10-Q 1 ef20012328_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023 or


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

For the transition period from _________ to _________

Commission File Number:  000-23575

COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)

California
 
77-0446957
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

445 Pine Avenue, Goleta, California
 
93117
(Address of principal executive offices)
 
(Zip Code)

(805) 692-5821
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, no par value
CWBC
The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  YES ☐ NO

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

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

Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares of common stock, no par value, of the registrant issued and outstanding as of November 8, 2023: 8,850,312.



Table of Contents
 
Index
Page
Part I.  Financial Information
 
 
Item 1 – Financial Statements
 
   
3
   
4
   
5
   
6
   
7
   
8
 
The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
 
     
 
36
 
52
 
53
     
Part II. Other Information
 
 
54
 
54
 
54
 
54
 
54
 
54
 
55
     
56

PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2023
   
December 31,
2022
 
   
(unaudited)
       
   
(in thousands, except share amounts)
 
Assets:
           
Cash and due from banks
 
$
1,855
   
$
1,379
 
Interest-earning demand deposits in other financial institutions
   
138,764
     
63,311
 
Cash and cash equivalents
   
140,619
     
64,690
 
Investment securities - available-for-sale, at fair value, net of allowance for credit losses of $103 at September 30, 2023 and $0 at December 31, 2022; amortized cost of $16,924 at September 30, 2023 and $27,790 at December 31, 2022
   
15,124
     
26,688
 
Investment securities - held-to-maturity, at amortized cost; fair value of $1,987 at September 30, 2023 and $2,423 at December 31, 2022
   
2,158
     
2,557
 
Investment securities - measured at fair value; amortized cost of $66 at September 30, 2023 and December 31, 2022
   
309
     
225
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
    4,865       4,533  
Loans held for sale, at lower of cost or fair value
    18,435       21,033  
Loans held for investment
    934,247       934,309  
Allowance for credit losses(1)
    (12,135 )     (10,765 )
Total loans held for investment, net
   
922,112
     
923,544
 
Other assets acquired through foreclosure, net
   
1,511
     
2,250
 
Premises and equipment, net
   
5,891
     
6,104
 
Other assets
   
29,275
     
39,878
 
Total assets
 
$
1,140,299
   
$
1,091,502
 
Liabilities:
               
Deposits:
               
Noninterest-bearing demand
 
$
190,817
   
$
216,494
 
Interest-bearing demand
   
456,808
     
428,173
 
Savings
   
16,905
     
23,490
 
Certificates of deposit ($250,000 or more)
   
14,911
     
6,693
 
Other certificates of deposit
   
236,652
     
200,234
 
Total deposits
   
916,093
     
875,084
 
Federal Home Loan Bank advances and other borrowings
   
90,000
     
90,000
 
Other liabilities
   
18,144
     
13,768
 
Total liabilities
   
1,024,237
     
978,852
 
                 
Stockholders’ equity:
               
Common stock — no par value, 60,000,000 shares authorized; 8,850,312 shares issued and outstanding at September 30, 2023 and 8,798,412 at December 31, 2022
   
46,381
     
45,694
 
Retained earnings
   
70,872
     
67,727
 
Accumulated other comprehensive loss, net
   
(1,191
)
   
(771
)
Total stockholders’ equity
   
116,062
     
112,650
 
Total liabilities and stockholders’ equity
 
$
1,140,299
   
$
1,091,502
 

(1) On January 1, 2023, the Company adopted the provisions of Accounting Standards Codification Topic 326. The allowance in 2023 is reported using the current expected credit loss (“CECL”) method. Periods prior to adoption are reported in accordance with previous GAAP using the incurred loss method.

See the accompanying Notes to Unaudited Consolidated Financial Statements.

COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS (unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Interest and dividend income:
 
(in thousands, except per share amounts)
 
Loans, including fees
 
$
13,331
   
$
11,867
   
$
38,981
   
$
34,190
 
Investment securities and other
   
1,222
     
787
     
3,872
     
1,670
 
Total interest and dividend income
   
14,553
     
12,654
     
42,853
     
35,860
 
Interest expense:
                               
Deposits
   
3,830
     
528
     
9,858
     
1,598
 
FHLB advances and other borrowings
   
204
     
203
     
729
     
593
 
Total interest expense
   
4,034
     
731
     
10,587
     
2,191
 
Net interest income
   
10,519
     
11,923
     
32,266
     
33,669
 
Provision (credit) for credit losses
   
43
     
298
     
(667
)
   
266
 
Net interest income after provision (credit) for credit losses
   
10,476
     
11,625
     
32,933
     
33,403
 
Non-interest income:
                               
Other loan fees
   
248
     
292
     
703
     
915
 
Gains from loan sales, net
   
24
     
49
     
110
     
245
 
Document processing fees
   
88
     
114
     
268
     
337
 
Service charges
   
149
     
114
     
470
     
295
 
Other
   
572
     
303
     
1,438
     
1,422
 
Total non-interest income
   
1,081
     
872
     
2,989
     
3,214
 
Non-interest expenses:
                               
Salaries and employee benefits
   
5,114
     
4,823
     
15,864
     
14,784
 
Occupancy, net
   
1,093
     
1,046
     
3,326
     
3,064
 
Professional services
   
672
     
653
     
2,442
     
1,687
 
Data processing
   
349
     
302
     
1,075
     
919
 
Depreciation
   
180
     
173
     
543
     
535
 
FDIC assessment
   
331
     
131
     
789
     
466
 
Advertising and marketing
   
179
     
196
     
671
     
687
 
Other
   
445
     
286
     
1,341
     
551
 
Total non-interest expenses
   
8,363
     
7,610
     
26,051
     
22,693
 
Income before provision for income taxes
   
3,194
     
4,887
     
9,871
     
13,924
 
Provision for income taxes
   
942
     
1,409
     
3,034
     
3,851
 
Net income
 
$
2,252
   
$
3,478
   
$
6,837
   
$
10,073
 
Earnings per share:
                               
Basic
 
$
0.25
   
$
0.40
   
$
0.77
   
$
1.16
 
Diluted
 
$
0.25
   
$
0.39
   
$
0.76
   
$
1.13
 
Weighted average number of common shares outstanding:
                               
Basic
   
8,850
     
8,748
     
8,835
     
8,709
 
Diluted
   
8,981
     
8,915
     
8,968
     
8,883
 
Dividends declared per common share
 
$
0.080
   
$
0.075
   
$
0.240
   
$
0.220
 

See the accompanying Notes to Unaudited Consolidated Financial Statements.

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2023
   
2022
   
2023
   
2022
 
 
(in thousands)
 
Net income
 
$
2,252
   
$
3,478
   
$
6,837
   
$
10,073
 
Other comprehensive income (loss), net:
                               
Unrealized gain (loss) on securities available-for-sale (“AFS”), net (tax effect of ($206), $121, $175 and $226 for each respective period presented)
    489       (307 )     (420 )     (846 )
Net other comprehensive income (loss)
    489       (307 )     (420 )     (846 )
Comprehensive income
 
$
2,741
   
$
3,171
   
$
6,417
   
$
9,227
 

See the accompanying Notes to Unaudited Consolidated Financial Statements.

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

Three Months Ended September 30, 2023
 
Common Stock
   
Accumulated Other
Comprehensive
   
Retained
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Loss
   
Earnings
   
Equity
 
   
(in thousands)
 
Balance, July 1, 2023
   
8,849
   
$
46,293
   
$
(1,680
)
 
$
69,328
   
$
113,941
 
Net income
   
     
     
     
2,252
     
2,252
 
Exercise of stock options
   
3
     
13
     
     
     
13
 
Stock based compensation
   
     
75
     
     
     
75
 
Dividends on common stock
   
     
     
     
(708
)
   
(708
)
Other comprehensive income, net
   
     
     
489
   
     
489
Balance, September 30, 2023
   
8,852
   
$
46,381
   
$
(1,191
)
 
$
70,872
   
$
116,062
 

Three Months Ended September 30, 2022
 
Common Stock
   
Accumulated Other
Comprehensive
   
Retained
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Loss
   
Earnings
   
Equity
 
   
(in thousands)
 
Balance, July 1, 2022
   
8,744
   
$
45,402
   
$
(447
)
 
$
62,187
   
$
107,142
 
Net income
   
     
     
     
3,478
     
3,478
 
Exercise of stock options
   
11
     
93
     
     
     
93
 
Stock based compensation
   
     
71
     
     
     
71
 
Dividends on common stock
   
     
     

     
(656
)
   
(656
)
Other comprehensive loss, net
   
     
     
(307
)
   
     
(307
)
Balance, September 30, 2022
   
8,755
   
$
45,566
   
$
(754
)
 
$
65,009
   
$
109,821
 

Nine Months Ended September 30, 2023
 
Common Stock
   
Accumulated Other
Comprehensive
   
Retained
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Loss
   
Earnings
   
Equity
 
   
(in thousands)
 
Balance, January 1, 2023
   
8,798
   
$
45,694
   
$
(771
)
 
$
67,727
   
$
112,650
 
Cumulative effect of change in accounting principle (net of taxes of $659) (1)
                      (1,573 )     (1,573 )
Net income
   
     
     
     
6,837
     
6,837
 
Exercise of stock options
   
54
     
292
     
     
     
292
 
Stock based compensation
   
     
395
     
     
     
395
 
Dividends on common stock
   
     
     
     
(2,119
)
   
(2,119
)
Other comprehensive loss, net
   
     
     
(420
)
   
     
(420
)
Balance, September 30, 2023
   
8,852
   
$
46,381
   
$
(1,191
)
 
$
70,872
   
$
116,062
 

Nine Months Ended September 30, 2022
 
Common Stock
   
Accumulated Other
Comprehensive
   
Retained
   
Total
Stockholders’
 
   
Shares
   
Amount
   
(Loss) Income
   
Earnings
   
Equity
 
   
(in thousands)
 
Balance, January 1, 2022
   
8,650
   
$
44,431
   
$
92
   
$
56,852
   
$
101,375
 
Net income
   
     
     
     
10,073
     
10,073
 
Exercise of stock options
   
105
     
920
     
     
     
920
 
Stock based compensation
   
     
215
     
     
     
215
 
Dividends on common stock
   
     
     
     
(1,916
)
   
(1,916
)
Other comprehensive loss, net
   
     
     
(846
)
   
     
(846
)
Balance, September 30, 2022
   
8,755
   
$
45,566
   
$
(754
)
 
$
65,009
   
$
109,821
 

(1) On January 1, 2023, the Company adopted the provisions of Accounting Standards Codification Topic 326. The allowance in 2023 is reported using the current expected credit loss (“CECL”) method. Periods prior to adoption are reported in accordance with previous GAAP using the incurred loss method.

See the accompanying Notes to Unaudited Consolidated Financial Statements.

COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

   
Nine Months Ended
September 30,
 
   
2023
   
2022
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income
 
$
6,837
   
$
10,073
 
Adjustments to reconcile net income to cash provided by operating activities:
               
Provision (credit) for credit losses
   
(667
)
   
266
 
Depreciation
   
543
     
535
 
Stock based compensation
   
395
     
215
 
Deferred taxes
   
(906
)
   
124
 
Net (amortization) accretion of discounts and premiums for investment securities
   
(33
)
   
(33
)
Gains on:
               
Sale of other assets acquired through foreclosure, net
    (236 )     (104 )
Sale of loans, net
   
(110
)
   
(245
)
Loans originated for sale
   
(7,620
)
   
(14,701
)
Proceeds from sales of loans held for sale
    7,717       14,629  
Proceeds from principal paydowns on loans held for sale
    3,346       1,384  
Changes in:
               
Investment securities measured at fair value
   
(84
)
   
50
 
Servicing assets, net
    14       45  
Other assets
   
12,329
     
1,496
 
Other liabilities
   
4,045
     
722
 
Net cash provided by operating activities
   
25,570
     
14,456
 
Cash flows from investing activities:
               
Principal pay downs and maturities of available-for-sale securities
   
20,868
     
1,791
 
Purchase of available-for-sale securities
    (9,964 )     (40,360 )
Principal pay downs and maturities of held-to-maturity securities
   
394
     
217
 
Purchase of FHLB stock
    (332 )     (92 )
Loan originations and principal collections, net
   
(2,010
)
   
(54,235
)
Purchase of premises and equipment, net
   
(330
)
   
(291
)
Proceeds from sale of other assets acquired through foreclosure, net
    2,551       372  
Net cash provided by (used in) investing activities
   
11,177
     
(92,598
)
Cash flows from financing activities:
               
Net increase (decrease) in deposits
   
41,009
     
(97,942
)
Proceeds from FHLB advances
    20,000       20,000  
Repayments of FHLB advances
    (20,000 )      
Proceeds from advances from line of credit
    10,000        
Repayments of advances from line of credit
    (10,000 )      
Proceeds from exercise of stock options
   
292
     
920
 
Cash dividends paid on common stock
   
(2,119
)
   
(1,916
)
Net cash provided by (used in) financing activities
   
39,182
     
(78,938
)
Net increase (decrease) in cash and cash equivalents
   
75,929
     
(157,080
)
Cash and cash equivalents at beginning of period
   
64,690
     
208,375
 
Cash and cash equivalents at end of period
 
$
140,619
   
$
51,295
 
Supplemental disclosure:
               
Cash paid during the period for:
               
Interest
 
$
8,212
   
$
2,204
 
Income taxes
   
1,420
     
3,945
 
Noncash items:
               
Transfers from loans to loans held for sale
   
735
     
 
Transfers from loans to other assets acquired through foreclosure, net
    1,576        

See the accompanying Notes to Unaudited Consolidated Financial Statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full-service banking through its wholly owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”) which includes 445 Pine, LLC, the Bank’s wholly owned limited liability company. Unless indicated otherwise or unless the context suggests otherwise, these entities are referred to herein collectively and on a consolidated basis as the “Company.”

Basis of Presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the banking 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.

Interim Financial Information

The accompanying unaudited consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022, have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022.

The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022.

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 credit losses and the fair value of securities available-for-sale. Although management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of management, all necessary adjustments have been reflected in the financial statements during their preparation.

Reclassifications
 
Certain amounts in the consolidated financial statements as of December 31, 2022 and for the three and nine months ended September 30, 2022 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income, comprehensive income, or stockholders’ equity as previously reported.

Allowance for Credit Losses - Available-For-Sale (“AFS”) and Held-To-Maturity (“HTM”) Debt Securities

Effective January 1, 2023, the allowance for credit losses on investment securities is determined for both HTM and AFS investments in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) - “Financial Instruments-Credit Losses.”

The allowance for credit losses for HTM investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. For investment securities where the Company has reason to believe the credit loss exposure is remote, a zero-credit loss assumption is applied. Such investment securities typically consist of those guaranteed by the U.S. government or government agencies, where there is an explicit or implicit guarantee by the U.S. government, that are highly rated by rating agencies, and historically have had no credit loss experience.
For AFS securities, the Company performs a quarterly qualitative evaluation for securities in an unrealized loss position to determine if the decline in fair value below the security’s amortized cost is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security; (v) the ability of the issuer of the security to make scheduled principal and interest payments; and (vi) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss, or a portion thereof, is credit related, the Company records the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in the current period’s earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If the Company intends to sell, or if it is more likely than not that the Company will be required to sell a security in an unrealized loss position before the recovery of its amortized cost basis, the total amount of the unrealized loss is recognized in the current period’s earnings. Unrealized losses deemed non-credit related are recorded, net of tax, through accumulated other comprehensive income (loss).

A debt security is placed on nonaccrual status at the time any principal or interest payments become greater than 90 days delinquent. Interest accrued but not received when a security is placed on nonaccrual status is reversed against interest income. Accrued interest receivable on available-for-sale securities is excluded from the estimate of the required allowance for credit losses.

