Communit y West Bancshares
Moving Forward
ANNUAL REPORT 2016
Community West Bancshares
built positive momentum
throughout 2016.
We really hit our stride in 2016
with robust loan and deposit
growth, improved asset
quality, a healthy net interest
margin, solid profitability and
a strong capital position.
Many exciting things took place over the course of the year,
including expansion at both ends of our tri-county footprint
and we made organizational changes to further our efforts to
become the prominent community bank on California’s Central
Coast.
A number of milestones were achieved in 2016. Total assets
surpassed $700 million for the first time in Community West’s
history, increasing 14.4% to $711 million, from $621 million
the previous year. Total deposits grew to $612 million, up from
$544 million a year earlier, and non-interest bearing deposits
increased 31.2% to $100 million at December 31, 2016,
compared to $76 million a year ago.
Total loans reached $631 million, up 16.1% from $543 million
at the end of 2015, while nonaccrual loans decreased 52.6% to
$2.4 million, or 0.38% of net loans at year end 2016, representing
the lowest level since 2007. We’ve been able to maintain a net
interest margin in the mid-4% range, largely due to our above
industry-average loan yields and loan interest recoveries.
The strength of the economy in our local markets combined with
on-going demand for our high-service, relationship approach to
lending, deposit and cash management are the driving forces
behind our success. There has been significant consolidation
among community banks throughout our marketplace over the
last few years, and we are seizing the opportunity. Our first
full-service branch office in San Luis Obispo County opened in
November 2016, and the relocated branch in Santa Maria and
new Oxnard branch both opened in January 2017. We are making
significant investments in our future growth.
In September 2016, Community West was named to Sandler
O’Neill and Partners Bank and Thrift Sm-All Stars – Class of
2016. This award recognized Community West as one of the
top 27 best performing small capitalization institutions from a
list of publicly traded banks and thrifts in the U.S. with market
capitalizations less than $2.5 billion. In making their selections,
Sandler concentrated on growth, profitability, credit quality and
capital strength.
Our focus in the coming year remains on the local markets and
expanding our franchise through organic growth. There is real
optimism among our board, management team and employees
for the year ahead, and we will continue to build on the positive
momentum of last year. On behalf of the board and senior
managers, we want to thank you, our loyal shareholders, for your
continued support of Community West Bancshares.
William R. Peeples
Chairman of the Board
Martin E. Plourd
President/Chief Executive Officer
Our new Oxnard branch
Community West Bank continues to build a
new full-service branch offices in Oxnard,
There has been significant consolidation among community banks over the
last few years, and we feel there is real opportunity for Community West
Bank to expand our presence along California’s Central Coast, providing the
financial services and responsive service preferred by local businesses.
At Community West Bank, we believe that local deposits should work locally.
Our community bankers offer the financing, cash management services
and trusted advice that put our clients on a better route to success. And
our employees are committed to supporting the communities in which they
live and work, donating their time and talents to numerous nonprofits and
community organizations.
As the largest publicly traded community bank serving Ventura, Santa
Barbara and San Luis Obispo counties, Community West Bank has seven
full-service branch banking offices in Goleta, Oxnard, San Luis Obispo, Santa
Barbara, Santa Maria, Ventura and Westlake Village. Check us out at
www.CommunityWestBank.com.
Relationship Banking
“Let’s Work Together” is our bank motto and is
central to the way Community West Bank does
business. Our experienced commercial loan
officers, branch managers and staff offer personal
service and local knowledge to assist with each
client’s specific financial needs, consistently
delivering on the bank’s mission of providing
memorable customer service.
We offer the complete range of services and
capabilities that you would expect from a full-
service financial institution, provided with the
personal care that sets us apart from much
larger banks. Community West Bank provides a
variety of deposit accounts and loans, and the
convenience of electronic banking services. It’s
the way our professionals deliver those services,
every day, with an uncommon level of care, that
builds trust and close banking relationships with
our clients.
a firm foundation for the future, opening
, San Luis Obispo and Santa Maria.
Commercial Lending
Since first opening our doors in 1989 as a small local business in
Goleta, Community West Bank has developed an understanding for
the special needs of our business clients, and we are better able to
make responsive and well guided local lending decisions based on
firsthand knowledge of the communities we serve. From revolving
lines of credit, term loans and commercial real estate financing, to
agribusiness financing, equipment loans and SBA loans, we offer
the right financing solutions for local businesses.
Among the many business cash management services we provide
are remote deposit capture, online banking and bill pay, mobile
banking app, ACH processing, positive pay, merchant card
processing, domestic and international wire transfers and business
credit cards. Our clients tell us that immediate access to decision
makers, flexible financing and rapid turnaround are among the
most important considerations when choosing to do business with
Community West Bank. Our background and experience in tailoring
financing to fit business goals is what sets us apart.
Agricultural Lending
Community West Bank supports
agricultural and agribusiness clients,
whether it’s an agricultural mortgage loan
for land acquisition, refinancing existing
debt or financing capital improvements.
We understand that the challenges
faced by agricultural businesses are
different from our other business clients,
and require expertise, dedication and
experience from their banker.
We are an approved lender for Farmer
Mac, offering long term fixed rates,
and have been the predominant USDA
Farm Service Agency lender for the
past 3 years in a row. Community West
Bank has dedicated staff and resources
focusing on the opportunities afforded by
these programs to serve the agricultural
sector throughout California.
Our new San Luis Obispo branch
Government Guaranteed Lending
Since we first started providing government guaranteed
lending, our business clients have received over $700
million in funding for commercial space, expansion and
capital improvements. Community West Bank has earned
the designation of “Preferred Lender” by the U.S. Small
Business Administration, which allows us to expedite the
processing of SBA loan applications with in-house approvals
and rapid loan closings. For over two decades, we have
offered SBA 7(a) and SBA 504 loan programs, as well as the
U.S. Department of Agriculture (USDA) Business & Industry
loan program for businesses in rural areas.
Manufactured Home Lending
Over the past 16 years, Community West Bank has
become the premier manufactured home lender in Santa
Barbara County and we are increasing our market share in
Ventura and San Luis Obispo counties. We lend in coastal
California communities from San Diego to San Francisco,
and have strengthened our relationships with the three
largest manufactured home dealers in California in order
to focus on the new home market. Manufactured home
loans are retained in the bank’s portfolio and currently
have a delinquency rate of less than 1%. At the end of 2016,
Community West Bank held more than 1,700 manufactured
home loans in over 300 mobile home parks.
