|
10,777
|
$
|
11,116
|
$
|
10,986
|
$
|
43,854
|
||||||||||
|
Interest expense
|
2,512
|
1,996
|
1,564
|
1,193
|
7,265
|
|||||||||||||||
|
Net interest income
|
8,463
|
8,781
|
9,552
|
9,793
|
36,589
|
|||||||||||||||
|
Provision (credit) for loan losses
|
392
|
762
|
113
|
(44
|
)
|
1,223
|
||||||||||||||
|
Net interest income after provision for loan losses
|
8,071
|
8,019
|
9,439
|
9,837
|
35,366
|
|||||||||||||||
|
Non-interest income
|
950
|
640
|
1,352
|
970
|
3,912
|
|||||||||||||||
|
Non-interest expenses
|
6,729
|
7,003
|
6,722
|
7,069
|
27,523
|
|||||||||||||||
|
Income before income taxes
|
2,292
|
1,656
|
4,069
|
3,738
|
11,755
|
|||||||||||||||
|
Provision for income taxes
|
694
|
496
|
1,209
|
1,111
|
3,510
|
|||||||||||||||
|
Net income
|
$
|
1,598
|
$
|
1,160
|
$
|
2,860
|
$
|
2,627
|
$
|
8,245
|
||||||||||
|
Earnings per share:
|
||||||||||||||||||||
|
Income per common share - basic
|
$
|
0.19
|
$
|
0.14
|
$
|
0.33
|
$
|
0.31
|
$
|
0.97
|
||||||||||
|
Income per common share - diluted
|
$
|
0.19
|
$
|
0.14
|
$
|
0.33
|
$
|
0.31
|
$
|
0.97
|
||||||||||
|
December 31, 2019
|
||||||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
||||||||||||||||
|
(in thousands, except per share amounts)
|
||||||||||||||||||||
|
Interest income
|
$
|
11,025
|
$
|
11,367
|
$
|
11,719
|
$
|
11,628
|
$
|
45,739
|
||||||||||
|
Interest expense
|
2,802
|
2,869
|
2,921
|
2,790
|
11,382
|
|||||||||||||||
|
Net interest income
|
8,223
|
8,498
|
8,798
|
8,838
|
34,357
|
|||||||||||||||
|
(Credit) provision for loan losses
|
(57
|
)
|
177
|
(75
|
)
|
(210
|
)
|
(165
|
)
|
|||||||||||
|
Net interest income after provision for loan losses
|
8,280
|
8,321
|
8,873
|
9,048
|
34,522
|
|||||||||||||||
|
Non-interest income
|
604
|
692
|
647
|
1,664
|
3,607
|
|||||||||||||||
|
Non-interest expenses
|
6,717
|
6,760
|
6,464
|
6,814
|
26,755
|
|||||||||||||||
|
Income before income taxes
|
2,167
|
2,253
|
3,056
|
3,898
|
11,374
|
|||||||||||||||
|
Provision for income taxes
|
657
|
673
|
902
|
1,179
|
3,411
|
|||||||||||||||
|
Net income
|
$
|
1,510
|
$
|
1,580
|
$
|
2,154
|
$
|
2,719
|
$
|
7,963
|
||||||||||
|
Earnings per share:
|
||||||||||||||||||||
|
Income per common share - basic
|
$
|
0.18
|
$
|
0.19
|
$
|
0.25
|
$
|
0.32
|
$
|
0.94
|
||||||||||
|
Income per common share - diluted
|
$
|
0.18
|
$
|
0.18
|
$
|
0.25
|
$
|
0.32
|
$
|
0.93
|
||||||||||
| ITEM 9. |
None
| ITEM 9A. |
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of the Chief Executive Officer, and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of December 31, 2020. Based on that evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2020, in timely alerting them to
material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s reports that it files with or submits to the SEC under the Exchange Act.
Report on Management’s Assessment of Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2020. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal
Control — Integrated Framework (2013 framework). Management concluded that, based on its assessment, the Company’s internal control over financial reporting was effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
The Company’s management has also evaluated, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, whether there were any changes in the Company’s internal
control over financial reporting that occurred during the fourth quarter ended December 31, 2020. Based upon this evaluation, the Company’s management has determined that there were no changes in the Company’s internal control over financial
reporting that occurred during the Company’s fourth quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
This Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation
by the Company’s registered public accounting firm pursuant to rules of the Commission that permit the Company to provide only the management’s report in this Form 10-K.
| ITEM 9B. |
Not applicable.
PART III
| ITEM 10. |
Information required by this Item regarding the Company’s directors and executive officers, and corporate governance, including information with respect to beneficial ownership reporting compliance,
will appear in the Proxy Statement we will deliver to our shareholders in connection with our 2021 Annual Meeting of Shareholders (the “Proxy Statement”) to be filed pursuant to Regulation 14A within 120 days after the end of the Company's last
fiscal year. Such information is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its directors, principal executive officer, principal financial officer, principal accounting officer or controller and persons performing
similar functions and employees. A copy of the code of ethics is available on the Company’s website at www.communitywest.com.
| ITEM 11. |
The information required by this Item will appear in the Proxy Statement we will deliver to our shareholders in connection with our 2021 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
| ITEM 12. |
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement we will deliver to our shareholders in connection with
our 2021 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Information relating to securities authorized for issuance under the Company’s equity compensation plans is contained under “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities - Securities Authorized for Issuance Under Equity Compensation Plans” herein.
| ITEM 13. |
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2021 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
| ITEM 14. |
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2021 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
PART IV
| ITEM 15. |
(1) The following financial statements are incorporated by reference from Item 8 hereto:
|
Report of Independent Registered Public Accounting Firm
|
Page 55
|
|
|
Consolidated Balance Sheets as of December 31, 2020 and 2019
|
Page 58
|
|
|
Consolidated Income Statements for the three years ended December 31, 2020, 2019 and 2018
|
Page 59
|
|
|
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2020, 2019 and 2018
|
Page 60
|
|
|
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2020, 2019 and 2018
|
Page 61
|
|
|
Consolidated Statements of Cash Flows for the three years ended December 31, 2020, 2019 and 2018
|
Page 62
|
|
|
Notes to Consolidated Financial Statements
|
Page 63
|
(2) Financial Statement Schedules
Financial statement schedules other than those listed above have been omitted because they are either not applicable or the information is otherwise included.