Loans Held for Sale

Loans which are originated and intended for sale in the secondary market are carried at the lower of their amortized cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to the lower of cost or fair value provision. Loans held for sale are comprised of commercial agriculture loans guaranteed by the USDA Farm Service Agency (“FSA”) and Small Business Association (“SBA”) loans. The Company did not incur any lower of cost or fair value provision expense in the three and nine months ended September 30, 2023 and 2022.

Loans Held for Investment

Loans are recorded 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.

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 client’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period. When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs, and premiums and discounts paid on purchased loans are accounted for through interest income.

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.

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 borrower 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.

Allowance for Credit Losses - Loans (Subsequent to the Adoption of ASC 326 on January 1, 2023)

Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326 – “Financial Instruments-Credit Losses”. The allowance for credit losses for loans (“ACL”) is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Company has elected to exclude accrued interest receivable from the amortized cost basis in the estimate of the ACL. The provision for credit losses on loans (which is a component of the provision for credit losses on the consolidated income statements) reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The Company’s methodologies for determining the adequacy of ACL are set forth in a formal policy and take into consideration the need for an ACL for loans evaluated on a collective pool basis which have similar risk characteristics, as well as allowances that are tied to individual loans that do not share risk characteristics and are individually evaluated. The Company increases its ACL by charging the provision for credit losses on its consolidated income statements. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes the non-collectability of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the ACL.

Management conducts an assessment of the ACL on a monthly basis and undertakes a more comprehensive evaluation quarterly. The ACL is estimated using relevant information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts and is maintained at a level sufficient to provide for expected credit losses over the life of the loan, including expected prepayments, based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio and economic conditions.

The ACL is measured on a collective pool basis when similar risk characteristics exist. In estimating the component of the ACL for loans that share common risk characteristics, loans are pooled based on the loan types and areas of risk concentration. For loans evaluated collectively as a pool, the ACL is calculated using the weighted average remaining maturity (“WARM”) method. The WARM method utilizes a historical average annual charge-off rate containing loan loss information over a historical lookback period that is used as a foundation for estimating the ACL for the remaining outstanding balances of loans in a segment at a particular consolidated balance sheet date. The WARM methodology was chosen because each of the loan segments have had loan loss histories dating back as far as 2006 and therefore capture the Company’s historical losses and recoveries and thus established reliable loan loss rates for each loan segment. In the events where there was insufficient historical loan data to establish a reliable loan loss rate, California peer bank data has been utilized to establish loan loss rates.

The Company established a general forecast loan policy to calculate the loan loss rates for each loan segment. The general forecast policy projects that the next four quarters will be similar to the Company’s loan loss rates from 2009 to 2016, and then revert to the long-term average over one quarter.

The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not directly reflected in the Company’s historical loan losses and may include adjustments for changes in environmental and economic conditions, such as changes in unemployment rates, changes in Gross Domestic Product, the impact of droughts in the Company’s lending areas, and other relevant factors in near to medium term of time.

Portfolio segmentation is defined as the level at which an entity develops and documents a systematic methodology to determine its ACL. The method for determining the ACL described above is used to determine the ACL in each portfolio segment in the Company’s loan portfolio. The Company has designated the following portfolio segments of loans:

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. The primary risks of manufactured housing loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates, which may reduce the borrower’s ability to make the required principal and/or interest payments.

Commercial Real Estate (“CRE”): CRE loans are those for which the Company holds commercial real estate property as collateral. This category of loans also includes loans secured by agriculture/farmland and construction loans. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Commercial: Commercial loans are loans that are secured by business assets including inventory, receivables, machinery, and equipment. Risk associated with commercial loans arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Small Business Administration (SBA): These are the unguaranteed portion of loans that are partially guaranteed by the SBA. SBA loans are similar to commercial business loans. The Company originates SBA loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis. Certain loans classified as SBA are secured by commercial real estate property which are included in the commercial real estate category above. SBA loans secured by all other forms of real estate are included in the business loans secured by real estate segment. All other SBA loans are secured by business assets and have similar risks to those discussed in the commercial category above.

Single Family Real Estate and Home Equity Lines of Credit (“HELOC”): These loans are made to consumers and are secured by residential real estate. The primary risks of single family real estate and HELOC loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may reduce the borrower’s ability to make the required principal and/or interest payments.

Consumer: The Company has a limited number of consumer loans. Risk arises with these loans in the borrower’s inability to pay and decreases in the fair value of the underlying collateral, if any.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required ACL and are not included in the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, when the Company determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs. Collateral may consist of various types of real estate including residential properties, commercial properties, agriculture land, vacant land, and manufactured housing. The Company assesses these loans on each reporting date to determine whether repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty.

If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an ACL or partial charge off as the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

The process of assessing the adequacy of the ACL is necessarily subjective. Further, and particularly in times of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of expected credit losses within the loan portfolio. As such, there can be no assurance that future charge offs will not exceed management’s current estimate of what constitutes a reasonable ACL.

Allowance for Loan Losses (Prior to the Adoption of ASC 326 on January 1, 2023)

Prior to the adoption of ASC 326 on January 1, 2023, the allowance for loan losses was intended to be appropriate to provide for probable losses that were considered inherent in the loan portfolio. This process involved deriving probable loss estimates that were based on migration analyses and historical loss rates, in addition to qualitative factors that were based on management’s judgment. The migration analysis and historical loss rate calculations were based on annualized loss rates. Migration analysis was utilized for the commercial real estate, commercial, commercial agriculture, SBA, HELOC, single family residential, and consumer portfolios. The historical loss rate method was utilized primarily for the manufactured housing portfolio. The migration analysis considered the risk rating of loans that were charged off in each loan category.

The Company’s allowance for loan losses was maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans. The allowance was charged for losses when management believed that full recovery on the loan was unlikely.

The allowance for loan losses calculation for the different loan portfolios consisted of the following:
 

Commercial real estate, commercial, commercial agriculture, SBA, HELOC, single family residential, and consumer: Migration analysis combined with risk rating of the loans was used to determine the required allowance for loan losses for all non-impaired loans. In addition, the migration results were adjusted based upon qualitative factors that affect the specific portfolio category. Reserves on impaired loans were determined based upon the individual characteristics of the loan.

Manufactured housing: The allowance for loan losses was calculated on the basis of loss history and risk rating, which was primarily a function of delinquency. In addition, the loss results were adjusted based upon qualitative factors that affected this specific portfolio.

A loan was considered impaired when, based on current information, it was probable that the Company would 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 included payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments. Loans that experienced insignificant payment delays or payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considered 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 used the fair value of collateral method to measure impairment. The collateral-dependent loans that recognized impairment were charged down to the fair value of the collateral less costs to sell. All other loans were measured for impairment either based on the present value of future cash flows or the loan’s observable market price.

The Company evaluated and individually assessed for impairment loans either on nonaccrual, those that were classified as a troubled debt restructuring, or when other conditions existed which led management to review for possible impairment. Measurement of impairment on impaired loans was determined on a loan-by-loan basis and in total established a specific reserve for impaired loans. Interest income was not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continued to perform in accordance with the loan contract and the borrower provided financial information to support maintaining the loan on accrual.

The Company determined the appropriate allowance for loan losses on a monthly basis. Any differences between estimated and actual observed losses from the prior month were reflected in the current period in determining the appropriate allowance for loan losses determination and adjusted as deemed necessary. The review of the appropriateness of the allowance took 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 have affected borrowers’ ability to pay and/or the value of the underlying collateral. Additional factors considered included geographic location of borrowers, changes in the Company’s product-specific credit policy, and lending staff experience. These estimates depended on the outcome of future events and, therefore, contained inherent uncertainties.

Another component of the allowance for loan losses considered qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools was based on changes in any of the following factors:
 

Concentrations of credit

Trends in volume, maturity, and composition of loans

Volume and trend in delinquency, nonaccrual, and classified assets

Economic conditions

Policy and procedures or underwriting standards

Staff experience and ability

Value of underlying collateral

Competition, legal, or regulatory environment

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

Modified Loans to Troubled Borrowers

From time to time, the Company will modify certain loans in order to alleviate temporary difficulties in a borrower’s financial condition and/or constraints on a borrower’s ability to repay the loan, and to minimize potential losses to the Company. Such modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and in limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been in default for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on these loans on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated selling costs. In addition, GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. See Note 4 - Loans Held for Investment for additional information concerning modified loans to troubled borrowers.

Off-Balance Sheet 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.
 
After the adoption of ASC 326 on January 1, 2023, the estimate of the ACL for off-balance sheet commitments provides for current estimated credit losses for the unused portion of collective pools of off-balance sheet credit exposures expected to be funded, except for unconditionally cancellable commitments for which no allowance for credit losses is required under ASC 326. The ACL for off-balance sheet commitments includes factors that are consistent with the ACL methodology for loans using the expected loss factors and an estimated utilization or probability of draw factor, which are based on historical experience. Changes in the ACL for off-balance sheet commitments are reported as a component of provision for credit losses in the consolidated income statements and the allowance for credit losses for off-balance sheet commitments is included in other liabilities in the consolidated balance sheets.

Prior to the adoption of ASC 326 on January 1, 2023, the Company applied qualitative factors to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate for losses on off-balance sheet instruments is included within other liabilities and the charge to income that established this liability is included in other expense on the consolidated income statement.
 
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 are classified as income tax expense in the consolidated income statements. Deferred tax assets are included in other assets on the consolidated balance sheets.
 
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach, which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
 
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”).  ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
 
Earnings Per Share
 
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include outstanding stock options. Restricted stock awards are considered to be outstanding common shares for the purpose of computing basic and diluted earnings per share.

The components of basic and diluted earnings per share are as follows:

 
 
Three Months Ended
  September 30,
   
Nine Months Ended
September 30,
 
 
 
2023
    2022     2023     2022  
   
(dollars in thousands, except per share amounts)
 
Net income available to common stockholders
 
$
2,252
   
$
3,478
    $ 6,837     $ 10,073  
                                 
Weighted average number of common shares outstanding - basic
   
8,849,831
     
8,748,308
      8,834,961       8,708,805  
Add: Dilutive effects of assumed exercises of stock options
   
131,403
     
166,403
      133,520       173,934  
Weighted average number of common shares outstanding - diluted
   
8,981,234
     
8,914,711
      8,968,481       8,882,739  
                                 
Earnings per share:
                               
Basic
 
$
0.25
   
$
0.40
    $ 0.77     $ 1.16  
Diluted
 
$
0.25
   
$
0.39
    $ 0.76     $ 1.13  
Stock options for 113,131 and 96,450 shares of common stock were not considered in computing diluted earnings per share for the three months ended September 30, 2023 and 2022, respectively, because they were antidilutive. Stock options for 129,276 and 90,243 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2023 and 2022, respectively, because they were antidilutive.
 
Recently Adopted Accounting Pronouncements
 
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 - “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU replaces the incurred loss impairment model in current GAAP with a model that reflects current expected credit losses (“CECL”). The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. CECL also requires credit losses on available-for-sale debt securities to be measured through an allowance for credit losses when the fair value is less than the amortized cost basis. It also applies to off-balance sheet credit exposures. The ASU requires that all expected credit losses for financial assets held at the reporting date be measured based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosure, including qualitative and quantitative disclosures that provide additional information about significant estimates and judgments used in estimating credit losses. The provisions of this Update became effective for the Company for all annual and interim periods beginning January 1, 2023.

In April 2019, the FASB issued ASU 2019-04 - “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”. This ASU was issued as part of an ongoing project on the FASB’s agenda for improving the Codification or correcting for its unintended application. The FASB issued this ASU, which is specific to ASUs: 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” 2016-01 - “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” and 2017-12 - “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this Update became effective for all interim and annual reporting periods for the Company on January 1, 2023. The Company adopted the provisions within this ASU in conjunction with the implementation of ASC 326 - “Financial Instruments - Credit Losses,” including: (i) the election to not measure credit losses on accrued interest receivable when such balances are written-off in a timely manner when deemed uncollectable and (ii) the election to not include the balance of accrued interest receivable as part of the amortized cost of a loan, but rather to present it separately in the consolidated balance sheets.

In May 2019, the FASB issued ASU 2019-05 - “Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief.” This ASU was issued to allow entities that have certain financial instruments within the scope of ASC 326-20 - “Financial Instruments - Credit Losses - Measured at Amortized Cost” to make an irrevocable election to elect the fair value option for those instruments in ASC 825-10 - “Financial Instruments - Overall” upon the adoption of ASC 326, which for the Company was January 1, 2023. The fair value option is not applicable to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company did not elect the fair value option for any of its financial assets upon the adoption of ASC 326 on January 1, 2023.

The Company has developed an expected credit loss estimation model in accordance with ASC 326. The Company established a committee comprised of executive management and members of Accounting and Credit Administration and utilizes a third-party software provider specializing in CECL loss modeling. For loans evaluated collectively as a pool, the allowance for credit losses is calculated using the weighted average remaining maturity (“WARM”) method, as described more fully above. The Company’s model incorporates reasonable and supportable economic forecasts into the estimate of expected credit losses, which requires significant judgment.

Effective January 1, 2023, the Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach, and recorded a net decrease of $1.6 million to the beginning balance of retained earnings as of January 1, 2023, for the cumulative effect adjustment. The following table illustrates the impact of adoption of the CECL methodology on the Company’s consolidated balance sheet as of January 1, 2023:

   
Pre-CECL
Adoption
   
Impact of
CECL
Adoption
   
As Reported
Under CECL
 
   
(in thousands)
 
Assets:
                 
Allowance for credit losses on securities:
                 
Available-for-sale
 
$
   
$
   
$
 
Held-to-maturity
   
     
     
 
Allowance for credit losses - loans
   
10,765
     
1,811
     
12,576
 
Deferred tax assets
   
5,053
     
659
     
5,712
 
                         
Liabilities:
                       
Allowance for credit losses for off-balance sheet commitments
   
94
     
421
     
515
 
                         
Stockholders’ equity:
                       
Retained earnings
   
67,727
     
(1,573
)
   
66,154
 

The Company’s assessment of held-to-maturity and available-for-sale investment securities as of January 1, 2023, indicated that an allowance for credit losses was not required. The Company determined the likelihood of default on held-to-maturity investment securities was remote, and the amount of expected non-repayment on those investments was zero. The Company also analyzed available-for-sale investment securities that were in an unrealized loss position as of January 1, 2023, and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As such, no allowance for credit losses was recorded for held-to-maturity and available-for-sale securities as of January 1, 2023.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three-year period the Day 1 adverse regulatory capital effects of ASU 2016-13. As a result, entities have the option to gradually phase in the full effect of CECL on regulatory capital over a three-year transition period. The Company elected to phase in the full effect of CECL on regulatory capital over the three-year transition period.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Under the provisions of this ASU, an entity must determine whether a modification results in a new loan or the continuation of an existing loan. Further, the amendments in this ASU require that an entity disclose current period gross charge-offs on loans by year of origination and class of financing receivable. This guidance became effective for the Company on January 1, 2023. The new guidance did not have a material impact on the Company’s consolidated financial statements; however, the required disclosures were added to the consolidated financial statements.