Our new Santa Maria branch
2016 Financials Snapshot
Year Ended December 31,
2016
2015
2014
2013
2012
(in thousands, except per share amounts)
Results of Operations:
Interest income
Interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision (benefit) for income taxes
Net income
Dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
$32,216
3,127
29,089
(48)
29,137
2,253
22,548
8,842
3,613
5,229
-
-
$30,222
$28,004
$27,866
$31,368
2,516
27,706
(2,274)
29,980
2,309
27,281
5,008
2,138
2,870
445
(129)
3,275
24,729
(5,135)
29,864
2,197
20,081
11,980
4,934
7,046
937
(159)
4,332
23,534
(1,944)
25,478
2,831
22,135
6,174
(2,812)
8,986
1,039
-
5,949
25,419
4,281
21,138
4,281
22,246
3,173
-
3,173
1,046
-
Net income available to common stockholders
$5,229
$2,554
$6,268
$7,947
$2,127
Per Share Data:
Income per common share - basic
Weighted average shares outstanding - basic
Income per common share - diluted
Weighted average shares outstanding - diluted
Book value per common share
Selected Balance Sheet Data:
Net loans
Total assets
Total deposits
Total liabilities
Total stockholders’ equity
$0.64
8,114
$0.62
8,444
$8.07
$0.31
8,203
$0.30
8,491
$7.55
$0.77
8,141
$0.75
8,505
$7.31
$1.13
7,017
$0.98
8,390
$6.60
$0.36
5,990
$0.31
8,233
$6.29
623,355
710,572
612,236
645,236
65,336
536,546
487,256
462,005
449,201
621,213
557,318
539,000
532,101
544,338
477,084
436,135
434,220
559,269
490,311
471,444
479,052
61,944
67,007
67,556
53,049
Selected Financial and Liquidity Ratios:
Return on average stockholders’ equity
Return on average assets
Equity to assets ratio
Tier 1 leverage ratio
Common Equity Tier 1 ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Efficiency Ratio
8.19%
0.81%
9.19%
9.64%
10.57%
10.57%
11.80%
71.94%
4.34%
0.49%
9.97%
10.11%
12.12%
12.12%
13.37%
90.89%
10.42%
1.25%
12.02%
11.86%
-
14.94%
16.19%
74.58%
15.15%
1.69%
12.53%
12.68%
-
15.65%
17.26%
83.96%
6.22%
0.55%
9.97%
9.72%
-
12.81%
15.98%
74.80%
Community Involvement
Community West Bank,
and our employees,
proudly support non-
profit and community
organizations throughout
Ventura, Santa Barbara
and San Luis Obispo
counties.
Alzheimer’s Association
of Santa Barbara County
American Cancer Society
American Heart Association
Animal Shelter Assistance Program
Boys & Girls Club of North SLO County
Buena Girls Soccer
California Agricultural Leadership Foundation
California Society of CPAs
California Women for Agriculture
Central Coast Alliance
United for Sustainable Economy
Central Coast Economic Forecast
Children’s Creative Project
Clinicas del Camino Real
Commemorative Air Force Museum
Court Appointed Special Advocates
Devereux
Dog Adoption and Welfare Group
Dos Pueblos Little League
Dream Foundation
Economic Alliance Foundation
Economic Vitality Corporation of SLO County
Fiestas Patrias
Foodbank of Santa Barbara County
Food Bank Coalition of SLO County
Food Share, Inc.
French Hospital Foundation
Goleta Valley Chamber of Commerce
Goleta Valley Community Center
Goleta Valley Cottage Hospital Foundation
Goleta Valley Softball Association
Good Samaritan Shelter
Grower-Shipper Association
of Central California
Habitat for Humanity
Home Builders Association
of the Central Coast
Inferno Youth Sports
Jack’s Helping Hand
Junior League of Santa Barbara
Kellogg Elementary School
Legal Aid Foundation of SB County
Lifewater
National Association of Women
in Construction
Neal Taylor Nature Center
Old Spanish Days
Oxnard Chamber of Commerce
Paso Robles Chamber of Commerce
Rebozo Festival
Rotary Club of Arroyo Grande
Rotary Club of Goleta
Rotary Club of Nipomo
Rotary Club of Westlake Village
San Luis Obispo Association of Realtors
San Luis Obispo Chamber of Commerce
Santa Barbara Carriage & Western Museum
Santa Barbara Chamber of Commerce
Santa Barbara County Fair
Santa Barbara County Housing Trust Fund
Santa Barbara Elks Lodge
Santa Barbara Family YMCA
Santa Barbara Pony Baseball
Santa Barbara Unified School District
Santa Barbara Zoological Foundation
Santa Maria Police Council
Santa Maria Police Officers Association
Santa Maria Valley Contractors Association
Scholarship Foundation of Santa Barbara
Soroptimist Club
Spirit of Entrepreneurship Foundation
Teach Boosters
UCSB Economic Forecast Project
United Way of Santa Barbara
Unity Shoppe
Ventura Boys & Girls Club
Ventura Chamber of Commerce
Ventura County Arts Association
Ventura County Contractors Association
Ventura County Fair
Ventura County Medical Resource Foundation
Ventura Downtown Lions Club
Section 1: 10-K (COMMUNITY WEST BANCSHARES 10-K 12-31-2016)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
Commission File Number: 000-23575
COMMUNITY WEST BANCSHARES
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
445 Pine Avenue, Goleta, California
(Address of principal executive offices)
77-0446957
(I.R.S. Employer Identification No.)
93117
(Zip code)
(805) 692-5821
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
Nasdaq Global Market
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:21396) No (cid:21398)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:21396) No (cid:21398)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (cid:21398) No (cid:21396)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes (cid:21398) No (cid:21396)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:21396)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:21396)
Accelerated filer (cid:21396)
Non-accelerated filer (Do not check if smaller reporting company) (cid:21396)
Smaller reporting company (cid:21398)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:21396) No (cid:21398)
The aggregate market value of common stock, held by non-affiliates of the registrant was $35,568,010 based on the June 30, 2016 closing price of
$7.36 per common share, as reported on the Nasdaq Global Market. For purposes of the foregoing computation, all executive officers, directors and
five percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such
executive officers, directors or five percent beneficial owners are, in fact, affiliates of the registrant.
As of February 24, 2017, 8,099,739 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the 2017 Annual Meeting of Stockholders to be held on or about May 25, 2017 are incorporated by reference into Part III of this
Report. The proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year
ended December 31, 2016.
Index
INDEX
PART
I
Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures (Not Applicable)
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
CERTIFICATIONS
2
Page
3
3
5
11
11
11
11
12
13
14
44
46
88
88
88
89
89
89
89
89
90
93
96
Index
Forward-Looking Statements
PART I
Certain statements contained in this Annual Report on Form 10-K (“Form 10-K”) are “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these
safe harbor provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and State
securities laws, including statements that are related to or are dependent upon estimates or assumptions relating to expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
The forward-looking statements contained in this Form 10-K reflect our current views about future events and financial performance and involve
certain risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results
and those expressed in any forward-looking statement, including those risks discussed under the heading “Risk Factors” in this Form 10-K. Risks
and uncertainties include those set forth in our filings with the Securities and Exchange Commission (“SEC”).
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors”
beginning on page 11. Forward-looking statements speak only as of the date they are made, the Company does not undertake any obligations to
update forward-looking statements to reflect circumstances and or events that occur after the date the forward-looking statements are made.
Purpose
The following discussion is designed to provide insight on the financial condition and results of operations of Community West Bancshares
(“CWBC”) and its wholly-owned subsidiary Community West Bank N.A (“CWB” or the “Bank”). Unless otherwise stated, “the Company” refers to
CWBC and CWB as a consolidated entity. References to “CWBC or to the “holding company,” refer to Community West Bancshares, the parent
company, on a stand-alone basis. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes
to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015, herein referred to as the “Consolidated Financial
Statements”. These Consolidated Financial Statements are presented beginning on page 49 of this Form 10-K.