EXHIBITS
|
(3)
|
Exhibits. The following is a list of exhibits filed as a part of this Annual Report.
|
|
3.3
|
|
|
3.4
|
Bylaws (1)
|
|
3.5
|
|
|
4.1
|
|
|
4.2
|
|
|
10.3*
|
|
|
10.22*
|
|
|
10.23*
|
|
|
10.36*
|
|
|
10.38*
|
|
|
10.39*
|
|
|
10.41*
|
|
|
10.42
|
|
|
10.44*
|
|
|
10.45
|
|
|
10.46
|
|
|
10.47*
|
|
|
10.48*
|
|
|
10.49*
|
|
|
10.50*
|
|
|
Subsidiaries of the Registrant (5)
|
|
|
Consent of RSM US LLP**
|
|
|
Certification of the Chief Executive Officer **
|
|
|
Certification of the Chief Financial Officer **
|
|
|
Certification pursuant to 18 U.S. C. Section 1350 **
|
|
101.INS
|
XBRL Taxonomy Instance Document***
|
|
101.SCH
|
XBRL Taxonomy Schema Document***
|
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase Document***
|
|
101.DEF
|
XBRL Taxonomy Definition Linkbase Document***
|
|
101.LAB
|
XBRL Taxonomy Label Linkbase Document***
|
|
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document***
|
| (1) |
Incorporated by reference from the Registrant's Annual Report on Form 10-K filed with the Commission on March 26, 1998.
|
| (2) |
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on December 18, 2008.
|
| (3) |
Incorporated by reference from the Registrant’s Amendment to Registration Statement on Form 8-A filed with the Commission on March 12, 1998.
|
| (4) |
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Commission on March 31, 2003.
|
| (5) |
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Commission on March 26, 2007.
|
| (6) |
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on July 2, 2007.
|
| (7) |
Incorporated by reference from the Registrant's Form 8-K filed with the Commission on November 3, 2011.
|
| (8) |
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on January 29, 2014.
|
| (9) |
Incorporated by reference from Registrant’s Statement on Form S-8 (File No 333-201281) filed with the Commission on December 29, 2014.
|
| (10) |
Incorporated by reference from the Registrant’s Form 10-Q for the quarter and three months ended March 31, 2020 filed with the Commission on May 8, 2020.
|
| (11) |
Incorporated by reference from the Registrant’s Form 10-Q for the quarter and six months ended June 30, 2017 filed with the Commission on August 4, 2017.
|
| (12) |
Incorporated by reference from the Registrant’s Statement on Form S-8 (File No 323-218994) filed with the Commission on June 27, 2017.
|
| (13) |
Incorporated by reference from the Registrant's Form 10-Q for the quarter and nine months ended September 30, 2018 filed with the Commission on November 2, 2018.
|
| * |
Indicates a management contract or compensatory plan or arrangement.
|
| ** |
Filed herewith.
|
| *** |
Furnished herewith.
|
Pursuant to the requirements of Section 13 or 15(d) 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: March 12, 2021
|
By:
|
/s/ William R. Peeples
|
|
William R. Peeples
|
||
|
Chairman of the Board
|
||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|||
|
/s/ William R. Peeples
|
Director and Chairman of the Board
|
March 12, 2021
|
|||
|
William R. Peeples
|
|||||
|
/s/ Martin E. Plourd
|
President and Chief Executive Officer and Director
|
March 12, 2021
|
|||
|
Martin E. Plourd
|
(Principal Executive Officer)
|
||||
|
/s/ Susan C. Thompson
|
Executive Vice President and Chief Financial Officer
|
March 12, 2021
|
|||
|
Susan C. Thompson
|
(Principal Financial and Accounting Officer)
|
||||
|
/s/ Robert H. Bartlein
|
Director
|
March 12, 2021
|
|||
|
Robert H. Bartlein
|
|||||
|
/s/ Jean W. Blois
|
Director
|
March 12, 2021
|
|||
|
Jean W. Blois
|
|||||
|
/s/ Dana L. Boutain
|
Director
|
March 12, 2021
|
|||
|
Dana L. Boutain
|
|||||
|
/s/ Tom L. Dobyns
|
Director
|
March 12, 2021
|
|||
|
Tom L. Dobyns
|
|||||
|
/s/ John D. Illgen
|
Director and Secretary of the Board
|
March 12, 2021
|
|||
|
John D. Illgen
|
|||||
|
/s/ James W. Lokey
|
Director
|
March 12, 2021
|
|||
|
James W. Lokey
|
|||||
|
/s/ Shereef Moharram
|
Director
|
March 12, 2021
|
|||
|
Shereef Moharram
|
|||||
|
/s/ Christopher Raffo
|
Director
|
March 12, 2021
|
|||
|
Christopher Raffo
|
|||||
|
/s/ Kirk B. Stovesand
|
Director
|
March 12, 2021
|
|||
|
Kirk B. Stovesand
|
106