2.
INVESTMENT SECURITIES
 
The amortized cost and estimated fair value of investment securities are as follows:
    September 30, 2023  
   
Amortized
Cost
   
Allowance
for Credit
Losses
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Securities available-for-sale
  (in thousands)  
U.S. government agency notes
 
$
3,478
    $    
$
15
   
$
   
$
3,493
 
U.S. government agency collateralized mortgage obligations (“CMO”)
   
4,196
           
     
(218
)
   
3,978
 
Corporate debt securities
   
9,250
      (103 )    
     
(1,494
)
   
7,653
 
Total
 
$
16,924
    $ (103 )  
$
15
   
$
(1,712
)
 
$
15,124
 
                                         
Securities held-to-maturity
                                       
U.S. government agency mortgage-backed securities (“MBS”)
 
$
2,158
         
$
2
   
$
(173
)
 
$
1,987
 
Total
 
$
2,158
         
$
2
   
$
(173
)
 
$
1,987
 

    September 30, 2023  
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities measured at fair value
    (in thousands)
 
Equity securities: Farmer Mac class A stock
 
$
66
   
$
243
   
$
   
$
309
 
Total
 
$
66
   
$
243
   
$
   
$
309
 
 
   
December 31, 2022
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
Securities available-for-sale
 
(in thousands)
 
U.S. government agency notes
 
$
4,081
   
$
26
   
$
   
$
4,107
 
U.S. government agency CMO
   
4,475
     
     
(179
)
   
4,296
 
U.S. Treasury securities
    9,984             (14 )     9,970  
Corporate debt securities
   
9,250
     
     
(935
)
   
8,315
 
Total
 
$
27,790
   
$
26
   
$
(1,128
)
 
$
26,688
 
                                 
Securities held-to-maturity
                               
U.S. government agency MBS
 
$
2,557
   
$
3
   
$
(137
)
 
$
2,423
 
Total
 
$
2,557
   
$
3
   
$
(137
)
 
$
2,423
 
                                 
Securities measured at fair value
                               
Equity securities: Farmer Mac class A stock
 
$
66
   
$
159
   
$
   
$
225
 
Total
 
$
66
   
$
159
   
$
   
$
225
 
 
At September 30, 2023 and December 31, 2022, securities with carrying values of $9.5 million and $21.1 million, respectively, were pledged to the Federal Home Loan Bank (“FHLB”) as collateral for current and future advances.
 
At September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The maturity periods and weighted average yields of investment securities available-for-sale and held-to-maturity at the period ends indicated were as follows:
 
   
September 30, 2023
 
   
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
 
$
     
   
$
     
   
$
482
     
5.60
%
 
$
3,011
     
6.35
%
 
$
3,493
     
6.25
%
U.S. government agency CMO
   
     
     
     
     
429
     
3.69
%
   
3,549
     
5.64
%
   
3,978
     
5.43
%
Corporate debt securities
   
     
     
     
     
7,653
      3.74 %    
     
     
7,653
     
3.74
%
Total
 
$
     
   
$
     
   
$
8,564
     
3.84
%
 
$
6,560
     
5.97
%
 
$
15,124
     
4.76
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
     
   
$
     
   
$
731
     
3.60
%
 
$
1,427
     
4.28
%
 
$
2,158
     
4.05
%
Total
 
$
     
   
$
     
   
$
731
     
3.60
%
 
$
1,427
     
4.28
%
 
$
2,158
     
4.05
%
 
   
December 31, 2022
 
   
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
 
$
     
   
$
     
   
$
519
     
3.59
%
 
$
3,588
     
4.40
%
 
$
4,107
     
4.30
%
U.S. government agency CMO
   
     
     
     
     
     
     
4,296
     
4.63
%
   
4,296
     
4.63
%
U.S. Treasury securities
    9,970       2.06 %                                         9,970       2.06 %
Corporate debt securities
   
     
     
     
     
8,315
     
3.74
%
   
     
     
8,315
     
3.74
%
Total
 
$
9,970
     
2.06
%
 
$
     
   
$
8,834
     
3.73
%
 
$
7,884
     
4.53
%
 
$
26,688
     
3.34
%
                                                                                 
Securities held-to-maturity
                                                                               
U.S. government agency MBS
 
$
     
   
$
     
   
$
746
     
3.60
%
 
$
1,811
     
3.68
%
 
$
2,557
     
3.66
%
Total
 
$
     
   
$
     
   
$
746
     
3.60
%
 
$
1,811
     
3.68
%
 
$
2,557
     
3.66
%
 
The amortized cost and fair value of available-for-sale and held-to-maturity investment securities maturities as of the periods presented are as shown below:
 
   
September 30,
2023
   
December 31,
2022
 
   
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Securities available-for-sale
 
(in thousands)
 
Due in less than one year
 
$
   
$
   
$
9,984
   
$
9,970
 
After one year through five years
   
     
     
     
 
After five years through ten years
   
10,220
     
8,564
     
9,768
     
8,834
 
After ten years
   
6,704
     
6,560
     
8,038
     
7,884
 
Total
 
$
16,924
   
$
15,124
   
$
27,790
   
$
26,688
 
                                 
Securities held-to-maturity
                               
Due in less than one year
 
$
   
$
   
$
   
$
 
After one year through five years
   
     
     
     
 
After five years through ten years
   
731
     
662
     
746
     
705
 
After ten years
   
1,427
     
1,325
     
1,811
     
1,718
 
Total
 
$
2,158
   
$
1,987
   
$
2,557
   
$
2,423
 
 
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.
 
As of September 30, 2023 and December 31, 2022, securities that are in an unrealized loss position and length of time that individual securities have been in a continuous loss position are summarized as follows:
 
   
September 30, 2023
 
   
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 CMO
 
$
(23
)
 
$
607
   
$
(195
)
 
$
3,371
   
$
(218
)
 
$
3,978
 
Corporate debt securities
   
   
     
(1,494
)
   
7,653
     
(1,494
)
   
7,653
 
Total
 
$
(23
)
 
$
607
   
$
(1,689
)
 
$
11,024
   
$
(1,712
)
 
$
11,631
 
                                                 
Securities held-to-maturity
                                               
U.S. government agency MBS
 
$
(2
)
 
$
134
   
$
(171
)
 
$
1,694
   
$
(173
)
 
$
1,828
 
Total
 
$
(2
)
 
$
134
   
$
(171
)
 
$
1,694
   
$
(173
)
 
$
1,828
 
 
   
December 31, 2022
 
   
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 CMO
 
$
(130
)
 
$
3,690
   
$
(49
)
 
$
606
   
$
(179
)
 
$
4,296
 
U.S. Treasury securities
    (14 )     9,970                   (14 )     9,970  
Corporate debt securities
   
(764
)
   
6,986
     
(171
)
   
1,329
     
(935
)
   
8,315
 
Total
 
$
(908
)
 
$
20,646
   
$
(220
)
 
$
1,935
   
$
(1,128
)
 
$
22,581
 
                                                 
Securities held-to-maturity
                                               
U.S. government agency MBS
  $ (137 )   $ 2,115     $     $     $ (137 )   $ 2,115  
Total
  $ (137 )   $ 2,115     $     $     $ (137 )   $ 2,115  
 
As of September 30, 2023 and December 31, 2022, there were 36 and 37 securities, respectively, in an unrealized loss position.

At September 30, 2023 and December 31, 2022, there were no available-for-sale or held-to-maturity securities that were on nonaccrual status. All securities in the portfolio were current with their contractual principal and interest payments. Accrued interest receivable related to available-for-sale and held-to-maturity securities was $124 thousand and $7 thousand, respectively, at September 30, 2023. Accrued interest receivable related to available-for-sale and held-to-maturity securities was $69 thousand and $8 thousand, respectively, at December 31, 2022. Accrued interest receivable is included in other assets on the consolidated balance sheets.

There were no collateral dependent available-for-sale or held-to-maturity securities at September 30, 2023 or December 31, 2022.

The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is deemed credit related or due to other factors such as changes in interest rates and general market conditions. An ACL on available-for-sale investment securities is recorded when the fair value of the investment is below its amortized cost and the decline in fair value has been deemed, through the Company’s qualitative assessment, to be credit-related. Non-credit-related declines in fair value of available-for-sale investment securities, which may be attributed to changes in interest rates and other market related factors, are not recorded through an ACL. Such declines are recorded as an adjustment to accumulated other comprehensive income (loss), net of tax. In the event the Company is required to sell or has the intent to sell an available-for-sale security that has experienced a decline in fair value below its amortized cost, the Company writes the amortized cost of the security down to fair value in the current period.

During the three and nine months ended September 30, 2023, the Company recorded a provision for credit losses for certain corporate debt securities classified as available-for-sale in the amount of $103 thousand. The need for ACL for these securities was in response to downgrades of the credit ratings of the issuers. The ACL was determined using the discounted cash flow method, using estimated loss rates that were derived from averages for corporate debt securities with similar credit ratings. There were no charge offs of any balances of corporate debt securities. The ending allowance for credit losses for securities at September 30, 2023 was $103 thousand.

The Company did not record an allowance for credit losses for held-to-maturity securities as of September 30, 2023, because the likelihood of non-repayment  was considered to be remote as the issuers of those securities were U.S. Federal government agencies. There was no provision for credit losses recognized related to any held-to-maturity investment securities during the three and nine months ended September 30, 2023.

Prior to the adoption of ASC 326, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that were deemed to be other-than-temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considered, among other things: (i) the length of time and the extent to which the fair value had 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 was more likely than not that it would have been required to sell the security before the recovery of its amortized basis. Management concluded that none of the Company’s securities were impaired due to reasons of credit quality as of December 31, 2022, and therefore management believes the impairments detailed in the table above were temporary and no other-than-temporary impairment loss was recorded in the Company’s consolidated income statements.

3.
LOANS HELD FOR SALE AND LOANS SERVICED FOR OTHERS
 
As of September 30, 2023 and December 31, 2022, the Company had approximately $4.7 million and $5.2 million of SBA loans included in loans held for sale, 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 United States Department of Agriculture (“USDA”), USDA Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. As of September 30, 2023 and December 31, 2022, the Company had $13.7 million and $15.9 million of USDA loans included in loans held for sale, respectively.

The unpaid balance of loan serviced for others as of the periods presented are as shown below:

   
September 30,
2023
   
December 31,
2022
 
   
(in thousands)
 
SBA
 
$
1,438
   
$
1,926
 
USDA, FSA, and USDA Business and Industry
   
     
735
 
Farmer Mac
   
159,450
     
155,522
 
Total loans serviced for others
 
$
160,888
   
$
158,183
 

4.
LOANS HELD FOR INVESTMENT

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

    September 30,     December 31,  
   
2023
   
2022
 
   
(in thousands)
 
Manufactured housing
 
$
325,068
   
$
315,825
 
Commercial real estate
   
556,945
     
545,317
 
Commercial
   
38,232
     
59,070
 
SBA
   
1,687
     
3,482
 
HELOC
   
2,556
     
2,613
 
Single family real estate
   
10,615
     
8,709
 
Consumer
   
52
     
107
 
Gross loans held for investment
   
935,155
     
935,123
 
Deferred fees, net
   
(883
)
   
(787
)
Discount on SBA loans
   
(25
)
   
(27
)
Loans held for investment
    934,247       934,309  
Allowance for credit losses     (12,135 )     (10,765 )
Loans held for investment, net
 
$
922,112
   
$
923,544
 

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

   
September 30, 2023
 
   
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Over 90 Days
Past Due
   
Total
Past Due
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
324,276
   
$
615
   
$
   
$
177
   
$
792
   
$
325,068
 
Commercial real estate:
                                               
Commercial real estate
   
484,172
     
     
1,576
     
     
1,576
     
485,748
 
SBA 504 1st trust deed
   
12,335
     
     
     
     
     
12,335
 
Land
   
8,025
     
     
     
     
     
8,025
 
Construction
   
48,887
     
     
1,950
     
     
1,950
     
50,837
 
Commercial
   
37,985
     
     
247
     
     
247
     
38,232
 
SBA
   
1,613
     
73
     
     
1
     
74
     
1,687
 
HELOC
   
2,556
     
     
     
     
     
2,556
 
Single family real estate
   
10,615
     
     
     
     
     
10,615
 
Consumer
   
52
     
     
     
     
     
52
 
Total
 
$
930,516
   
$
688
   
$
3,773
   
$
178
   
$
4,639
   
$
935,155
 

   
December 31, 2022
 
   
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Over 90 Days
Past Due
   
Total
Past Due
   
Total
 
   
(in thousands)
 
Manufactured housing
 
$
315,058
   
$
665
   
$
102
   
$
   
$
767
   
$
315,825
 
Commercial real estate:
                                               
Commercial real estate
   
481,599
     
1,160
     
     
     
1,160
     
482,759
 
SBA 504 1st trust deed
   
12,947
     
     
     
     
     
12,947
 
Land
   
11,237
     
     
     
     
     
11,237
 
Construction
   
38,374
     
     
     
     
     
38,374
 
Commercial
   
59,070
     
     
     
     
     
59,070
 
SBA
   
2,529
     
953
     
     
     
953
     
3,482
 
HELOC
   
2,613
     
     
     
     
     
2,613
 
Single family real estate
   
8,709
     
     
     
     
     
8,709
 
Consumer
   
107
     
     
     
     
     
107
 
Total
 
$
932,243
   
$
2,778
   
$
102
   
$
   
$
2,880
   
$
935,123
 

The following table presents the composition of nonaccrual loans as of September 30, 2023, and December 31, 2022:

   
September 30, 2023
    December 31, 2022  
   
With an ACL
   
Without an ACL
   
Total Nonaccrual
    With an Allowance     Without an Allowance     Total Nonaccrual  
   
(in thousands)
 
Manufactured housing
 
$
100
   
$
627
   
$
727
    $     $ 61     $ 61  
Commercial real estate
   
     
327
     
327
                   
Construction
          1,950       1,950                    
Commercial
          50       50                    
HELOC
          141       141                    
Single family real estate
   
     
     
            150       150  
Total
 
$
100
   
$
3,095
   
$
3,195
    $     $ 211     $ 211  

There were $1 thousand of loans past due by 90 days or more that were not on nonaccrual status at September 30, 2023. There were no loans past due by 90 days or more that were not on nonaccrual status at December 31, 2022.

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 from interest income 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 the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Foregone interest on nonaccrual loans for the three months ended September 30, 2023 and 2022, was $117 thousand and $9 thousand, respectively.  Foregone interest on nonaccrual loans for the nine months ended September 30, 2023 and 2022, was $296 thousand and $32 thousand, respectively.

Accrued interest receivable related to loans was $5.3 million and $5.1 million at September 30, 2023 and December 31, 2022, respectively. Accrued interest receivable is included in other assets on the consolidated balance sheets.

Allowance for Credit Losses for Loans
 
The Company adopted the CECL requirements of ASC 326 on January 1, 2023. As discussed further in Note 1 - Summary of Significant Accounting Policies, the Company uses the WARM method as the basis for the estimation of expected credit losses under CECL.  The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required ACL and are not included in the collective evaluation. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s  effective interest rate or, when the Company determines that foreclosure is probable, the fair value of the collateral securing the loan, less estimated selling costs.

During the three months ended September 30, 2023, the ACL for loans decreased by $13 thousand to $12.1 million. The decline in the ACL was primarily due to a decline in the required allowance for loans evaluated on a collective basis of $140 thousand due to a decrease in net loan balances. This decrease was partially offset by an increase in the ACL for the qualitative factor related to the levels of substandard loans.

During the nine months ended September 30, 2023, the allowance for credit losses on loans increased by $1.4 million from $10.8 million at December 31, 2022. When the Company adopted the provisions of ASC 326 on January 1, 2023, it recorded the required $1.8 million increase directly to retained earnings (net of tax). During the first nine months of 2023, the Company recorded a provision (credit) for credit losses for loans of $(680) thousand.This decrease in allowance for credit losses during the nine months ended September 30, 2023 (after the adjustment for the adoption of ASC 326) was primarily due to a reduction in the qualitative factor related to the percentage of the state of California that was experiencing a drought. In addition, the allowance for credit losses also declined due to a reduction in the portion of the allowance derived from historical losses. Offsetting these decreases was an increase in the qualitative factor related to substandard loans, discussed above.

The following tables summarize the changes in the allowance for credit losses by portfolio type. Prior to the adoption of ASC 326 on January 1, 2023, the allowance for loan losses was determined in accordance with ASC 450 and ASC 310.
 