ITEM 1. BUSINESS
GENERAL
Community West Bancshares or CWBC, a California corporation, is a bank holding company registered under the Bank Holding Company Act of
1956, as amended, or “BHCA,” with corporate headquarters in Goleta, California. Our principal business is to serve as the holding company for our
wholly-owned subsidiary Community West Bank, N.A., a national banking association chartered by the Office of the Comptroller of the Currency
(“OCC”). Through CWB, the Company provides a variety of financial products and services to customers through seven full-service branch offices
in the cities of Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura and Westlake, California. The Oxnard branch was opened on
January 30, 2017.
PRODUCTS AND SERVICES
CWB is focused on relationship-based business banking to small to medium-sized businesses and their owners in the communities served by its
branch offices. CWB provides a variety of financial products and services to customers. The products and services include deposit products such
as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits, cash management products,
and lending products including; commercial, commercial real estate and consumer loans.
Competition in our markets remains healthy. The Company continues to be competitive due to its focus on high quality customer service and our
experienced relationship bankers who have strong relationships within the communities we serve.
Manufactured Housing
The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved
mobile home parks throughout California primarily on or near the coast. The parks must meet specific criteria. The manufactured housing loans are
secured by the manufactured home and are retained in the Company’s loan portfolio.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops,
equipment and livestock. These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), Farm Service Agency
(“FSA”), and the USDA Business and Industry loan program. The FSA loans typically issue a 90% guarantee up to $1,399,000 (amount adjusted
annually based on inflation) for up to 40 years.
3
Index
Small Business Administration Lending
CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990. The Company originates
SBA loans which can be sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA
programs to retain specified amounts. The two primary SBA loan programs that CWB offers are the basic 7(a) Loan Guaranty (“SBA 7(a)”) and the
Certified Development Company (“CDC”), a Section 504 (“504”) program.
CWB also offers Business & Industry ("B & I") loans. These loans are similar to the SBA product, except they are guaranteed by the U.S.
Department of Agriculture. The maximum guaranteed amount is 80%. B&I loans are made to businesses in designated rural areas and are generally
larger loans to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market.
As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation responsibility from the SBA.
Loans to One Borrower
State banking law generally limits the amount of funds that a bank may lend to a single borrower. Under federal law, the unsecured obligations of
any one borrower to a national bank generally may not exceed 15% of the sum of the bank’s unimpaired capital and unimpaired surplus, and the
secured and unsecured obligations of any one borrower. CWB was approved to increase this lending limit under the OCC’s Special Lending Limits
Program to 25%. This program ensures that national bank lending limits such as CWB’s would remain competitive with state-chartered banks.
Foreign Operations
The Company has no foreign operations. The Bank may provide loans, letters of credit and other trade-related services to commercial enterprises
that conduct business outside the United States.
Customer Concentration
The Company does not have any customer relationships that individually account for 10% of consolidated or segment revenues, respectively.
COMPETITION
The financial services industry is highly competitive. Many of our competitors are much larger in total assets and capitalization, have greater
access to capital markets, and offer a broader range of financial services than we can offer and may have lower cost structures.
This increasingly competitive environment is primarily a result of long term changes in regulation that made mergers and geographic expansion
easier; changes in technology and product delivery systems and web-based tools; the accelerating pace of consolidation among financial services
providers; and the flight of deposit customers to perceived increased safety. We compete for loans, deposits and customers with other banks,
credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial
services providers. This strong competition for deposit and loan products directly affects the rates of those products and the terms on which they
are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase
revenues to remain competitive. The competitive environment is also significantly impacted by federal and state legislation that makes it easier for
non-bank financial institutions to compete with the Company.
EMPLOYEES
As of December 31, 2016, the Company had 120 full-time equivalent team members. The Company's employees are not represented by a union or
covered by a collective bargaining agreement. Management believes that its employee relations are good.
GOVERNMENT POLICIES
The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory
authorities, including those of the states in which it operates and the U.S. government. These laws, regulations and policies include, for example,
statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve System which impact interest
rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory
agencies. Changes in these laws, regulations and policies may greatly affect our operations. See “Item 1A Risk Factors – Curtailment of
government guaranteed loan programs could affect a segment of our business” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Supervision and Regulation.”
4
Index
Additional Available Information
The Company maintains an Internet website at http://www.communitywest.com. The Company makes available its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d)
of the Exchange Act. Other information related to the Company is available free of charge, through this website as soon as reasonably practicable
after it has been electronically filed or furnished to the Securities Exchange Commission (“SEC”). The SEC maintains an Internet site,
http://www.sec.gov, in which all forms filed electronically may be accessed. The Company’s internet website and the information contained therein
are not intended to be incorporated in this Form 10-K. In addition, copies of the Company’s annual report will be made available, free of charge,
upon written request.
ITEM 1A. RISK FACTORS
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties, are discussed
below and elsewhere in this report. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that
could have a material adverse effect on our business, results of operations and financial condition. Other risks that we do not know about now, or
that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business
risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business. See
additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” section of this report beginning on page 14 and additional information regarding legislative and regulatory risks in the
“Supervision and Regulation” section beginning on page 37.
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of
Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a
material adverse effect on our business, financial condition, results of operations and prospects.
While real estate values and unemployment rates have recently improved, a deterioration in economic conditions in the market areas we serve could
result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of
operations:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
loan delinquencies, problem assets and foreclosures may increase;
the sale of foreclosed assets may slow;
demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;
collateral for loans made may decline further in value, exposing us to increased risk loans, reducing customers' borrowing power, and
reducing the value of assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our low-cost or non-interest bearing deposits may decrease and the composition of our deposits may be adversely
affected.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial
institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of
reduced real estate values, our financial condition and profitability could be adversely affected.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and
services, which could have an adverse effect on our results of operations.
Economic conditions have improved since the end of the economic recession; however, economic growth has been slow and uneven. A return of
recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which
we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate value and sales
volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and
services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the overall economy, has among other things, kept
interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. The Federal Reserve
Board increased the federal funds rate by 25 basis points in December 2016 and indicated the potential for further increases in the federal funds rate
in the near future. As the federal funds rate increases, market interest rates will likely rise, which may negatively impact the housing markets and the
U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a negative effect on our
borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial
performance.
5
Index
Reserve for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our financial
condition and/or results of operations. The Company maintains a reserve for loan losses to absorb estimated probable losses inherent in the loan
and commitment portfolios as of the balance sheet date. Provisions are taken from earnings and applied to the loan loss reserves as the risk of loss
in the loan and commitment portfolios increases. Conversely, credits to earnings from the loan loss reserves are made when asset qualities improve
resulting in a decrease in the risk of loss in the loan and commitment portfolios. As of December 31, 2016, the Company’s allowance for loan losses
was $7.5 million, or 1.31% of loans held for investment. In addition, as of December 31, 2016, we had $3.1 million in loans on nonaccrual, $0.7 million
of which are government guaranteed. In determining the level of the reserve for loan losses, Management makes various assumptions and
judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types
of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent
information known to Management at the time of the analysis. If Management’s assumptions are incorrect, the reserve for loan losses may not be
sufficient to cover losses, which could have a material adverse effect on the Company’s financial condition and/or results of operations. While the
allowance for loan losses was determined to be adequate at December 31, 2016, based on the information available to us at the time, there can be no
assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such
risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, life
insurance, and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of
the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to
repay loans should borrowers become unable to repay loans in accordance with their original terms and, if not, the cumulative effect may have an
adverse effect on our financial condition and/or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2016, approximately $386.2 million, or 61%, of our loan portfolio is secured by various forms of real estate, including residential
and commercial real estate. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new
loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. The real estate securing
our loan portfolio is concentrated in California. A decline in the real estate market could materially and adversely affect the business of CWB
because a significant portion of its loans are secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral
would then be diminished and CWB would be more likely to suffer losses on loans. Substantially all of the real property collateral is located in
California. If there is an additional decline in real estate values, especially in California, the collateral for their loans would provide less security.
Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale
volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to
California.
California’s current drought may impact the economy.
At December 31, 2016, California was experiencing a severe drought in all areas of the state. At December 31, 2016, CWB had $28.5 million of
agricultural loans which would be most impacted by the drought. The overall economy of California may be negatively impacted by this drought as
the cost of water and availability of water may increase the operating costs for businesses which could negatively affect their operating results,
loan quality and collateral.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive
compensation and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect customers,
depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters,
prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that we can pay, restrict the
ability of institutions to guarantee our debt and impose certain specific accounting requirements that may be more restrictive and may result in
greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”).
Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs.
We are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs
and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was
inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of
which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations
could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and
determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations.
If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset
concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become
unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems
appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions
resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict
our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to
remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to
terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be
negatively impacted.
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Index
Additional requirements imposed by the Dodd-Frank Act and related regulation could have an adverse effect on the Company.
Government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory requirements. The Dodd-Frank
Act provided for sweeping regulatory changes, including the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage
and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment;
the requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;
enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary
trading activities by banks;
additional corporate governance and executive compensation requirements; enhanced financial institution safety and soundness
regulations,
revisions in FDIC insurance assessment fees and a permanent increase in FDIC deposit insurance coverage to $250,000;
authorization for financial institutions to pay interest on business checking accounts; and
the establishment of new regulatory bodies, such as the Consumer Financial Protection Bureau and the Financial Services Oversight
Counsel, to identify emerging systemic risks and improve interagency cooperation.
Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under Dodd-Frank, may adversely
impact profitability of CWBC and CWB and may have a material and adverse effect on their respective businesses, financial condition, and results
of operations. They may also be required to invest significant management attention and resources to evaluate and make changes required by the
legislation and related regulations and may make it more difficult for them to attract and retain qualified executive officers and employees.
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to effect the implementation of the
Basel III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company
maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the capital requirements of bank
holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. For a further discussion
of the capital rules, see “SUPERVISION AND REGULATION” herein.
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the
USDA and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee
loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or
changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be
equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that
now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to
medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or
borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the
Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s results of
operations and financial condition may be adversely affected.
If the Company lost a significant portion of its low-cost deposits, it could negatively impact its liquidity and profitability.
The Company’s profitability depends in part on successfully attracting and retaining a stable base of low-cost deposits. While the Company
generally does not believe these core deposits are sensitive to interest rate fluctuations, the competition for these deposits in the Company’s
markets is strong and customers are increasingly seeking investments that are safe, including the purchase of U.S. Treasury securities and other
government-guaranteed obligations, as well as the establishment of accounts at the largest, most-well capitalized banks. If the Company were to
lose a significant portion of its low-cost deposits, it would negatively impact its liquidity and profitability.
7
Index
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance
these programs will be available as needed.
As of December 31, 2016, the Company has borrowings from the FHLB of San Francisco of $25.0 million and no borrowings from the FRB. The
Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally
dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing capacity of the Company
or eliminate certain types of collateral and could otherwise modify or even terminate its loan programs. Any change or termination could have an
adverse effect on the Company’s liquidity and profitability.
The Company is exposed to risk of environmental liabilities with respect to properties to which we obtain title
Approximately 43% of the Company’s loan portfolio at December 31, 2016 was secured by commercial real estate. In the course of our business, the
Company may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Company
may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company
is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and
prospects.
Changes in interest rates could adversely affect the Company’s profitability, business and prospects
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates and can
impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an
adverse effect on the Company’s business, asset quality and prospects. The Company’s operating income and net income depend to a great extent
on is net interest margin. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and
the interest rates paid on interest-bearing deposits, borrowings and other liabilities. These rates are highly sensitive to many factors beyond the
Company’s control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory
authorities, including the Federal Reserve. If the rate of interest paid on interest-bearing deposits, borrowings and other liabilities increases more
than the rate of interest received on loans, securities and other earning assets increases, the Company’s net interest income, and therefore earnings,
would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more
quickly than those on its deposits and other liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan
originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan
repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. The Company cannot guarantee that it will
be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain
borrowers to pay the interest on and principal of their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes
in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business,
financial condition, results of operations and cash flows.
CWBC and CWB have liquidity risk.
Liquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations,
including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. An inability to raise funds
through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on liquidity. Access to funding sources in
amounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry
in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a market
downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors
that are not specific to CWB, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the
financial services industry as a whole. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions
and having back-up access to the brokered Certificate of Deposits “CD’s” markets. Results of operations could be adversely affected if either
entity were unable to satisfy current or future financial obligations.
8
Index
The Company’s future success will depend on our ability to compete effectively in a highly competitive market
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including
commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance
companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds and other financial institutions, compete
with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans
and deposits.
There is very strong competition for financial services in the market areas in which we conduct our businesses from many local commercial banks as
well as numerous national and commercial banks and regionally based commercial banks. Many of these competing institutions have much greater
financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader
range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding
companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing
funding and in providing various services. The banking business in our primary market areas is very competitive, and the level of competition
facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be
impaired, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over financial reporting, we might be unable to
report our financial information on a timely basis and might suffer adverse regulatory consequences or violate listing standards. There could also
be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. We have in
the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal
control conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within our company will be detected. If we are unable to maintain proper and effective internal controls, we may not be
able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in
regulatory action, and could require us to restate, our financial statements. Any such restatement could result in a loss of public confidence in the
reliability of our financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our
financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these
policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are
critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those
assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period financial statements.
Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC,
banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or
positions on how various standards should be applied. These changes can be difficult to predict and can materially impact how we record and
report our financial condition and results of operations. In some cases, we could be required to apply a new revised standard retroactively,
resulting in the need to revise and republish prior period financial statements.
Terrorist attacks and threats of war or actual war may impact all aspects of our operations, revenues, costs and stock price in unpredictable
ways
Terrorist attacks in the United States, as well as future events occurring in response or in connection to them including, without limitation, future
terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade
disruptions, may impact our operations. Any of these events could cause consumer confidence and savings to decrease or result in increased
volatility in the United States and worldwide financial markets and economy. Any of these occurrences could have an adverse impact on the
Company’s operating results, revenues and costs and may result in the volatility of the market price for our securities, including our common stock,
and impair their future price.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet and
telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities
targeting us and/or our customers that use our internet banking, electronic banking or some other form of our telecommunications systems. Given
the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain
fraud losses may not be avoidable regardless of the preventative and detection systems in place.