   
For the Three Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2023
 
(in thousands)
 
Beginning balance
 
$
5,519
   
$
5,896
   
$
515
   
$
5
   
$
41
   
$
171
   
$
1
   
$
12,148
 
Charge-offs
   
     
     
     
     
     
     
     
 
Recoveries
   
8
     
20
     
13
     
4
     
     
     
     
45
 
Net recoveries
   
8
     
20
     
13
     
4
     
     
     
     
45
 
Provision (credit) for credit losses
   
(54
)
   
44
     
(46
)
   
(4
)
   
1
     
1
     
     
(58
)
Ending balance
 
$
5,473
   
$
5,960
   
$
482
   
$
5
   
$
42
   
$
172
   
$
1
   
$
12,135
 
                                                                 
2022
                                                               
Beginning balance
 
$
3,976
   
$
6,120
   
$
594
   
$
23
   
$
37
   
$
115
   
$
1
   
$
10,866
 
Charge-offs
   
     
     
     
(182
)
   
     
     
     
(182
)
Recoveries
   
88
     
20
     
13
     
4
     
6
     
     
     
131
 
Net recoveries (charge-offs)
   
88
     
20
     
13
     
(178
)
   
6
     
     
     
(51
)
Provision (credit) for credit losses
   
(77
)
   
182
     
24
     
174
     
(6
)
   
     
1
     
298
 
Ending balance
 
$
3,987
   
$
6,322
   
$
631
   
$
19
   
$
37
   
$
115
   
$
2
   
$
11,113
 

   
For the Nine Months Ended September 30,
 
   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
 
2023
 
(in thousands)
 
Beginning balance, prior to adoption of ASC 326
 
$
3,879
   
$
5,980
   
$
747
   
$
21
   
$
27
   
$
107
   
$
4
   
$
10,765
 
Impact of adoption of ASC 326
    1,671       31       70       (15 )     17       39       (2 )     1,811  
Charge-offs
   
     
     
     
     
     
     
     
 
Recoveries
   
74
     
59
     
37
     
69
     
     
     
     
239
 
Net recoveries
   
74
     
59
     
37
     
69
     
     
     
     
239
 
Provision (credit) for credit losses
   
(151
)
   
(110
)
   
(372
)
   
(70
)
   
(2
)
   
26
     
(1
)
   
(680
)
Ending balance
 
$
5,473
   
$
5,960
   
$
482
   
$
5
   
$
42
   
$
172
   
$
1
   
$
12,135
 
                                                                 
2022
                                                               
Beginning balance
 
$
2,606
   
$
6,729
   
$
923
   
$
22
   
$
18
   
$
105
   
$
1
   
$
10,404
 
Charge-offs
   
     
     
     
(182
)
   
     
     
     
(182
)
Recoveries
   
123
     
60
     
183
     
246
     
12
     
     
1
     
625
 
Net recoveries
   
123
     
60
     
183
     
64
     
12
     
     
1
     
443
 
Provision (credit) for credit losses
   
1,258
     
(467
)
   
(475
)
   
(67
)
   
7
     
10
     
     
266
 
Ending balance
 
$
3,987
   
$
6,322
   
$
631
   
$
19
   
$
37
   
$
115
   
$
2
   
$
11,113
 

As of September 30, 2023, and December 31, 2022, the Company had an allowance for credit losses for off-balance sheet commitments of $424 thousand and $94 thousand, respectively, which was included in other liabilities on the consolidated balance sheets. The provision (credit) for credit losses associated with the allowance for off-balance sheet commitments was $(2) thousand and $(90) thousand for the three and nine months ended September 30, 2023, respectively.


Beginning on January 1, 2023, the Company evaluates loans collectively for purposes of determining the allowance for credit losses in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the loan portfolio. These loans are typically identified as those that have exhibited deterioration in credit quality, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, have undergone a significant modification, have been downgraded to substandard or worse, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio, or that have been identified as collateral dependent, are evaluated individually for purposes of determining an appropriate lifetime allowance for credit losses. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the allowance for credit losses on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the allowance for credit losses for collateral dependent loans based on changes in the estimated fair value of the collateral. Changes in the allowance for credit losses for all other individually evaluated loans are based substantially on the Company’s evaluation of cash flows expected to be received from such loans.


The following table presents the amortized cost basis and the associated allowance for credit losses by portfolio segment for loans that were individually evaluated as of September 30, 2023:

 
 
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
   
(in thousands)
 
Amortized Cost Basis:
                                               
Individually evaluated loans with an allowance for credit losses recorded
 
$
853
   
$
   
$
   
$
   
$
   
$
   
$
   
$
853
 
Individually evaluated loans with no allowance for credit losses recorded
   
1,359
     
2,277
     
1,210
     
     
     
141
     
     
4,987
 
Total individually evaluated loans
   
2,212
     
2,277
     
1,210
     
     
     
141
     
     
5,840
 
Collectively evaluated loans
   
322,856
     
554,668
     
37,022
     
1,687
     
2,556
     
10,474
     
52
     
929,315
 
Total loans held for investment
 
$
325,068
   
$
556,945
   
$
38,232
   
$
1,687
   
$
2,556
   
$
10,615
   
$
52
   
$
935,155
 
                                                                 
Allowance for Credit Losses:
                                                               
Individually evaluated loans
 
$
16
   
$
   
$
   
$
   
$
   
$
   
$
   
$
16
 
Collectively evaluated loans
   
5,457
     
5,960
     
482
     
5
     
42
     
172
     
1
     
12,119
 
Total allowance for credit losses
 
$
5,473
   
$
5,960
   
$
482
   
$
5
   
$
42
   
$
172
   
$
1
   
$
12,135
 

Prior to the adoption of ASC 326 on January 1, 2023, the Company classified loans as impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreement or it was determined that the likelihood of the Company receiving all scheduled payments, including interest, when due was remote. Credit losses on impaired loans were determined separately based on the guidance in ASC 310. Beginning January 1, 2023, the Company accounts for credit losses on all loans in accordance with ASC 326, which eliminates the concept of an impaired loan within the context of determining credit losses.

The following table presents impairment method information related to loans and allowance for loan losses by loan portfolio segment as of December 31, 2022:

   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 

 
(in thousands)
 
Recorded Investment:
                                               
Impaired loans with an allowance recorded
 
$
2,918
   
$
209
   
$
67
   
$
41
   
$
   
$
208
   
$
   
$
3,443
 
Impaired loans with no allowance recorded
   
1,166
     
     
1,297
     
     
     
151
     
     
2,614
 
Total loans individually evaluated for impairment
   
4,084
     
209
     
1,364
     
41
     
     
359
     
     
6,057
 
Loans collectively evaluated for impairment
   
311,741
     
545,108
     
57,706
     
3,441
     
2,613
     
8,350
     
107
     
929,066
 
Total loans held for investment
 
$
315,825
   
$
545,317
   
$
59,070
   
$
3,482
   
$
2,613
   
$
8,709
   
$
107
   
$
935,123
 

                                                               
Related Allowance for Loan Losses
                                                               
Loans individually evaluated for impairment
   
157
     
18
     
     
1
     
     
8
     
     
184
 
Loans collectively evaluated for impairment
   
3,722
     
5,962
     
747
     
20
     
27
     
99
     
4
     
10,581
 
Total allowance for loan losses
 
$
3,879
   
$
5,980
   
$
747
   
$
21
   
$
27
   
$
107
   
$
4
   
$
10,765
 


The recorded investment in impaired loans approximated the unpaid balance of the loans as of December 31, 2022.



Prior to the adoption of ASC 326, a valuation allowance was established for an impaired loan when the fair value of the loan was less than the recorded investment. In certain cases, portions of impaired loans were charged-off to realizable value instead of establishing a valuation allowance and were included, when applicable, in the table above as “Impaired loans without specific valuation allowance.” The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of December 31, 2022.



The following table presents the amortized cost basis of collateral dependent loans by class of loans and by collateral type as of the dates indicated :



   
Manufactured
Homes
   
Single Family
Residence
   
Machinery
&
Equipment
   
Total
 
September 30, 2023  
(in thousands)
 
Manufactured housing
 
$
1,014
   
$
   
$
   
$
1,014
 
Commercial real estate
    2,277                   2,277  
Commercial
   
     
     
1,210
     
1,210
 
Single family real estate
   
     
141
     
     
141
 
Total
 
$
3,291
   
$
141
   
$
1,210
   
$
4,642
 


 
 
Manufactured
Homes
   
Single Family
Residence
   
Machinery
&
Equipment
   
Total
 
December 31, 2022
 
(in thousands)
 
Manufactured housing
 
$
574
   
$
   
$
   
$
574
 
Commercial
   
     
     
1,297
     
1,297
 
Single family real estate
   
     
150
     
     
150
 
Total
 
$
574
   
$
150
   
$
1,297
   
$
2,021
 

There was no associated allowance for credit losses (or allowance for loan losses prior to the adoption of ASC 326 on January 1, 2023) for collateral dependent loans as of September 30, 2023, or December 31, 2022.


The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Loan ratings are reviewed as part of the Company’s normal loan monitoring process, but, at a minimum, updated on an annual basis. Under the Company’s risk rating system, the Company rates loans with potential problems as “Special Mention,” “Substandard,” “Doubtful,” and “Loss”. The following is a description of the characteristics of loan ratings.



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 Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company 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 the 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 as 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.

Loans not meeting the criteria above are considered to be pass-rated loans.


The following tables present the risk categories for gross loans by class of loans and by year of origination as of the dates indicated:


   
Term Loans Amortized Cost Basis by Origination Year
             
   
2023
   
2022
   
2021
   
2020
   
2019
   
Prior
   
Revolving
   
Total
 
September 30, 2023  
(in thousands)
 
Manufactured housing:
                                               
Pass
 
$
38,199
   
$
57,135
   
$
49,553
   
$
46,564
   
$
24,731
   
$
106,655
   
$
   
$
322,837
 
Substandard
   
     
     
101
     
219
     
     
1,911
     
     
2,231
 
Total
   
38,199
     
57,135
     
49,654
     
46,783
     
24,731
     
108,566
     
     
325,068
 
                                                                 
Commercial real estate:
                                                               
Pass
   
34,298
     
152,500
     
122,794
     
58,350
     
49,489
     
121,401
     
     
538,832
 
Special mention
   
     
     
464
     
211
     
4,145
     
1,014
     
     
5,834
 
Substandard
   
     
     
500
     
2,993
     
     
8,786
     
     
12,279
 
Total
   
34,298
     
152,500
     
123,758
     
61,554
     
53,634
     
131,201
     
     
556,945
 
                                                                 
Commercial:
                                                               
Pass
   
1,589
     
5,497
     
2,663
     
1,094
     
738
     
13,418
     
8,176
     
33,175
 
Special mention
   
     
     
1,996
     
407
     
     
     
     
2,403
 
Substandard
   
     
     
     
     
     
2,654
     
     
2,654
 
Total
   
1,589
     
5,497
     
4,659
     
1,501
     
738
     
16,072
     
8,176
     
38,232
 
                                                                 
SBA:
                                                               
Pass
   
     
     
     
192
     
     
1,454
     
     
1,646
 
       Special mention                                   40             40  
Loss
   
     
     
     
     
     
1
     
     
1
 
Total
   
     
     
     
192
     
     
1,495
     
     
1,687
 
                                                                 
HELOC:
                                                               
Pass
   
     
     
     
     
     
2,556
     
     
2,556
 
Total
   
     
     
     
     
     
2,556
     
     
2,556
 
                                                                 
Single family real estate:
                                                               
Pass
   
2,242
     
826
     
1,997
     
1,989
     
748
     
2,667
     
     
10,469
 
Substandard
   
     
     
     
     
     
146
     
     
146
 
Total
   
2,242
     
826
     
1,997
     
1,989
     
748
     
2,813
     
     
10,615
 
                                                                 
Consumer:
                                                               
Pass
   
52
     
     
     
     
     
     
     
52
 
Total
   
52
     
     
     
     
     
     
     
52
 
                                                                 
Total loans
 
$
76,380
   
$
215,958
   
$
180,068
   
$
112,019
   
$
79,851
   
$
262,703
   
$
8,176
   
$
935,155
 

   
Term Loans Amortized Cost Basis by Origination Year
             
   
2022
   
2021
   
2020
   
2019
   
2018
   
Prior
   
Revolving
   
Total
 
December 31, 2022
 
(in thousands)
 
(Manufactured housing:
                                               
Pass
 
$
62,591
   
$
54,403
   
$
51,158
   
$
26,745
   
$
25,768
   
$
94,106
   
$
   
$
314,771
 
Substandard
   
     
     
     
     
121
     
933
     
     
1,054
 
Total
   
62,591
     
54,403
     
51,158
     
26,745
     
25,889
     
95,039
     
     
315,825
 
                                                                 
Commercial real estate:
                                                               
Pass
   
161,023
     
125,074
     
57,441
     
50,134
     
32,662
     
95,174
     
     
521,508
 
Special mention
   
     
     
10,092
     
4,206
     
1,033
     
     
     
15,331
 
Substandard
   
     
     
1,056
     
     
     
7,422
     
     
8,478
 
Total
   
161,023
     
125,074
     
68,589
     
54,340
     
33,695
     
102,596
     
     
545,317
 
                                                                 
Commercial:
                                                               
Pass
   
8,804
     
2,924
     
1,505
     
1,107
     
6,956
     
10,889
     
20,699
     
52,884
 
Special mention
   
     
2,723
     
     
     
     
     
     
2,723
 
Substandard
   
     
     
     
     
     
3,463
     
     
3,463
 
Total
   
8,804
     
5,647
     
1,505
     
1,107
     
6,956
     
14,352
     
20,699
     
59,070
 
                                                                 
SBA:
                                                               
Pass
   
     
690
     
1,083
     
     
     
1,709
     
     
3,482
 
Total
   
     
690
     
1,083
     
     
     
1,709
     
     
3,482
 
                                                                 
HELOC:
                                                               
Pass
   
     
     
     
     
     
     
2,613
     
2,613
 
Total
   
     
     
     
     
     
     
2,613
     
2,613
 
                                                                 
Single family real estate:
                                                               
Pass
   
817
     
2,187
     
2,028
     
761
     
364
     
2,398
     
     
8,555
 
Substandard
   
     
     
     
     
150
     
4
     
     
154
 
Total
   
817
     
2,187
     
2,028
     
761
     
514
     
2,402
     
     
8,709
 
                                                                 
Consumer:
                                                               
Pass
   
13
     
     
     
     
     
94
     
     
107
 
Total
   
13
     
     
     
     
     
94
     
     
107
 
                                                                 
Total loans
 
$
233,248
   
$
188,001
   
$
124,363
   
$
82,953
   
$
67,054
   
$
216,192
   
$
23,312
   
$
935,123
 

Loan Modifications

In certain instances, the Company may make modifications to the terms of loans to borrowers that are experiencing financial distress by providing a term extension, a payment deferral, a reduction of the contractual interest rate on the loan, or a partial forgiveness of principal (or a combination of these modifications). When principal forgiveness is provided to a borrower, the amount of forgiveness is charged off against the ACL.



The following table presents the amortized cost basis of loans at September 30, 2023, that were both experiencing financial difficulty and were modified during the nine months ended September 30, 2023, by loan class and by type of modification; the only type of modification that was granted to borrowers that were experiencing financial difficulty during the nine months ended September 30, 2023, was a term extension. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the total amortized cost basis of the loan class, as well as the financial effects of the modifications, is presented below.


   
For the Nine Months Ended September 30, 2023
 
   
Amortized
Cost of
Modified
Loans
   
% of Total
Class of
Loans
   
Term
Extension
(Weighted
Average
years)
 
   
(dollars in thousands)
 
Commercial real estate
 
$
500
     
0.09
%
   
5.00
 
Commercial
   
1,417
     
2.40
%
   
60.00
 
Total
 
$
1,917
     
0.20
%
   
45.65
 

The Company does not have any commitments to lend any additional amounts to the borrowers included in the previous table. All of the loans listed in the previous table were considered to be current as of September 30, 2023.

The ACL for a loan to a borrower that was experiencing financial difficulty and was granted a modification (and included in the table above) is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loans no longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACL for such a loan is determined through individual evaluation. There were no defaults on loans to borrowers that were experiencing financial difficulty that had been modified since January 1, 2023.
 