9
Index
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in the security of these
systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we
have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there
can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers,
including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information,
damage our reputation, increase our costs and cause losses
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial
losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms,
including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic
fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial
bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems
and networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of the Company’s and our
clients’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the
nature of the threats continues to evolve. As a result, our computer systems, software and networks and those of our customers may be vulnerable
to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer
viruses or other malicious code, cyber attacks and other events that could have an adverse security impact and result in significant losses by us
and/or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats
may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support
providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our
transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business
activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack
on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the
risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no
assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other
things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic
environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance
our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope
with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to
cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems
failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees especially seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at
every level. In particular, our relative success to date has been partly the result of our management’s ability to identify and retain highly qualified
relationship bankers that have long-standing relationships in their communities. These professionals bring with them valuable customer
relationships and have been integral in our ability to attract deposits and to expand our market share. From time to time, the Company recruits or
utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete
with that employer, or to solicit customers of that employer. If the Company is unable to hire or retain qualified employees it may not be able to
successfully execute its business strategy. If the Company or its employee is found to have violated any nonsolicitation or other restrictions
applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.
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Index
We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations. Our ability to raise additional capital is
dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to
implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital
when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through
acquisitions may be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
The Company is headquartered at 445 Pine Avenue in Goleta, California. This facility houses the Company's corporate offices and the
manufactured housing loan division. The Company operates seven domestic branch locations one of which is owned. Subsequent to year end, the
Company opened the seventh full-service domestic branch in Oxnard, California. All other properties are leased by the Company, including the
corporate headquarters.
The Company continually evaluates the suitability and adequacy of its offices. Management believes that the existing facilities are adequate for its
present and anticipated future use.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in various litigation matters of a routine nature in the ordinary course of the Company’s business.
In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters are not expected to have a
material impact on the Company’s financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Index
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC. The following table sets forth the
high and low sales prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:
2016 Quarters
2015 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
9.95 $
7.85
0.035 $
8.62 $
7.35
0.035 $
7.55 $
6.80
0.035 $
7.25 $
6.79
0.03 $
7.30 $
6.85
0.03 $
7.05 $
6.85
0.03 $
6.88 $
6.46
0.03 $
6.98
6.52
0.02
Range of stock prices:
High
Low
$
Cash Dividends Declared:
$
Holders
As of February 24, 2017 the closing price of our common stock on NASDAQ was $10.35 per share. As of that date the Company had approximately
223 holders of record of its common stock. The Company has a greater number of beneficial owners of our common stock who own their shares
through brokerage firms and institutional accounts.
Common Stock Dividends
It is the Company’s intention to review its dividend policy on a quarterly basis. As a holding company with limited significant assets other than the
capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank,
CWB. CWB’s ability to pay dividends to the Company is limited by California law and federal banking law. See “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Supervision and Regulation – CWBC – Limitations on Dividend Payments.”
Repurchases of Securities
Common
The Company authorized a $3.0 million common stock repurchase program. The repurchase program is expected to be executed over no more than a
two-year period. Under this program the Company has repurchased 187,569 common stock shares for $1.4 million at an average price of $7.25 per
share. There were no repurchases of common stock under this program during the three months ended December 31, 2016.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2016:
Plan Category
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
(a)
Weighted-average exercise price of
outstanding options, warrants and
rights
(b)
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a))
(c)
Plans approved by shareholders
Plans not approved by
shareholders
Total
704,925 $
-
704,925 $
6.41
-
6.41
123,750
-
123,750
For material features of the plans, see “Item 8. Financial Statements and Supplementary Data - Note 11. Stockholder’s Equity-Stock Option Plans.”
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Index
ITEM 6.
SELECTED FINANCIAL DATA
The following summary presents selected financial data as of and for the periods indicated. You should read the selected financial data presented
below in conjunction with “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
2016
Year Ended December 31,
2015
2013
2014
(in thousands, except per share amounts)
2012
$
Results of Operations:
Interest income
Interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision (benefit) for income taxes
Net income
$
$
$
$
$
Dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
Net income available to common stockholders
Per Share Data:
Income per common share - basic
Income per common share - diluted
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
Shares outstanding at period end
Dividends declared per common share
Book value per common share
Selected Balance Sheet Data:
Net loans
Allowance for loan losses
Total assets
Total deposits
Total liabilities
Total stockholders' equity
Selected Financial and Liquidity Ratios:
Net interest margin
Return on average assets
Return on average stockholders' equity
Equity to assets ratio
Loan to deposit ratio
Capital Ratios:
Tier 1 leverage ratio (1)
Common Equity Tier 1 ratio (1)
Tier 1 risk-based capital ratio (1)
Total risk-based capital ratio (1)
Selected Asset Quality Ratios:
Net charge-offs (recoveries) to average loans
Allowance for loan losses to total loans
Allowance for loan losses to nonaccrual loans
Nonaccrual loans to gross loans
Nonaccrual loans and repossessed assets to total loans
Loans past due 90 days or more and still accruing interest
to total loans
$
$
$
$
$
$
32,216
3,127
29,089
(48)
29,137
2,253
22,548
8,842
3,613
5,229
-
-
5,229
0.64
0.62
8,114
8,444
8,096
0.135
8.07
623,355
7,464
710,572
612,236
645,236
65,336
4.60%
0.81%
8.19%
9.19%
103.04%
9.64%
10.57%
10.57%
11.80%
-0.10%
1.18%
239.46%
0.49%
0.52%
$
30,222
2,516
27,706
(2,274)
29,980
2,309
27,281
5,008
2,138
2,870
445
(129)
$
2,554
0.31
0.30
8,203
8,491
8,206
0.11
7.55
$
$
$
$
536,546
6,916
621,213
544,338
559,269
61,944
4.80%
0.49%
4.34%
9.97%
99.84%
10.11%
12.12%
12.12%
13.37%
-0.26%
1.27%
99.42%
1.28%
1.32%
$
28,004
3,275
24,729
(5,135)
29,864
2,197
20,081
11,980
4,934
7,046
937
(159)
$
6,268
0.77
0.75
8,141
8,505
8,203
0.04
7.31
$
$
$
487,256
7,887
557,318
477,084
490,311
67,007
4.50%
1.25%
10.42%
12.02%
103.79%
11.86%
-
14.94%
16.19%
-0.16%
1.59%
71.52%
2.23%
2.25%
-
-
-
$
27,866
4,332
23,534
(1,944)
25,478
2,831
22,135
6,174
(2,812)
8,986
1,039
-
7,947
$
1.13
0.98
7,017
8,390
7,867
-
6.60
$
$
$
462,005
12,208
539,000
436,135
471,444
67,556
4.51%
1.69%
15.15%
12.53%
108.73%
12.68%
-
15.65%
17.26%
0.70%
2.57%
72.51%
3.55%
4.35%
0.01%
31,368
5,949
25,419
4,281
21,138
4,281
22,246
3,173
-
3,173
1,046
-
2,127
0.36
0.31
5,990
8,233
5,995
-
6.29
449,201
14,464
532,101
434,220
479,052
53,049
4.49%
0.55%
6.22%
9.97%
106.78%
9.72%
-
12.81%
15.98%
1.02%
3.12%
64.50%
4.84%
5.24%
-
(1) Effective 2015, CWB was subject to Basel III regulatory capital guidelines. CWBC as a small bank holding company is not subject to the
Basel III capital reporting requirements. The 2016 and 2015 ratios were the estimated consolidated capital ratios under Basel III.
13
Index
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with “Item 8–Financial Statements and Supplementary Data.” This discussion
and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors,
including but not limited to those set forth under “ Forward-Looking Statements,” on page 3 of this Form 10-K, may cause actual results to differ
materially from those projected in the forward-looking statements.
Financial Overview and Highlights
Community West Bancshares is a financial services company headquartered in Goleta, California that provides full service banking and lending
through its wholly-owned subsidiary Community West Bank (“CWB”), which has seven California branch banking offices located in Goleta,
Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura and Westlake Village.
Financial Result Highlights of 2016
Net income available to common stockholders of $5.2 million, or $0.62 per diluted share for 2016, compared to $2.6 million, or $0.30 per diluted share
for 2015 and $6.3 million or $0.75 per diluted share for 2014.
The significant factors impacting the Company during 2016 were:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Net income of $5.2 million for 2016 compared to a net income of $2.9 million for 2015.
Total loans increased 16.1% to $630.8 million at December 31, 2016 compared to $543.5 million at December 31, 2015.
Total deposits increased 12.5% to $612.2 million at December 31, 2016, compared to $544.3 million a year ago.
Non-interest-bearing deposits increased 31.2% to $100.4 million at December 31, 2016, compared to $76.5 million a year ago.
The provision (credit) for loan losses was ($48,000) for 2016 compared to ($2.3 million) in 2015. Net loan loss recoveries were ($0.6
million) for 2016 compared to ($1.3 million) in 2015.
Net nonaccrual loans decreased to $2.4 million at December 31, 2016, compared to $5.0 million at December 31, 2015.
Allowance for loan losses was $7.5 million at December 31, 2016, or 1.31% of total loans held for investment compared to 1.44% at
December 31, 2015.
Net interest margin for the year ended December 31, 2016 decreased to 4.60% compared to 4.80% for the year ended 2015.
Full service branch office locations opened in San Luis Obispo, California and Oxnard, California (January 2017).
The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to
the Company’s overall comparative performance for the year ended December 31, 2016 throughout the analysis sections of this report.
A summary of our results of operations and financial condition and select metrics is included in the following table:
Net income available to common stockholders
Basic earnings per share
Diluted earnings per share
Total assets
Gross loans
Total deposits
Net interest margin
Return on average assets
Return on average stockholders' equity
Asset Quality
Year Ended December 31,
2016
2014
2015
(in thousands, except per share amounts)
$
$
5,229
0.64
0.62
710,572
630,819
612,236
4.60%
0.81%
8.19%
$
2,554
0.31
0.30
621,213
543,462
544,338
4.80%
0.49%
4.34%
6,268
0.77
0.75
557,318
495,143
477,084
4.50%
1.25%
10.42%
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. The following table summarizes these asset quality metrics:
14
Index
Non-accrual loans (net of guaranteed portion)
Non-accrual loans to gross loans
Net charge-offs (recoveries) to average loans
Asset and Deposit Growth
$
2016
Year Ended December 31,
2015
(in thousands)
$
5,013
$
0.92%
0.38%
(0.26)%
(0.10)%
2,375
2014
11,027
2.23%
(0.16)%
The Company’s assets and liabilities are comprised primarily of loans and deposits. The ability to originate new loans and attract new deposits is
fundamental to the Company’s asset growth. Total assets increased to $710.6 million at December 31, 2016 from $621.2 million at December 31, 2015.
Total loans including net deferred fees and unearned income increased by $87.3 million, or 16.1%, to $630.8 million as of December 31, 2016
compared to December 31, 2015. Total deposits increased by 12.5% to $612.2 million as of December 31, 2016 from $544.3 million as of December 31,
2015.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
Year Ended
December 31,
2016
2015
Increase
(Decrease)
Year Ended
December 31,
2015
2014
Increase
(Decrease)
(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income
Interest expense
Net interest income
Provision (credit) for losses
Net interest income after provision for
loan losses
Non-interest income
Non-interest expenses
Income before provision for income
taxes
Provision for income taxes
Net income
Dividends and accretion on preferred
stock
Discount on partial redemption of
preferred stock
Net income available to common
stockholders
Earnings per share - basic
Earnings per share - diluted
$
$
$
$
$
32,216 $
3,127
29,089
(48)
29,137
2,253
22,548
8,842
3,613
5,229 $
-
-
5,229 $
0.64 $
0.62 $
30,222 $
2,516
27,706
(2,274)
29,980
2,309
27,281
5,008
2,138
2,870 $
1,994 $
611
1,383
2,226
(843)
(56)
(4,733)
3,834
1,475
2,359 $
30,222 $
2,516
27,706
(2,274)
29,980
2,309
27,281
5,008
2,138
2,870 $
28,004 $
3,275
24,729
(5,135)
29,864
2,197
20,081
11,980
4,934
7,046 $
445
(445)
445
937
(129)
129
(129)
(159)
2,675 $
0.33 $
0.32 $
2,554 $
0.31 $
0.30 $
6,268 $
0.77 $
0.75 $
2,554 $
0.31 $
0.30 $
15
2,218
(759)
2,977
2,861
116
112
7,200
(6,972)
(2,796)
(4,176)
(492)
30
(3,714)
(0.46)
(0.45)
Index
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:
Interest-Earning Assets
Federal funds sold and interest-earning deposits
Investment securities
Loans (1)
Total earnings assets
Nonearning Assets
Cash and due from banks
Allowance for loan losses
Other assets
Total assets
Interest-Bearing Liabilities
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Other borrowings
Total interest-bearing liabilities
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits
Other liabilities
Stockholders' equity
Total Liabilities and Stockholders' Equity
Net interest income and margin (2)
Net interest spread (3)
Year Ended December 31,
2016
2015
Average
Balance Interest
Average
Yield/Cost
Average
Balance Interest
Average
Yield/Cost
121
$ 25,103 $
34,867
998
573,084 31,097
633,054 32,216
(in thousands)
29,612 $
0.48% $
2.86%
34,317
5.43% 513,826
5.09% 577,755
93
990
29,139
30,222
0.31%
2.88%
5.67%
5.23%
2,660
(7,095)
15,930
$ 644,549
251,644
14,138
219,653
485,435
10,699
496,134
80,611
3,947
63,857
$ 644,549
1,763
(7,459)
16,310
$ 588,369
934
109
1,808
2,851
276
3,127
0.37% 257,785
0.77%
14,479
0.82% 165,894
0.59% 438,158
2.58%
9,415
0.63% 447,573
902
123
1,358
2,383
133
2,516
0.35%
0.85%
0.82%
0.54%
1.41%
0.56%
70,864
3,856
66,076
$ 588,369
$
4.60%
4.46%
27,706
4.80%
4.67%
$ 29,089
(1)
(2)
(3)
Includes nonaccrual loans.