Troubled Debt Restructured Loan (TDR)


Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company, in infrequent situations would modify or restructure loans as a TDR. A TDR is a loan on which the Company, 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 Company’s modifications were extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or accrued interest.

The total carrying amount of loans that were classified as TDRs at December 31, 2022, was $6.0 million; of these, $5.8 million were performing according to their modified terms.

5.
OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

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 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 to the extent that they are deemed to be recoverable and increase the value of the property; otherwise, those costs are expensed. Costs related to holding the assets are charged to expense.

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
   
(in thousands)
 
Balance, beginning of period
 
$
65
   
$
2,250
   
$
2,250
   
$
2,518
 
Additions
    1,511
     
      1,576
     
 
Proceeds from dispositions
   
(46
)
   
     
(2,551
)
   
(372
)
(Loss)/gain on sales, net
   
(19
)
   
     
236
     
104
 
Balance, end of period
 
$
1,511
   
$
2,250
   
$
1,511
   
$
2,250
 

Gains or losses on sale are included in other non-interest income on the consolidated income statements.

6.
FAIR VALUE MEASUREMENT
 
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. ASC 820 - Fair Value Measurements and Disclosures (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. ASC 820 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 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.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2023, or December 31, 2022. The estimated fair value amounts for September 30, 2023, and December 31, 2022, have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.
 
This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
 
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.
 
The following tables summarize the fair value of assets measured on a recurring basis:
 
   
Fair Value Measurements at the End of the
Reporting Period Using:
       
September 30, 2023
 
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
 
$
309
   
$
   
$
   
$
309
 
Investment securities - available-for-sale:
                               
U.S. government agency notes
          3,493             3,493  
U.S. government agency CMO
          3,978             3,978  
Corporate debt securities
          7,653             7,653  
Interest only strips
   
     
     
5
     
5
 
Servicing assets
   
     
     
40
     
40
 
Total
 
$
309
   
$
15,124
   
$
45
   
$
15,478
 
 
   
Fair Value Measurements at the End of the
Reporting Period Using:
       
December 31, 2022
 
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
 
$
225
   
$
   
$
   
$
225
 
Investment securities - available-for-sale:
                               
U.S. government agency notes
          4,107             4,107  
U.S. government agency CMO
          4,296             4,296  
U.S. Treasury securities
          9,970             9,970  
Corporate debt securities
          8,315             8,315  
Interest only strips
   
     
     
7
     
7
 
Servicing assets
   
     
     
26
     
26
 
Total
 
$
225
   
$
26,688
   
$
33
   
$
26,946
 
 
The change in servicing assets that are measured using Level 3 inputs and are carried at fair value on a recurring basis was as follows:

 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2023
   
2022
   
2023
   
2022
 
    (in thousands)  
Servicing Assets:
 

 
Balance, beginning of period
 
$
3
   
$
36
   
$
26
   
$
44
 
Valuation adjustments
   
37
     
(2
)
   
14
     
(10
)
Balance, end of period
 
$
40
   
$
34
   
$
40
   
$
34
 

Market valuations of the Company’s investment securities, which are classified as Level 2, are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid, and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
 
On certain SBA loan sales, the Company retained interest only strip assets (“I/O strips”) which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. I/O strips are classified as Level 3 in the fair value hierarchy. The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds. I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.
 
For certain servicing assets, the Company had elected to use the amortization method for the treatment of servicing assets and had measured for impairment on a periodic basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds and discount rates. 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 assets acquired through foreclosure and certain loans that are collateral dependent and recorded at the fair value of collateral (less costs to sell).
 
The following summarizes the fair value measurements of assets measured on a non-recurring basis:
 
         
Fair Value Measurements at the End of the
Reporting Period Using:
 
   
Total
   
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
   
Active Markets
for Similar
Assets
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
September 30, 2023:
                       
Other assets acquired through foreclosure
  $
1,511
    $
    $
1,511
    $
 
Total
 
$
1,511
   
$
   
$
1,511
   
$
 

         
Fair Value Measurements at the End of the
Reporting Period Using:
 
   
Total
   
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
   
Active Markets
for Similar
Assets
(Level 2)
   
Unobservable
Inputs
(Level 3)
 
   
(in thousands)
 
December 31, 2022:
                       
Impaired loans
 
$
3,805
   
$
   
$
3,805
   
$
 
Other assets acquired through foreclosure
   
2,250
     
     
2,250
     
 
Total
 
$
6,055
   
$
   
$
6,055
   
$
 
 
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered collateral dependent, the need for an ACL is evaluated. Such loans are measured at the fair value of the loan’s collateral. The fair value of the loan’s collateral is determined by appraisals or independent valuations which may contain a wide range of values and therefore the Company classifies the fair value of the collateral dependent loans as a non-recurring valuation within Level 2 of the valuation hierarchy.
 
Other assets acquired through foreclosure 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  valuation within Level 2 of the valuation hierarchy. When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
 
Fair Values of Financial Instruments
 
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
 
The estimated fair value of the Company’s financial instruments are as follows:
 
   
September 30, 2023
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
140,619
   
$
140,619
   
$
   
$
   
$
140,619
 
FHLB and FRB stock
   
4,865
     
     
4,865
     
     
4,865
 
Investment securities - available-for-sale
   
15,124
     
     
15,124
     
     
15,124
 
Investment securities - held-to-maturity
    2,158
     
      1,987
     
      1,987
 
Investment securities - measured at fair value
    309       309                   309  
Loans, net and loans held for sale
   
940,547
     
     
884,199
     
     
884,199
 
Accrued interest receivable
    5,626             5,626             5,626  
Servicing assets
    1,323                   2,439       2,439  
Interest only strips
    5                   5       5  
Financial liabilities:
                                       
Deposits
   
916,093
     
      912,521      
     
912,521
 
FHLB advances
   
90,000
     
     
83,876
     
     
83,876
 
Accrued interest payable
    2,501             2,501             2,501  
 
   
December 31, 2022
 
   
Carrying
   
Fair Value
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
 
(in thousands)
 
Cash and cash equivalents
 
$
64,690
   
$
64,690
   
$
   
$
   
$
64,690
 
FHLB and FRB stock
   
4,533
     
     
4,533
     
     
4,533
 
Investment securities - available-for-sale
   
26,688
     
     
26,688
     
     
26,688
 
Investment securities - held-to-maturity
    2,557             2,423             2,423  
Investment securities - measured at fair value
    225       225                   225  
Loans, net and loans held for sale
   
944,577
     
     
892,134
     
3,805
     
895,939
 
Accrued interest receivable
    5,295             5,295             5,295  
Servicing assets
    1,480                   2,646       2,646  
Interest only strips
    7                   7       7  
Financial liabilities:
                                       
Deposits
   
875,084
     
     
867,697
     
     
867,697
 
FHLB advances
   
90,000
     
     
83,322
     
     
83,322
 
Accrued interest payable     126             126             126  

7.
BORROWINGS
 
Federal Home Loan Bank Advances – The Company, through the Bank, has a blanket lien credit line with FHLB. FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities. FHLB advances at September 30, 2023 had fixed rates of interest ranging from 0.76% to 0.95%. The advances mature between April and June of 2025. The Company also had $27.0 million of letters of credit with FHLB at September 30, 2023 to secure public funds. At September 30, 2023, CWB had pledged to the FHLB $9.5 million of securities and $382.7 million of loans. At September 30, 2023, CWB had $124.8 million available for additional borrowing. At December 31, 2022, CWB had pledged to the FHLB $21.1 million of securities and $232.6 million of loans.

Total FHLB interest expense was $198 thousand and $695 thousand for the three and nine months ended September 30, 2023, respectively, and was $203 thousand and $663 thousand for the three and nine months ended September 30, 2022, respectively.

Federal Reserve BankThe Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans for up to 28 days. At September 30, 2023 and December 31, 2022, there were $289.3 million and $248.6 million, respectively, of loans pledged to the FRB. There were no outstanding FRB advances as of September 30, 2023 and December 31, 2022. Available borrowing capacity was $98.0 million as of September 30, 2023.
 
Federal Funds Purchased Lines The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There were no amounts outstanding as of September 30, 2023 and December 31, 2022.
 
Line of Credit - The Company has an unsecured line of credit agreement to borrow up to $10.0 million at Prime + 0.25%. The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to 1, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The line of credit matured in September 2023 and the Company renewed the line of credit for an additional two-year term with no other changes to the financial terms or covenants. As of September 30, 2023 and December 31, 2021, there were no outstanding balances on the revolving line of credit.

8.
STOCKHOLDERS’ EQUITY

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
   
Unrealized holding
gains (losses) on AFS
   
Unrealized holding
gains (losses) on AFS
 
   
(in thousands)
 
Beginning balance
 
$
(1,680
)
 
$
(447
)
 
$
(771
)
 
$
92
 
Other comprehensive income (loss) before reclassifications
   
489
   
(307
)
   
(420
)
   
(846
)
Amounts reclassified from accumulated other comprehensive income
   
     
     
     
 
Net current-period other comprehensive income (loss)
   
489
   
(307
)
   
(420
)
   
(846
)
Ending balance
 
$
(1,191
)
 
$
(754
)
 
$
(1,191
)
 
$
(754
)

Common Stock

On February 28, 2019, the Board of Directors increased the common stock repurchase program to $4.5 million and extended the repurchase program until August 31, 2023. On August 30, 2023, the Board of Directors approved an extension of the expiration date of the repurchase program to August 31, 2025. Under this program the Company has repurchased 350,189 common stock shares for $3.0 million at an average price of $8.71 per share. There were no repurchased shares of common stock under this program during the three and nine months ended September 30, 2023.

During the three and nine months ended September 30, 2023, the Company declared and paid common stock dividends of $0.7 million and $2.1 million, respectively. During the three and nine months ended September 30, 2022, the Company declared and paid common stock dividends of $0.7 and $1.9 million, respectively.

9.
CAPITAL REQUIREMENTS

At September 30, 2023 and December 31, 2022, the Company qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, is not subject to consolidated capital rules at the holding company level.

CWB is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a material effect on the Company’s business and financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CWB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors.

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of September 30, 2023 and December 31, 2022.
 
   
Total Capital
(To Risk-
Weighted
Assets)
   
Tier 1 Capital
(To Risk-
Weighted
Assets)
   
Common Equity
Tier 1 (To Risk-
Weighted
Assets)
   
Leverage
Ratio/Tier 1
Capital
(To Average
Assets)
 
September 30, 2023
                       
CWB’s actual regulatory ratios
 

13.27
%
   
12.09
%
   
12.09
%
   
10.84
%
Minimum capital requirements
   
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
Well-capitalized requirements
   
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%

   
Total Capital
(To Risk-
Weighted
Assets)
   
Tier 1 Capital
(To Risk-
Weighted
Assets)
   
Common Equity
Tier 1 (To Risk-
Weighted
Assets)
   
Leverage
Ratio/Tier 1
Capital
(To Average
Assets)
 
December 31, 2022
                       
CWB’s actual regulatory ratios
   
12.56
%
   
11.44
%
   
11.44
%
   
10.34
%
Minimum capital requirements
   
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
Well-capitalized requirements
   
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%
 
The adoption of CECL on January 1, 2023 resulted in a $1.6 million reduction to stockholders’ equity, net of $0.7 million in taxes. Banking organizations that experienced a reduction in retained earnings from the adoption of CECL have the option to elect a phase-in approach for up to 3 years of the “day 1” adverse impact to regulatory capital. The Company made this election and will phase in the impact of the transition to CECL over a three-year period, starting with the first quarter of 2023.

There are no conditions or events since September 30, 2023 that management believes have changed the Company’s or the Bank’s risk-based capital category.

10.
REVENUE RECOGNITION

ASC 606 requires recognition of revenue at an amount that reflects the consideration to which the Company expects to be entitled to in exchange for transferring goods or services to a customer. The majority of the Company’s revenue is from sources outside of the scope of ASC 606. Revenue from service charges and fees and interchange fees on credit and debit cards are within the scope of ASC 606.

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 obligations for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

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

Non-interest income
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
 In-scope of Topic 606:
 
(in thousands)
 
Service charges on deposit accounts
 
$
275
   
$
87
   
$
408
   
$
225
 
Exchange fees and other service charges
   
231
     
129
     
337
     
379
 
Non-interest income (in-scope of ASC 606)
   
506
     
216
     
745
     
604
 
Non-interest income (out-of-scope of ASC 606)
   
575
     
656
     
2,244
     
2,610
 
Total
 
$
1,081
   
$
872
   
$
2,989
   
$
3,214
 

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2023 and December 31, 2022, the Company did not have any signficant contract balances. 

11.
LEASES

The Company has operating leases for office space. The Company’s 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, the Company generally does not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of the lease liability nor the right-of-use asset until after exercise of the renewal option. As of September 30, 2023, and December 31, 2022, the balance of the right-of-use assets was $4.5 million and $5.2 million, respectively, and the balance of lease liabilities was $4.6 million and $5.3 million, respectively. The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying consolidated balance sheets.

   
Nine Months Ended September 30,
 
   
2023
   
2022
 
    (in thousands)  
Lease cost:            
Operating lease cost
 
$
765
   
$
1,008
 
Sublease income
   
     
 
Total lease cost
 
$
765
   
$
1,008
 
                 
Other information:
               
Operating cash flows from operating leases
 
$
762
   
$
999
 
Weighted average remaining lease term - operating leases
   
6.49
     
7.21
 
Weighted average discount rate - operating leases
   
3.66
%
   
3.25
%

Future minimum operating lease payments for the years shown are as follows (in thousands):

2023
 
$
260
 
2024
   
1,041
 
2025
   
991
 
2026
   
891
 
2027
   
488
 
Thereafter
   
1,554
 
Total future minimum lease payments
   
5,225
 
Less remaining imputed interest
   
606
 
Total lease liabilities
 
$
4,619
 

12. SUBSEQUENT EVENTS

On October 10, 2023, the Company announced the signing of an Agreement of Reorganization and Merger with Central Valley Community Bancorp (NASDAQ: CVCY), headquartered in Fresno, California, together with its banking subsidiary, Central Valley Community Bank, pursuant to which the companies will combine in an all-stock merger transaction. Under the terms of the agreement, Community West Bancshares will merge with and into Central Valley Community Bancorp and Community West Bank will merge with and into Central Valley Community Bank. The Central Valley Community Bancorp and Community West Bancshares Boards of Directors have unanimously approved the transaction, which is expected to close in the second quarter of 2024. The resulting merged company will be named Community West Bancshares, and the merged Bank will be Community West Bank.

On October 27, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.08 per common share, payable on November 30, 2023, to common shareholders of record on November 14, 2023.