Net interest margin is computed by dividing net interest income by total average earning assets.
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
16
Index
Interest-Earning Assets
Federal funds sold and interest-earning deposits
Investment securities
Loans (1)
Total earnings assets
Nonearning Assets
Cash and due from banks
Allowance for loan losses
Other assets
Total assets
Interest-Bearing Liabilities
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Convertible debentures
Other borrowings
Total interest-bearing liabilities
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits
Other liabilities
Stockholders' equity
Total Liabilities and Stockholders' Equity
Net interest income and margin (2)
Net interest spread (3)
Year Ended December 31,
2015
2014
Average
Balance Interest
Average
Yield/Cost
Average
Balance Interest
Average
Yield/Cost
$
29,612 $
34,317
513,826
577,755
93
990
29,139
30,222
(in thousands)
0.31% $
2.88%
5.67%
5.23%
26,296 $
33,242
489,598
549,136
76
762
27,166
28,004
0.29%
2.29%
5.55%
5.10%
1,763
(7,459)
16,310
$ 588,369
257,785
14,479
165,894
438,158
-
9,415
447,573
70,864
3,856
66,076
$ 588,369
$
1,642
(10,778)
22,474
$ 562,474
902
123
1,358
2,383
-
133
2,516
0.35%
0.85%
0.82%
0.54%
0.00%
1.41%
0.56%
271,744
15,923
123,354
411,021
241
21,235
432,497
1,064
202
1,397
2,663
30
582
3,275
0.39%
1.27%
1.13%
0.65%
12.45%
2.74%
0.76%
58,456
3,921
67,600
$ 562,474
$
4.80%
4.67%
27,706
24,729
4.50%
4.34%
(1)
(2)
(3)
Includes nonaccrual loans.
Net interest margin is computed by dividing net interest income by total average earning assets.
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
17
Index
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and
changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in
the average loan balances.
Year Ended December 31,
2016 versus 2015
Increase (Decrease)
Due to Changes in (1)
Rate
(in thousands)
Volume
$
$
15 $
(22)
3,191
3,184
(23)
(3)
441
33
448
2,736 $
(7) $
50
(1,233)
(1,190)
55
(11)
9
110
163
(1,353) $
Year Ended December 31,
2015 versus 2014
Increase (Decrease)
Due to Changes in (1)
Rate
(in thousands)
Total
Total
Volume
8 $
28
1,958
1,994
32
(14)
450
143
611
1,383 $
32 $
12
1,385
1,429
(49)
(12)
349
(167)
121
1,308 $
196 $
5
588
789
(113)
(67)
(388)
(282)
(880)
1,669 $
228
17
1,973
2,218
(162)
(79)
(39)
(449)
(759)
2,977
Interest income:
Investment securities
Federal funds sold and other
Loans, net
Total interest income
Interest expense:
Interest checking
Savings
Time deposits
Other borrowings
Total interest expense
Net increase
(1) Changes due to both volume and rate have been allocated to volume changes.
Comparison of interest income, interest expense and net interest margin
The Company’s primary source of revenue is interest income. Interest income for the year ended December 31, 2016 was $32.2 million, an increase
from $30.2 million and $28.0 million, respectively, for the years ended December 31, 2015 and 2014. The interest income was positively impacted by
increased average earning assets primarily loans in 2016. Average loans for the year increased 11.5% over 2015 and 17.1 % over 2014. Average
asset yields declined for 2016 as competition for new quality loans continued to further compress the interest rates and the margin. In 2015 the
margin benefited by 22 basis points from the payoff of two large nonaccrual loan relationships. These loan interest recoveries on nonaccrual loans
in 2015 also accounted for the increased average yield on loans for 2015 compared to 2016 and 2014.
Interest expense for the year ended December 31, 2016 increased compared to 2015 by $0.6 million and decreased compared to 2014 by $0.1 million,
respectively, to $3.1 million. The increase for 2016 compared to 2015 was mostly the result of the increased volume of deposits and increased rates.
Average interest-bearing deposits increased 10.8% in 2016 compared to 2015. The average cost on interest-bearing deposits also increased to 59
basis points in 2016 compared to 54 basis points in 2015.
The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was to decrease the margin for
2016 compared to 2015. The net interest margin was 4.60% for 2016 compared to 4.80% for 2015 and 4.50% in 2014.
Net interest income increased by $1.4 million for 2016 compared to 2015 and $4.4 million, compared to 2014.
Total interest income increased by $2.2 million to $30.2 million in 2015 compared to 2014. The interest income was positively impacted by increased
yields on earning assets in 2015 which increased to 5.23% compared to 5.10% for 2014. The average yield on loans increased to 5.67% for 2015
compared to 5.55% for 2014 as the Company benefited from loan interest recoveries on nonaccrual loans during the year. Total interest expense
decreased by $0.8 million in 2015 compared to 2014. This decline was primarily due to decreased total cost of funds which include non-interest
bearing deposits from 67 basis points for 2014 to 49 basis points for 2015. Net interest income increased by $3.0 million for 2015 compared to 2014.
Provision for loan losses
The provision for loan losses in each period is reflected as a charge against earnings in that period. The provision for loan losses is equal to the
amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio. The
provision (credit) for loan losses was ($48,000) in 2016 compared to ($2.3 million) in 2015 and ($5.1 million) in 2014. The credit to provision for loan
losses for 2016 resulted from $0.6 million net recoveries, reduced historical loss factors partially offset by loan growth. The credit to provision for
2015 resulted from $2.0 million from reduced historical loss factors, $1.3 million net recoveries, and $0.3 million reduction in impaired loan reserve and
grade change improvements partially offset by provision of $1.4 million for loan growth and qualitative factor changes. The result of the
improvements in credit quality, historical loss rates and net recoveries was the ratio of the allowance for loan losses to loans held for investment
decreased from 1.44% at December 31, 2015 to 1.31% at December 31, 2016. Additional information regarding improved credit quality can be found
beginning on page 26.
18
Index
The following table summarizes the provision (credit), charge-offs (recoveries) by loan category for the year ended December 31, 2016, 2015 and
2014:
For the Year Ended December 31,
Manufactured
Housing
Commercial
Real Estate Commercial
Single Family
2016
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
2015
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
2014
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
$
$
$
$
$
$
3,525 $
(123)
128
5
(1,329)
2,201 $
4,032 $
(297)
205
(92)
(415)
3,525 $
5,114 $
(543)
143
(400)
(682)
4,032 $
SBA HELOC
(in thousands)
451 $
(121)
266
43 $
-
86
145
(490)
106 $
86
(29)
100 $
1,853 $
-
132
132
1,722
3,707 $
1,459 $
-
545
545
(151)
1,853 $
939 $
-
136
136
166
1,241 $
986 $
-
422
422
(469)
939 $
1,066 $
-
454
454
(1,069)
451 $
2,552 $
(16)
857
841
(1,934)
1,459 $
2,064 $
-
149
1,951 $
(171)
393
149
(1,227)
986 $
222
(1,107)
1,066 $
Real Estate Consumer
Total
103 $
-
93
93
(87)
109 $
192 $
(29)
3
(26)
(63)
103 $
245 $
(36)
4
(32)
(21)
192 $
2 $
(1)
-
(1)
(1)
- $
2 $
-
-
-
-
2 $
2 $
-
-
-
-
2 $
6,916
(245)
841
596
(48)
7,464
7,877
(326)
1,639
1,313
(2,274)
6,916
12,208
(766)
1,570
804
(5,135)
7,877
140 $
-
10
10
(107)
43 $
280 $
-
24
24
(164)
140 $
The percentage of net non-accrual loans (net of government guarantees) to the total loan portfolio has decreased to 0.38% as of December 31, 2016
from 0.92% at December 31, 2015.