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

This discussion is designed to provide insight into management’s assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources, and interest rate sensitivity. It should be read in conjunction with the Company’s unaudited interim consolidated financial statements and notes thereto included herein and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (this “Form 10-Q”) contains certain forward-looking statements about the Company and the Bank that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about future financial and operational results, expectations, or intentions are forward-looking statements. Such statements reflect management's current views of future events and operations. These forward-looking statements are based on information currently available to the Company as of the date of this Form 10-Q. It is important to note that these forward-looking statements are not guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of which are difficult to predict and are generally beyond our control and which may cause our actual results and performance to differ materially from anticipated results or performance or those contained or implied by such forward-looking statements including, but not limited to:
 

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

liquidity of banking institutions both domestically and internationally, including sources and availability of funds, depositor behavior in response adverse economic developments, and the ability to attract and retain deposits and manage liquidity;

the reduction in the value of securities portfolios due to rising interest rates;

recent bank failures and other adverse developments in the financial sector that affects customer and investor confidence and resulting deposit volatility and uncertainty and disruption in capital markets;

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

legislative or regulatory changes which may adversely affect the Company’s business, including the interest rate policies of the Board of Governors of the Federal Reserve and regulatory pressure to increase capital levels;

continued inflation, including the rising cost of oil and gas, and its impact on our customers’ businesses and ability to repay loans;

climate conditions, including the drought experienced in California over the past several years followed by the flooding due to the unusually large amounts of precipitation experienced this past winter, and their impact on the economy;

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

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

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

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

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

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

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated along with the costs and effects of litigation and of adverse outcomes of such litigation;

the occurrence or non-occurrence of events longer than anticipated;

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

the ability to attract and retain key members of management;

the ability to realize cost efficiencies;

a failure or breach of our operational or security systems or infrastructure, including cyber-attacks on us or third party vendors or service providers;

a return of recessionary conditions and increased unemployment that could result in deterioration in credit quality of our loan portfolio and/or the value of the collateral securing the repayment of those loans, and/or reduce demand for our products and services;

United States tax policies, including our effective income tax rate;

loss of key personnel;

possible impact by the transition from London Inter-bank Offering Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”) or other indices as a reference rate;


risks related to natural disasters, earthquakes, wildfires, terrorist attacks, threats of war or actual war, including the current military actions involving the Russian Federation and Ukraine and the recent conflict in the Middle East, supply chain interruptions, and health epidemics may impact our operations, revenues, costs, and stock price; and

 
risks related to the transaction that is the subject of the Agreement of Reorganization and Merger dated October 10, 2023, by and among Central Valley Community Bancorp and Community West Bancshares (the “Reorganization Agreement”) pursuant to which the companies will combine in an all-stock merger transaction not satisfying the conditions to closing the transaction, including the companies not receiving the regulatory approvals and the shareholder approvals of the transaction and as a result not completing the transaction in accordance with the terms of the Reorganization Agreement.

For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, available in the “Investor Relations” section of our website, https://www.communitywest.com/sec-filings/documents. The Company is under no obligation (and expressly disclaims any obligation) to update or alter such forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Financial Overview and Highlights

Community West Bancshares (“CWBC”) incorporated under the laws of the state of California, is a bank holding company headquartered in Goleta, California providing full-service banking and lending through its wholly-owned subsidiary Community West Bank (“CWB” or the “Bank”), which has seven California branch banking offices in Goleta, Ventura, Santa Maria, Santa Barbara, San Luis Obispo, Oxnard, and Paso Robles and one wholly-owned subsidiary, 445 Pine LLC which was formed to hold certain repossessed property. These entities are collectively referred to herein as the “Company.”

Financial Result Highlights for the Third Quarter of 2023

The Company’s financial results for the third quarter were as follows:


Net income was $2.3 million, or $0.25 per diluted share in the third quarter of 2023, compared to $3.5 million, or $0.39 per diluted share in the third quarter of 2022.
 

Net interest income was $10.5 million for the third quarter of 2023, compared to $11.9 million in the third quarter of 2022.
 

A provision (credit) for credit losses of $43 thousand was recorded for the third quarter of 2023, compared to $298 thousand for the third quarter of 2022.
 

Net interest margin was 3.98% for the third quarter of 2023, compared to 4.39% for the third quarter of 2022.
 

Return on average assets was 0.83% for the third quarter of 2023, compared to 1.25% for the third quarter of 2022.
 

Return on average common equity was 7.72% for the third quarter of 2023, compared to 12.65% for the third quarter 2022.
 

Cash and cash equivalents increased $75.9 million to $140.6 million at September 30, 2023 from $64.7 million at December 31, 2022 as management took steps to increase on-balance sheet liquidity during 2023.
 

Loans held for investment were $934.2 million at September 30, 2023, compared to $934.3 million at December 31, 2022.
 

Total assets increased by $48.8 million at September 30, 2023 to $1.14 billion, compared to $1.09 billion at December 31, 2022.
 

Total demand deposits decreased $3.6 million to $664.5 million at September 30, 2023, compared to $668.2 million at December 31, 2022. During the same period, certificates of deposit balances increased $44.6 million to $251.6 million at September 30, 2023 from $206.9 million at December 31, 2022.
 

Book value per common share increased to $13.11 at September 30, 2023, compared to $12.80 at December 31, 2022.
 

The Bank remains well-capitalized with a Tier 1 leverage ratio of 10.84% at September 30, 2023, compared to 10.34% at December 31, 2022.
 
The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the three and nine months ended September 30, 2023 throughout the analysis sections of this report on Form 10-Q.

Critical Accounting Estimates

The Company's significant accounting policies conform with generally accepted accounting Principles ("GAAP") and are described in Note 1 - Summary of Significant Accounting Policies of the Notes to Financial Statements section in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgement and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant areas in which management of the Company applies critical assumptions and estimates include the following:

The Company adopted the CECL requirements of ASC 326 on January 1, 2023. The Company adopted the provisions of ASC 326 using the modified retrospective transition approach, and recorded a net decrease of $1.6 million to the beginning balance of retained earnings as of January 1, 2023, for the cumulative effect adjustment (net of tax effects). The Company uses the WARM method as the basis for the estimation of expected credit losses under CECL. The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required ACL and are not included in the collective evaluation. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, when the Company determines that foreclosure is probable, the fair value of the collateral securing the loan, less estimated selling costs.

Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the ACL in future periods. A discussion of facts and circumstances considered by management in determining the ACL is included in Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans Held for Investment in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 and in Note 1 - Summary of Significant Accounting Policies in Item 1 - Financial Statements in this Form 10-Q.

RESULTS OF OPERATIONS

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
   
(in thousands, except per share amounts)
 
                         
Net income
 
$
2,252
   
$
3,478
   
$
6,837
   
$
10,073
 
Basic earnings per share
 
$
0.25
   
$
0.40
   
$
0.77
   
$
1.16
 
Diluted earnings per share
 
$
0.25
   
$
0.39
   
$
0.76
   
$
1.13
 
Net interest margin
   
3.98
%
   
4.39
%
   
4.07
%
   
4.09
%
Return on average assets
   
0.83
%
   
1.25
%
   
0.84
%
   
1.19
%
Return on average common equity
   
7.72
%
   
12.65
%
   
8.01
%
   
12.66
%

The following table sets forth a summary financial overview for the comparable three and nine months ended September 30, 2023 and 2022:

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2023
   
2022
   
(Decrease)
   
2023
   
2022
   
(Decrease)
 
   
(in thousands, except per share amounts)
 
Consolidated Income Statement Data:
                                   
Interest and dividend income
 
$
14,553
   
$
12,654
   
$
1,899
   
$
42,853
   
$
35,860
   
$
6,993
 
Interest expense
   
4,034
     
731
     
3,303
     
10,587
     
2,191
     
8,396
 
Net interest income
   
10,519
     
11,923
     
(1,404
)
   
32,266
     
33,669
     
(1,403
)
Provision (credit) for credit losses
   
43
     
298
     
(255
)
   
(667
)
   
266
     
(933
)
Net interest income after provision (credit) for credit losses
   
10,476
     
11,625
     
(1,149
)
   
32,933
     
33,403
     
(470
)
Non-interest income
   
1,081
     
872
     
209
     
2,989
     
3,214
     
(225
)
Non-interest expenses
   
8,363
     
7,610
     
753
     
26,051
     
22,693
     
3,358
 
Income before provision for income taxes
   
3,194
     
4,887
     
(1,693
)
   
9,871
     
13,924
     
(4,053
)
Provision for income taxes
   
942
     
1,409
     
(467
)
   
3,034
     
3,851
     
(817
)
Net income
 
$
2,252
   
$
3,478
   
$
(1,226
)
 
$
6,837
   
$
10,073
   
$
(3,236
)
Earnings per share - basic
 
$
0.25
   
$
0.40
   
$
(0.15
)
 
$
0.77
   
$
1.16
   
$
(0.39
)
Earnings per share - diluted
 
$
0.25
   
$
0.39
   
$
(0.14
)
 
$
0.76
   
$
1.13
   
$
(0.37
)

Interest Rates and Differentials

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

   
Three Months Ended September 30,
 
   
2023
   
2022
 
   
Average
Balance
   
Interest
   
Average
Yield/Cost(1)
   
Average
Balance
   
Interest
   
Average
Yield/Cost(1)
 
Interest-Earning Assets
 
(in thousands)
 
Federal funds sold and interest-earning deposits
 
$
70,564
   
$
903
     
5.08
%
 
$
76,265
   
$
401
     
2.09
%
Investment securities
   
22,568
     
319
     
5.61
%
   
65,148
     
386
     
2.35
%
Loans (2)
   
955,609
     
13,331
     
5.53
%
   
935,169
     
11,867
     
5.03
%
Total interest-earning assets
   
1,048,741
     
14,553
     
5.51
%
   
1,076,582
     
12,654
     
4.66
%
Nonearning Assets
                                               
Cash and due from banks
   
2,114
                     
2,177
                 
Allowance for credit losses
   
(12,107
)
                   
(11,031
)
               
Other assets
   
35,121
                     
38,022
                 
Total Assets
 
$
1,073,869
                   
$
1,105,750
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
388,385
     
1,908
     
1.95
%
   
465,317
     
325
     
0.28
%
Savings deposits
   
17,797
     
13
     
0.29
%
   
25,133
     
14
     
0.22
%
Time deposits
   
242,794
     
1,909
     
3.12
%
   
151,130
     
189
     
0.50
%
Total interest-bearing deposits
   
648,976
     
3,830
     
2.34
%
   
641,580
     
528
     
0.33
%
FHLB advances and other borrowings
   
90,217
     
204
     
0.90
%
   
90,764
     
203
     
0.89
%
Total interest-bearing liabilities
   
739,193
     
4,034
     
2.17
%
   
732,344
     
731
     
0.40
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
200,804
                     
248,538
                 
Other liabilities
   
18,209
                     
15,789
                 
Stockholders' equity
   
115,663
                     
109,079
                 
Total Liabilities and Stockholders' Equity
 
$
1,073,869
                   
$
1,105,750
                 
Net interest income and margin (3)
         
$
10,519
     
3.98
%
         
$
11,923
     
4.39
%
Net interest spread (4)
                   
3.34
%
                   
4.26
%
Total cost of funds (including the effect of non-interest bearing demand deposits) (5)
                   
1.70
%
                   
0.30
%

(1)
Annualized.
(2)
Includes nonaccrual loans and loans held for sale, and is net of deferred fees, related direct costs, premiums, and discounts, but excludes the ACL. Interest income includes net accretion/(amortization) of deferred fees, costs, premiums, and discounts of $70 thousand and $112 thousand for the three months ended September 30, 2023 and 2022, respectively.
(3)
Net interest margin is computed by dividing net interest income by total average interest earning assets.
(4)
Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(5)
Total cost of funds (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

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

   
Nine Months Ended September 30,
 
   
2023
   
2022
 
   
Average
Balance
   
Interest
   
Average
Yield/Cost(1)
   
Average
Balance
   
Interest
   
Average
Yield/Cost(1)
 
Interest-Earning Assets
 
(in thousands)
 
Federal funds sold and interest-earning deposits
 
$
81,525
   
$
2,924
     
4.80
%
 
$
143,455
   
$
812
     
0.76
%
Investment securities
   
24,911
     
948
     
5.09
%
   
45,903
     
858
     
2.50
%
Loans (2)
   
953,511
     
38,981
     
5.47
%
   
912,414
     
34,190
     
5.01
%
Total interest-earning assets
   
1,059,947
     
42,853
     
5.41
%
   
1,101,772
     
35,860
     
4.35
%
Nonearning Assets
                                               
Cash and due from banks
   
2,037
                     
2,177
                 
Allowance for credit losses
   
(12,199
)
                   
(10,805
)
               
Other assets
   
36,848
                     
38,195
                 
Total Assets
 
$
1,086,633
                   
$
1,131,339
                 
Interest-Bearing Liabilities
                                               
Interest-bearing demand deposits
   
401,262
     
5,032
     
1.68
%
   
493,332
     
917
     
0.25
%
Savings deposits
   
20,148
     
38
     
0.25
%
   
24,827
     
47
     
0.25
%
Time deposits
   
235,437
     
4,788
     
2.72
%
   
163,666
     
634
     
0.52
%
Total interest-bearing deposits
   
656,847
     
9,858
     
2.01
%
   
681,825
     
1,598
     
0.31
%
FHLB advances and other borrowings
   
93,352
     
729
     
1.04
%
   
90,257
     
593
     
0.88
%
Total interest-bearing liabilities
   
750,199
     
10,587
     
1.89
%
   
772,082
     
2,191
     
0.38
%
Noninterest-Bearing Liabilities
                                               
Noninterest-bearing demand deposits
   
204,719
                     
236,531
                 
Other liabilities
   
17,535
                     
16,352
                 
Stockholders' equity
   
114,180
                     
106,374
                 
Total Liabilities and Stockholders' Equity
 
$
1,086,633
                   
$
1,131,339
                 
Net interest income and margin (3)
         
$
32,266
     
4.07
%
         
$
33,669
     
4.09
%
Net interest spread (4)
                   
3.52
%
                   
3.97
%
Total cost of funds (including the effect of non-interest bearing demand deposits) (5)
                   
1.48
%
                   
0.29
%

(1)
Annualized.
(2)
Includes nonaccrual loans and loans held for sale, and is net of deferred fees, related direct costs, premiums, and discounts, but excludes the ACL. Interest income includes net accretion/(amortization) of deferred fees, costs, premiums, and discounts of $316 thousand and $784 thousand for the nine months ended September 30, 2023 and 2022, respectively.
(3)
Net interest margin is computed by dividing net interest income by total average interest earning assets.
(4)
Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(5)
Total cost of funds (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2023 versus 2022
   
2023 versus 2022
 
 
Increase (Decrease)
Due to Changes in (1)
   
Increase (Decrease)
Due to Changes in (1)
 
   
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
   
(in thousands)
   
(in thousands)
 
Interest income:
                                   
Federal funds sold and interest-earning deposits
 
$
(30
)
 
$
532
   
$
502
   
$
(352
)
 
$
2,464
   
$
2,112
 
Investment securities
   
(252
)
   
185
     
(67
)
   
(393
)
   
483
     
90
 
Loans, net
   
259
     
1,205
     
1,464
     
1,530
     
3,261
     
4,791
 
Total interest income
   
(23
)
   
1,922
     
1,899
     
785
     
6,208
     
6,993
 
                                                 
Interest expense:
                                               
Interest-bearing demand deposits
   
(54
)
   
1,637
     
1,583
     
(172
)
   
4,287
     
4,115
 
Savings deposits
   
(4
)
   
3
     
(1
)
   
(9
)
   
     
(9
)
Time deposits
   
116
     
1,604
     
1,720
     
279
     
3,875
     
4,154
 
FHLB advances and other borrowings
   
(1
)
   
2
     
1
     
21
     
115
     
136
 
Total interest expense
   
57
     
3,246
     
3,303
     
119
     
8,277
     
8,396
 
Net increase
 
$
(80
)
 
$
(1,324
)
 
$
(1,404
)
 
$
666
   
$
(2,069
)
 
$
(1,403
)

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

Comparison of interest income, interest expense, and net interest margin

The Company’s primary source of revenue is interest income. Interest income for the three and nine months ended September 30, 2023 was $14.6 million and $42.9 million, respectively, compared to $12.7 million and $35.9 million for three and nine months ended September 30, 2022, respectively. Total interest income in the three and nine months ended September 30, 2023 was positively impacted by an increase in the rates earned on the average outstanding balances of interest-earning assets. The average rate earned on loans during the three and nine months ended September 30, 2023, was 5.53% and 5.47%, respectively, compared to 5.03% and 5.01% for the three and nine months ended September 30, 2022, respectively. This increase in the rates earned on loans resulted from increased loan rates on new originations, loan prepayment revenue, and the impact of higher benchmark interest rates for variable rate loans. Interest income was also positively impacted by increases of 2.99% and 4.04% in the yield received on federal funds sold and interest earning deposits for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. These increases were attributable to higher rates earned for overnight deposits and money market deposits due to increases in the federal funds rate. The annualized yield on interest-earning assets for the third quarter of 2023 was 5.51% compared to 4.66% for the third quarter of 2022. The annualized yield on interest-earning assets for the nine months ended September 30, 2023 was 5.41% compared to 4.35% for the nine months ended September 30, 2022.

Interest expense for the third quarter and year-to-date periods ending September 30, 2023 was $4.0 million and $10.6 million, respectively. These amounts represented increases of $3.3 million and $8.4 million, respectively, when compared to the same periods in 2022. The increase in interest expenses compared to the prior year periods was primarily due to an increase in the rates paid on deposit accounts. For the three and nine months ended September 30, 2023, the cost of interest bearing deposits was 2.34% and 2.01%, respectively, compared to 0.33% and 0.31% during the comparable periods in the prior year. Including the impact of non-interest bearing deposits, the total cost of deposits was 1.79% for the third quarter of 2023 compared to 0.24% for the third quarter of 2022. Year-to-date total cost of deposits (including the impact of non-interest bearing deposits) for the nine months ended September 30, 2023 was 1.53% compared to 0.23% for the nine months ended September 30, 2022. These increases reflect competitive pricing pressures and the Company’s decision to increase wholesale funding in response to the current operating environment.

The cost of other borrowings was 0.90% and 0.89% for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the cost of other borrowings was 1.04% and 0.88%, respectively. The increased cost of other borrowings in the year-to-date period was the result of the use of overnight advances from FHLB and an advance on the Company’s line of credit to support the Company's liquidity during the first quarter of 2023. These amounts were repaid during the second quarter of 2023.

The total cost of funds for the quarter and year to date periods ended September 30, 2023, were 2.17% and 1.89%, respectively. The total cost of funds for the quarter and year to date periods ended September 30, 2022, were 0.40% and 0.38%, respectively.

The net impact of the changes in yields on interest earning assets and the rates paid on interest-bearing liabilities was a decrease in the net interest margin for the three months ended September 30, 2023, to 3.98% compared to 4.39% for the three months ended September 30, 2022. The net impact of the changes in yields on interest earning assets and the rates paid on interest bearing liabilities was a decrease in the net interest margin for the nine months ended September 30, 2023, to 4.07% compared to 4.09% for the nine months ended September 30, 2022.

Provision for credit losses

The provision for credit losses consisted of the following components for the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
   
(in thousands, except per share amounts)
 
Provision (credit) for credit losses for:
                       
Loans
 
$
(58
)
 
$
298
   
$
(680
)
 
$
266
 
Available-for-sale securities
   
103
     
-
     
103
     
-
 
Off-balance sheet commitments
   
(2
)
   
2
     
(90
)
   
2
 
Total provision (credit) for credit losses(1)
 
$
43
   
$
300
   
$
(667
)
 
$
268
 

(1) In accordance with the applicable GAAP rules in place at the time, the only item reported on the Provision (credit) for credit losses line  on the consolidated income statements for the three and nine months ended September 30, 2022 was the provision for credit losses for loans. The provision for credit losses for off-balance sheet commitments for those periods was recorded in other non-interest expense.

The Company recorded net loan recoveries of $45 thousand net loan charge-offs of $51 thousand for the three months ended September 30, 2023 and 2022, respectively. The Company recorded net loan recoveries of $239 thousand and $443 thousand for the nine months ended September 30, 2023 and 2022, respectively. The percentage of nonaccrual loans to the total loan portfolio was 0.34% as of September 30, 2023, compared to 0.02% at December 31, 2022. The ACL compared to net nonaccrual loans was 380% as of September 30, 2023, compared to 5,102% as of December 31, 2022. Total past due loans increased to $4.6 million as of September 30, 2023, from $2.9 million as of December 31, 2022.

During the quarter ended September 30, 2023, the Company recorded a $103 thousand provision for credit losses for corporate debt securities classified as available-for-sale due to downgrades in the credit ratings of certain issuers of those debt securities.

Non-Interest Income

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

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2023
   
2022
   
(Decrease)
   
2023
   
2022
   
(Decrease)
 
   
(in thousands)
 
Other loan fees
 
$
248
   
$
292
   
$
(44
)
 
$
703
   
$
915
   
$
(212
)
Gains from loan sales, net
   
24
     
49
     
(25
)
   
110
     
245
     
(135
)
Document processing fees
   
88
     
114
     
(26
)
   
268
     
337
     
(69
)
Service charges
   
149
     
114
     
35
     
470
     
295
     
175
 
Other
   
572
     
303
     
269
     
1,438
     
1,422
     
16
 
Total non-interest income
 
$
1,081
   
$
872
   
$
209
   
$
2,989
   
$
3,214
   
$
(225
)

Total non-interest income increased by $209 thousand for the three months ended September 30, 2023, compared to the same period in 2022. The increase in other income for the period was primarily the result of a $278 thousand gain (included in other income) from the valuation of two parcels (related to one borrower) which were repossessed and transferred to other assets acquired through foreclosure during the quarter. This increase was partially offset by a decrease in other loan fees, which decreased by $44 thousand for the three months ended September 30, 2023, due to a decrease in the volume of new originations of Farmer Mac loans.

Total non-interest income for the nine months ended September 30, 2023, was $3.0 million, a decrease of $0.2 million compared to $3.2 million for the nine months ended September 30, 2022. The decrease was primarily due to lower origination fee income from Farmer Mac loans and lower loan sale gains due to lower loan sales volume during the nine months ended September 30, 2023. These decreases were partially offset by an increase in service charges due to an increase in the volume of nonsufficient funds and account analysis charges during the period.

Non-Interest Expenses

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

   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2023
   
2022
   
(Decrease)
   
2023
   
2022
   
(Decrease)
 
   
(in thousands)
 
Salaries and employee benefits
 
$
5,114
   
$
4,823
   
$
291
   
$
15,864
   
$
14,784
   
$
1,080
 
Occupancy, net
   
1,093
     
1,046
     
47
     
3,326
     
3,064
     
262
 
Professional services
   
672
     
653
     
19
     
2,442
     
1,687
     
755
 
Data processing
   
349
     
302
     
47
     
1,075
     
919
     
156
 
Depreciation
   
180
     
173
     
7
     
543
     
535
     
8
 
FDIC assessment
   
331
     
131
     
200
     
789
     
466
     
323
 
Advertising and marketing
   
179
     
196
     
(17
)
   
671
     
687
     
(16
)
Other
   
445
     
286
     
159
     
1,341
     
551
     
790
 
Total non-interest expenses
 
$
8,363
   
$
7,610
   
$
753
   
$
26,051
   
$
22,693
   
$
3,358
 

Total non-interest expenses increased by $0.8 million during the three months ended September 30, 2023, compared to the same period in 2022. The increase in non-interest expenses for the periods presented is primarily due to increases in salaries and employee benefits, FDIC assessments, and other expenses. Salaries and employee benefits increased in the three months ended September 30, 2023, due to increased pressure on wages and benefits as a result of increased inflation and low unemployment as well as increases in benefits and insurance costs. The increase in the assessment fees paid to the FDIC was the result of a change in the Company's funding mix. The increase in other expenses was mainly the result of collection and legal expense recoveries during the three months ended September 30, 2022.

During the first nine months of 2023, total non-interest expenses increased by $3.4 million to $26.1 million for the nine months ended September 30, 2023, compared to $22.7 million for the nine months ended September 30, 2022. The increase over the prior year was due to a $1.1 million increase in salaries and benefits due to wage competition, increased benefit and insurance costs, and an increase in stock based compensation expense. During the first nine months of 2023, professional services expenses increased by $755 thousand due to increased accounting and consulting costs related to testing the effectiveness of the Company’s internal control structure and procedures for financial reporting as required for institutions over $1 billion in total assets and to support strategic and technology initiatives. The increase in other expenses is primarily related to $992 thousand collection and legal expense recovery in the first nine months of 2022.

Income Taxes

Income tax provision for the three and nine months ended September 30, 2023, was $0.9 million and $3.0 million, respectively, compared to $1.4 million and $3.9 million in the same periods during 2022. The combined state and federal effective income tax rates for the three months ended September 30, 2023 and 2022, were 29.5% and 28.8%, respectively, and for the nine months ended September 30, 2023 and 2022, were 30.7% and 27.7%, respectively. The lower effective tax rate for the year-to-date period in 2022 was the result of the fact that the income recorded from the proceeds from a bank owned life insurance policy in the first quarter of 2022 was non-taxable to the Company.

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 $5.7 million and $5.1 million at September 30, 2023, and December 31, 2022, respectively, are reported in other assets in the consolidated balance sheets.

Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized. There was no valuation allowance on deferred tax assets at September 30, 2023, or December 31, 2022.

The Company is subject to the provisions of ASC 740 - "Income Taxes" ("ASC 740"). ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at September 30, 2023, and December 31, 2022.

BALANCE SHEET ANALYSIS

Total assets increased $48.8 million to $1.14 billion at September 30, 2023, from $1.09 billion at December 31, 2022. The increase in total assets was mainly due to an increase of $75.9 million in cash and cash equivalents that resulted from an increase in total deposits and proceeds from the maturities of securities. The increase in cash and cash equivalents was part of management's plans during the first nine months of 2023 to solidify the Company's on-balance sheet liquidity position.

Total liabilities increased $45.4 million to $1.02 billion at September 30, 2023, from $0.98 billion at December 31, 2022, mostly due to an increase in deposits of $41.0 million. The increase in total deposits was the result of increases in the balances of interest-bearing deposits of $28.6 million to $456.8 million at September 30, 2023, and in certificate of deposit account balances of $44.6 million to $251.6 million at September 30, 2023. These increases were primarily due to an increase in wholesale funding accounts obtained by the Company. These increases were partially offset by a decrease in noninterest-bearing demand deposits of $25.7 million.

Total stockholders’ equity increased $3.4 million to $116.1 million at September 30, 2023, from $112.7 million at December 31, 2022. The $6.8 million increase in retained earnings from net income was partially offset by the $1.6 million charge to retained earnings from the adoption of ASC 326 on January 1, 2023, a $2.1 million decrease as a result of dividends paid on common stock, and a decrease in the fair value of available for sale securities, net of tax, of $420 thousand during the nine months ended September 30, 2023. Book value per common share was $13.11 at September 30, 2023, compared to $12.80 at December 31, 2022.

Selected Balance Sheet Accounts

   
September 30,
2023
   
December 31,
2022
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
(dollars in thousands)
 
Cash and cash equivalents
 
$
140,619
   
$
64,690
   
$
75,929
     
117.4
%
Investment securities available-for-sale
   
15,124
     
26,688
     
(11,564
)
   
(43.3
)%
Investment securities held-to-maturity
   
2,158
     
2,557
     
(399
)
   
(15.6
)%
Loans held for sale
   
18,435
     
21,033
     
(2,598
)
   
(12.4
)%
Loans held for investment, net
   
922,112
     
923,544
     
(1,432
)
   
(0.2
)%
Total assets
   
1,140,299
     
1,091,502
     
48,797
     
4.5
%
Total deposits
   
916,093
     
875,084
     
41,009
     
4.7
%
FHLB advances and other borrowings
   
90,000
     
90,000
     
     
0.0
%
Total stockholder's equity
   
116,062
     
112,650
     
3,412
     
3.0
%

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

   
September 30,
2023
   
December 31,
2022
 
   
(in thousands)
 
Manufactured housing
 
$
325,068
   
$
315,825
 
Commercial real estate
   
556,945
     
545,317
 
Commercial
   
38,232
     
59,070
 
SBA
   
1,687
     
3,482
 
HELOC
   
2,556
     
2,613
 
Single family real estate
   
10,615
     
8,709
 
Consumer
   
52
     
107
 
Gross loans held for investment
   
935,155
     
935,123
 
Deferred costs, net
   
(883
)
   
(787
)
Discount on SBA loans
   
(25
)
   
(27
)
Loans held for investment
   
934,247
     
934,309
 
Allowance for credit losses
   
(12,135
)
   
(10,765
)
Loans held for investment, net
 
$
922,112
   
$
923,544
 

The Company had $18.4 million and $21.0 million of loans held for sale at September 30, 2023, and December 31, 2022, respectively. Loans held for sale at September 30, 2023, consisted of $4.7 million of SBA loans and $13.7 million of commercial agriculture FSA guaranteed loans. Loans held for sale at December 31, 2022, consisted of $5.2 million in SBA loans and $15.9 million of commercial agriculture FSA guaranteed loans.

Concentrations of Lending Activities

The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices on the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company originates manufactured housing, commercial, SBA, construction, real estate, and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of September 30, 2023, and December 31, 2022, manufactured housing loans comprised 34.8% and 33.8%, respectively, of gross loans held for investment. As of September 30, 2023, and December 31, 2022, commercial real estate loans accounted for approximately 59.6% and 58.3% of gross loans held for investment, respectively. Approximately 27.5% and 24.5% of these commercial real estate loans were owner-occupied at September 30, 2023 and December 31, 2022, respectively. Substantially all of these loans are secured by first liens with average loan to value ratios at origination of 49.8% and 50.4% at September 30, 2023 and December 31, 2022, respectively. The Company was within internally established concentration policy limits at September 30, 2023, and December 31, 2022.

Asset Quality

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

   
September 30,
2023
   
December 31,
2022
 
   
(in thousands)
 
Nonaccrual loans
 
$
3,195
   
$
211
 
Nonaccrual loans to gross loans
   
0.34
%
   
0.02
%
Net charge-offs (recoveries) (annualized) to average loans
   
(0.03
)%
   
(0.06
)%
Allowance for credit losses to nonaccrual loans (net of government guaranteed portion)
   
380
%
   
5,102
%
Allowance for credit losses to gross loans
   
1.30
%
   
1.15
%

The following table summarizes nonaccrual loans by loan segment:

   
At September 30, 2023
   
At December 31, 2022
 
   
Nonaccrual
Balance
   
% of Total Nonaccrual
   
% of
Total Loans
   
Nonaccrual
Balance
   
% of Total Nonaccrual
   
% of
Total Loans
 
   
(dollars in thousands)
 
Manufactured housing
 
$
727
     
22.76
%
   
0.08
%
 
$
61
     
28.91
%
   
0.01
%
Commercial real estate
   
2,277
     
71.27
%
   
0.24
%
   
     
0.00
%
   
0.00
%
Commercial
   
50
     
1.56
%
   
0.01
%
   
     
0.00
%
   
0.00
%
HELOC
   
141
     
4.41
%
   
0.02
%
   
     
0.00
%
   
0.00
%
Single family real estate
   
     
0.00
%
   
0.00
%
   
150
     
71.09
%
   
0.01
%
Total nonaccrual loans
 
$
3,195
     
100.00
%
   
0.35
%
 
$
211
     
100.00
%
   
0.02
%

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

   
September 30,
2023
   
December 31,
2022
 
   
(in thousands)
 
Loans 30 through 89 days past due
 
$
4,461
   
$
2,880
 
Loans 90 days or more past due
   
178
     
 
Total past due loans
 
$
4,639
   
$
2,880
 

Collateral Dependent Loans

Beginning on January 1, 2023, the Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio, or that have been identified as collateral dependent, are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the ACL for collateral dependent loans based on changes in the estimated fair value of the collateral. Changes in the ACL for all other individually evaluated loans are based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

The following table presents the amortized cost basis of collateral dependent loans by class of loans and by collateral type as of September 30, 2023:

   
Manufactured
Homes
   
Single Family Residence
   
Machinery & Equipment
   
Total
 
                         
Manufactured housing
 
$
1,014
   
$
   
$
   
$
1,014
 
Commercial real estate
   
2,277
     
     
     
2,277
 
Commercial
   
     
     
1,210
     
1,210
 
Single family real estate
   
     
141
     
     
141
 
Total
 
$
3,291
   
$
141
   
$
1,210
   
$
4,642
 

Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information, it was probable that the Company would have been 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 included payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments. Loans that experienced insignificant payment delays or payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considered 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 used the fair value of collateral method to measure impairment. All other loans were measured for impairment based on the present value of future cash flows.

The following schedule summarizes impaired loans and specific reserves by loan class as of December 31, 2022:

   
Manufactured
Housing
   
Commercial
Real Estate
   
Commercial
   
SBA
   
HELOC
   
Single Family
Real Estate
   
Consumer
   
Total
Loans
 
Recorded Investment:
 
(in thousands)
 
Impaired loans with an allowance recorded
 
$
2,918
   
$
209
   
$
67
   
$
41
   
$
   
$
208
   
$
   
$
3,443
 
Impaired loans with no allowance recorded
   
1,166
     
     
1,297
     
     
     
151
     
     
2,614
 
Total loans individually evaluated for impairment
   
4,084
     
209
     
1,364
     
41
     
     
359
     
     
6,057
 
                                                                 
Related allowance for impaired loans
   
157
     
18
     
     
1
     
     
8
     
     
184
 
Total impaired loans, net
 
$
3,927
   
$
191
   
$
1,364
   
$
40
   
$
   
$
351
   
$
   
$
5,873
 

Allowance For Credit Losses

The Company adopted the CECL requirements of ASC 326 on January 1, 2023. The Company uses the WARM method as the basis for the estimation of expected credit losses under CECL. The WARM method utilizes a historical average annual charge-off rate over a historical lookback period as a foundation for estimating credit losses for the remaining outstanding balances of loans in a segment at a particular consolidated balance sheet date. The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required allowance for credit loss and are not included in the collective evaluation, as discussed above.

During the three months ended September 30, 2023, the allowance for credit losses decreased by $13 thousand to $12.1 million. This decrease in the required ACL during the quarter was primarily due to a decline in the required allowance for loans evaluated on a collective basis of $140 thousand due to a decrease in net loan balances. This decrease was partially offset by an increase in the ACL that is derived from qualitative factors related to substandard loans during the period.

During the nine months ended September 30, 2023, the allowance for credit losses on loans increased by $1.4 million from $10.8 million at December 31, 2022. When the Company adopted the provisions of ASC 326 on January 1, 2023, it recorded the required $1.8 million increase in the ACL directly to retained earnings (net of tax). During the first nine months of 2023, the Company recorded a provision (credit) for credit losses for loans of $(680) thousand. This decrease in allowance for credit losses during the nine months ended September 30, 2023 (after the adjustment for the adoption of ASC 326) was primarily due to a reduction in the qualitative factor related to the percentage of the state of California that was experiencing a drought. In addition, the allowance for credit losses also declined due to a reduction in the portion of the allowance derived from historical losses. Offsetting these decreases was an increase in the qualitative factor related to substandard loans, discussed above.

The following table summarizes the activity in the ACL by loan type.

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
Allowance for credit losses:
 
(in thousands)
 
Balance at beginning of period
 
$
12,148
   
$
10,866
   
$
10,765
   
$
10,404
 
Impact of adoption of ASC 326
   
     
     
1,811
     
 
Provision (credit) for credit losses:
                               
Manufactured housing
   
(54
)
   
(77
)
   
(151
)
   
1,258
 
Commercial real estate
   
44
     
182
     
(110
)
   
(467
)
Commercial
   
(46
)
   
24
     
(372
)
   
(475
)
SBA
   
(4
)
   
174
     
(70
)
   
(67
)
HELOC
   
1
     
(6
)
   
(2
)
   
7
 
Single family real estate
   
1
     
     
26
     
10
 
Consumer
   
     
1
     
(1
)
   
 
Total provision (credit) for credit losses
   
(58
)
   
298
     
(680
)
   
266
 
Recoveries of loans previously charged-off:
                               
Manufactured housing
   
8
     
88
     
74
     
123
 
Commercial real estate
   
20
     
20
     
59
     
60
 
Commercial
   
13
     
13
     
37
     
183
 
SBA
   
4
     
4
     
69
     
246
 
HELOC
   
     
6
     
     
12
 
Single family real estate
   
     
     
     
 
Consumer
   
     
     
     
1
 
Total recoveries
   
45
     
131
     
239
     
625
 
Loans charged-off:
                               
Manufactured housing
   
     
     
     
 
Commercial real estate
   
     
     
     
 
Commercial
   
     
     
     
 
SBA
   
     
182
     
     
182
 
HELOC
   
     
     
     
 
Single family real estate
   
     
     
     
 
Consumer
   
     
     
     
 
Total charged-off
   
     
182
     
     
182
 
Net charge-offs (recoveries)
   
(45
)
   
51
     
(239
)
   
(443
)
Balance at end of period
 
$
12,135
   
$
11,113
   
$
12,135
   
$
11,113
 

 Investment Securities

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

The carrying value of investment securities was as follows:

   
September 30,
2023
   
December 31,
2022
 
   
(in thousands)
 
Securities available-for-sale (at fair value)
           
U.S. government agency notes
 
$
3,493
   
$
4,107
 
U.S. government agency CMO
   
3,978
     
4,296
 
U.S. Treasury securities
   
     
9,970
 
Corporate debt securities
   
7,653
     
8,315
 
Total securities available for sale
   
15,124
     
26,688
 
                 
Securities held-to-maturity (at amortized cost): US government agency MBS
   
2,158
     
2,557
 
Equity securities (at fair value): Farmer Mac class A stock
   
309
     
225
 
Total investment securities
 
$
17,591
   
$
29,470
 

During the three and nine months ended September 30, 2023, we recorded an allowance for credit losses for available-for-sale securities (through the provision for credit losses) of $103 thousand related to corporate debt securities whose issuers experienced downgrades in their credit ratings to below what is considered to be investment grade during the quarter. The ACL was determined using the discounted cash flow method, using estimated loss rates that were derived from averages for corporate debt securities with similar credit ratings. To date, none of the issuers of these debt securities have missed an interest payment. Management monitors the credit ratings of the corporate debt issuers on a monthly basis and will make appropriate adjustments to the ACL as necessary.

Other Assets Acquired Through Foreclosure

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2023
   
2022
   
2023
   
2022
 
   
(in thousands)
 
Balance, beginning of period
 
$
65
   
$
2,250
   
$
2,250
   
$
2,518
 
Additions
   
1,511
     
     
1,576
     
 
Proceeds from dispositions
   
(46
)
   
     
(2,551
)
   
(372
)
(Loss)/gain on sales, net
   
(19
)
   
     
236
     
104
 
Balance, end of period
 
$
1,511
   
$
2,250
   
$
1,511
   
$
2,250
 

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 to the extent that they are deemed to be recoverable and increase the value of the property; otherwise, those costs are expensed. Costs related to holding the assets are charged to expense. The Company did not have any valuation allowances against foreclosed assets as of September 30, 2023 or December 31, 2022.

Deposits

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

   
September 30,
2023
   
December 31,
2022
   
Increase
(Decrease)
   
Percent
Increase
(Decrease)
 
   
(dollars in thousands)
 
Noninterest-bearing demand deposits
 
$
190,817
   
$
216,494
   
$
(25,677
)
   
(11.9
)%
Interest-bearing demand deposits
   
456,808
     
428,173
     
28,635
     
6.7
%
Savings
   
16,905
     
23,490
     
(6,585
)
   
(28.0
)%
Certificates of deposit ($250,000 or more)
   
14,911
     
6,693
     
8,218
     
122.8
%
Other certificates of deposit
   
236,652
     
200,234
     
36,418
     
18.2
%
Total deposits
 
$
916,093
   
$
875,084
   
$
41,009
     
4.7
%

Deposits are the primary source of funding the Company’s asset growth. Total deposits increased 4.7% to $916.1 million at September 30, 2023, from $875.1 million at December 31, 2022. Noninterest-bearing demand deposits were $190.8 million at September 30, 2023, a $25.7 million decrease compared to $216.5 million at December 31, 2022. Interest-bearing demand deposits increased $28.6 million to $456.8 million at September 30, 2023, compared to $428.2 million at December 31, 2022. Certificates of deposit, which include brokered deposits, increased $44.6 million to $251.6 million at September 30, 2023, compared to $206.9 million at December 31, 2022. Total brokered deposits increased by $60.5 million to $191.1 million at September 30, 2023 from $130.6 million at December 31, 2022.

The Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep ("ICS"). CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits. At September 30, 2023 and December 31, 2022, the Company had $209.3 million and $120.3 million, respectively, of CDARS and ICS deposits.

Liquidity and Capital Resources

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 is represented by cash and amounts due from banks and non-pledged marketable securities. CWB manages its liquidity risk through operating, investing, and financing activities. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. 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.

The Company has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost-effective manner. 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 FHLB. FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities. Total fixed rate FHLB advances were $90.0 million at September 30, 2023, and December 31, 2022. The Company also had $27.0 million of letters of credit with FHLB at September 30, 2023 to secure public funds. At September 30, 2023, CWB had pledged to the FHLB $9.5 million of securities and $382.7 million of loans. At September 30, 2023, based on the amounts of loans and securities pledged, CWB had $124.8 million available for additional borrowing. At December 31, 2022, CWB had pledged to the FHLB securities with a carrying value of $21.1 million and $232.6 million of loans.

CWB has established a credit line with the FRB. There were no outstanding FRB advances as of September 30, 2023, and December 31, 2022. At September 30, 2023, and December 31, 2022, there were $289.3 million and $248.6 million of loans pledged to the FRB, respectively. CWB had $98.0 million in borrowing capacity as of September 30, 2023.

CWBC has a $10.0 million revolving line of credit which matures in September of 2025, unless renewed. During the first quarter of 2023, the Company advanced $10.0 million from the line of credit which was subsequently repaid during the second quarter of 2023. The Company must maintain a compensating deposit account with the lender of $1 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to one, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3.0%. The Company was in compliance with all of the required debt covenants at September 30, 2023. As of September 30, 2023, there were no outstanding balances on the revolving line of credit.

The Company has federal funds purchased lines at correspondent banks with a total borrowing capacity of $20.0 million. There were no borrowings outstanding under these agreements as of September 30, 2023, and December 31, 2022.

The Company continues to face strong competition for core deposits. The liquidity ratio of the Company was 15.3% and 10.4% at September 30, 2023, and December 31, 2022, respectively. The Company’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available-for-sale investments, 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 regulatory approval. During the three and nine months ended September 30, 2023, CWBC declared and paid dividends of $0.7 million and $2.1 million, respectively. On October 27, 2023, the Company's Board of Directors declared a $0.08 per share dividend payable on November 30, 2023, to stockholders of record on November 14, 2023. The Company anticipates that it will continue to pay quarterly cash dividends in the future, although there can be no assurance that payments of such dividends will continue or that they will not be reduced.

Our material cash requirements may include funding existing loan commitments, funding equity investments, withdrawal/maturity of existing deposits, repayment of borrowings, operating lease payments, and expenditures necessary to maintain current operations.

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and principal payments due on our contractual obligations excluding interest:

   
At September 30, 2023
 
   
Less than
1 year
   
More than
1 year
   
Total
 
   
(dollars in thousands)
 
Time deposits
 
$
183,127
   
$
68,436
   
$
251,563
 
FHLB advances and other borrowings
   
     
90,000
     
90,000
 
Operating lease obligations
   
1,040
     
4,185
     
5,225
 
Total
 
$
184,167
   
$
162,621
   
$
346,788
 

In the ordinary course of business, we enter into various transactions to meet the financing needs of our customers, which, in accordance with generally accepted accounting principles, are not included in our consolidated balance sheets. These transactions include off-balance sheet commitments, including commitments to extend credit and standby letters of credit. The following table presents a summary of the Company's commitments to extend credit by expiration period.

   
At September 30, 2023
 
   
Less than
1 year
   
More than
1 year
   
Total
 
   
(dollars in thousands)
 
Loan commitments to extend credit
 
$
59,960
   
$
37,112
   
$
97,072
 
Standby letters of credit
   
     
     
 
Total
 
$
59,960
   
$
37,112
   
$
97,072
 

Capital Resources

Maintaining capital strength continues to be a long-term objective for the Company. Capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard depositor funds. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. The Company has the capacity to issue 60,000,000 total shares of common stock, of which 8,850,312 have been issued at September 30, 2023. Conversely, the Company may decide to repurchase shares of its outstanding common stock, depending on the market price and other relevant factors.

CWB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a material effect on the Company's business and financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CWB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors.

In 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. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR). A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. As of the fourth quarter 2021, the Company rescinded its CBLR election.

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of September 30, 2023 and December 31, 2022.

   
Total Capital
(To Risk-
Weighted
Assets)
   
Tier 1
Capital
(To Risk-
Weighted
Assets)
   
Common
Equity
Tier 1
(To Risk-
Weighted
Assets)
   
Leverage
Ratio/Tier 1
Capital
(To Average
Assets)
 
September 30, 2023
                       
CWB's actual regulatory ratios
   
13.27
%
   
12.09
%
   
12.09
%
   
10.84
%
Minimum capital requirements
   
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
Well-capitalized requirements
   
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%
                                 
December 31, 2022
                               
CWB's actual regulatory ratios
   
12.56
%
   
11.44
%
   
11.44
%
   
10.34
%
Minimum capital requirements
   
8.00
%
   
6.00
%
   
4.50
%
   
4.00
%
Well-capitalized requirements
   
10.00
%
   
8.00
%
   
6.50
%
   
5.00
%

The adoption of CECL on January 1, 2023, resulted in a $1.6 million reduction to stockholders’ equity, net of $0.7 million in taxes. Banking organizations that experienced a reduction in retained earnings from the adoption of CECL have the option to elect a phase-in approach for up to 3 years of the “day 1” adverse impact to regulatory capital. The Company made this election and will phase in the impact of the transition to CECL over a three-year period, starting with the first quarter of 2023.

There are no conditions or events since September 30, 2023 that management believes have changed the Company’s or the Bank’s risk-based capital category.

Supervision and Regulation

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

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

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

For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Certain qualitative and quantitative disclosures about market risk are set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K. For further discussion of interest rate risk, see Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Interest Rate Risk.”

The Company expects to see continued volatility in the economic markets and government responses to inflation, rising interest rates, the threat of a pending recession in the U.S. economy, and the conflict involving the Russian Federation and Ukraine and the unrest resulting from the recent conflict in the Middle East. These changing conditions and governmental responses could have impacts on the consolidated balance sheets and consolidated income statements of the Company.

ITEM 4.
CONTROLS AND PROCEDURES

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

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

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended September 30, 2023, and determined that there was no change in internal control over financial reporting that occurred during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

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

ITEM 1A.
RISK FACTORS

Investing in our common stock involves various risks which are particular to our Company, our industry, and our market area. Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 

As previously noted, the Company has entered into the Reorganization Agreement pursuant to which the Company and Central Valley Community Bancorp (Fresno, California) will combine in an all-stock merger transaction. While the Company has historically been successful on a standalone basis, the Company does have risk related to failing to successfully satisfy the conditions to close the transaction and closing the transaction in accordance with the terms of the Reorganization Agreement which include the companies not receiving the regulatory approvals and the shareholder approvals of the transaction as required by the Reorganization Agreement. The failure to close the transaction could have an adverse effect on the Company’s reputation, ability to attract and maintain deposit and/or loan customers, retain employees (including key personnel), and maintain investor confidence. The occurrence of any such events could have a material adverse effect on the Company’s results of operations, financial condition, and stock trading value.

Other than as identified above, there has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K.

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

None.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS

The following Exhibits are filed herewith.

Exhibit Number
 
   
Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) or Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
   
Certification of Chief Executive Officer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) or Rule 15d-14(b), promulgated under the Securities Exchange Act of 1934, as Amended, and 18 U.S.C. 1350.
   
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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

SIGNATURES

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

COMMUNITY WEST BANCSHARES
(Registrant)

Date: November 13, 2023
BY:
/s/ Richard Pimentel
 
Richard Pimentel
 
Executive Vice President and Chief Financial Officer
   
 
On Behalf of Registrant and as a Duly Authorized Officer
 
and as Principal Financial and Accounting Officer


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