The allowance for loan losses compared to net non-accrual loans has increased to 314% as of December 31, 2016 from 138% as of December 31,
2015. Total past due loans decreased to $0.2 million as of December 31, 2016 from $1.9 million as of December 31, 2015.
Non-interest Income
The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers.
The following tables present a summary of non-interest income for the periods presented:
$
Other loan fees
Document processing fees
Service charges
Gains from loan sales, net
Loan servicing, net
Other
Total non-interest income
$
Year Ended December 31,
2016
2015
Increase
(Decrease)
Year Ended December 31,
2015
2014
Increase
(Decrease)
1,042 $
496
403
-
90
222
2,253 $
1,014 $
466
372
132
166
159
2,309 $
(in thousands)
28 $
30
31
(132)
(76)
63
(56) $
1,014 $
466
372
132
166
159
2,309 $
904 $
394
306
186
127
280
2,197 $
110
72
66
(54)
39
(121)
112
Total non-interest income declined slightly for 2016 compared to 2015. The decline was mostly from the Company’s exit from the wholesale
mortgage loan origination and sale business line in 2015 which contributed $0.1 million in gains from loan sales. The Company did not sell any
loans in 2016. Also contributing to the decline was lower income from loan servicing, net of $0.1 million. Legacy sold loans continued to pay-off in
2016 and have not been replaced with new loan sales. These declines were partially offset by increased service charges and loan fees which are the
result of loan and deposit growth in 2016.
19
Index
Total non-interest income increased by $0.1 million, or 5.1 %, for 2015 compared to 2014. This increase was primarily from other loan fees and
document processing fees which increased by $0.2 million for 2015 compared to 2014 as a result of increased loan volumes in 2015 compared to
2014. Service charges income increased slightly for 2015 compared to 2014 mostly from account analysis charges and ATM fees. These increases
were partially offset by declined gains from loan sales and other non-interest income in 2015 compared to 2014 of $0.1 million. Other non-interest
income was impacted by lower other loan related income in 2015 compared to 2014 and gains on loan sales was impacted negatively due to the exit
of the Company from originating mortgage loans for sale towards the end of 2015.
Non-Interest Expenses
The following tables present a summary of non-interest expenses for the periods presented:
Year Ended December 31,
2016
2015
Increase
(Decrease)
Year Ended December 31,
2015
2014
Increase
(Decrease)
$
Salaries and employee benefits
Occupancy expense, net
Professional services
Data processing
Depreciation
Advertising and marketing
FDIC assessment
Stock compensation expense
Loan servicing and collection
Net (gain) loss on sales/write-downs of
foreclosed real
estate and repossessed assets
Loan litigation settlement, net
Other
Total non-interest expenses
$
14,383 $
2,264
873
793
678
616
376
338
209
16
-
2,002
22,548 $
12,904 $
1,943
993
533
399
466
342
412
395
10
7,095
1,789
27,281 $
(in thousands)
1,479 $
321
(120)
260
279
150
34
(74)
(186)
6
(7,095)
213
(4,733) $
12,904 $
1,943
993
533
399
466
342
412
395
10
7,095
1,789
27,281 $
12,154 $
1,833
1,551
570
324
608
338
308
845
(435)
-
1,985
20,081 $
750
110
(558)
(37)
75
(142)
4
104
(450)
445
7,095
(196)
7,200
Total non-interest expenses for the year ended December 31, 2016 compared to 2015 decreased by $4.7 million primarily due to the loan litigation
settlement, net of $7.1 million in 2015. Excluding the loan litigation settlement, net, total non-interest expenses for 2016 compared to 2015 increased
by $2.3 million. The majority of this increase was $1.5 million in salaries and benefits as a result of opening a full-service branch in San Luis Obispo
and adding other strategic positions throughout the organization. Total occupancy expenses and depreciation expense increased by $0.3 million,
respectively, for 2016 compared to 2015 mostly due to the addition of the San Luis Obispo Branch location and the move of the Santa Maria Branch
to a new more strategic location. Data processing expenses for 2016 compared to 2015 increased by $0.3 million as a result of a Company-wide
initiative to upgrade information technology systems and enhance product lines to meet customer needs. Advertising and marketing expenses
increased in 2016 compared to 2015 as a result of additional advertising for the branches and complete redesign of the Company’s website.
Total non-interest expenses for the year ended December 31, 2015 compared to 2014 increased by $7.2 million primarily due to the loan litigation
settlement, net of $7.1 million related to certain residential mortgage loan sales. Salaries and employee benefits increased by $0.8 million for 2015
compared to 2014 mostly due to the addition of the loan production office in San Luis Obispo and other strategic loan production positions. Net
(gain) loss on sales/write-downs of foreclosed real estate and repossessed assets increased by $0.4 million in 2015 compared to 2014 as the sales in
2014 resulted in a net gain primarily from one large OREO property versus a smaller number of sales in 2015 primarily manufactured houses resulting
in a small net loss. Partially offsetting these increases were decreased professional services expense of $0.6 million and loan servicing and
collection expenses of $0.5 million for 2015 compared to 2014. Professional services decreased for the comparable twelve month periods mostly due
to decreased legal and accounting and audit fees. Legal fees for 2015 compared to 2014 declined mostly due to one corporate legal matter.
Accounting and audit fees declined for 2015 compared to 2014 primarily from increased credit quality which resulted in changes to the frequency of
external loan review. Loan servicing and collection expenses decreased for 2015 compared to 2014 due to improved credit quality and fewer
foreclosures.
20
Index
Income Taxes
The income tax provision for 2016 was $3.6 million compared to $2.1 million in 2015 and a tax benefit of $4.9 million in 2014. The effective income tax
rate was 40.9%, 42.7% and 41.2%, respectively for 2016, 2015 and 2014.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets of $3.7 million at December
31, 2016 are reported in the consolidated balance sheet as a component of total assets.
Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established
against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.
A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or
all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent
approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of
future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if
management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of
the deferred tax assets may not be realized.
There was no valuation allowance on deferred tax assets at December 31, 2016 and 2015.
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740). ASC 740 prescribes a more likely than not threshold for the
financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance
on uncertain tax positions. There were no uncertain tax positions at December 31, 2016 and 2015.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the
amount of tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 7 “Income Taxes” to the
consolidated financial statements of this annual report on Form 10-K beginning on page 75.
BALANCE SHEET
Total assets increased $89.4 million to $710.6 million at December 31, 2016 compared to $621.2 million at December 31, 2015. The majority of the
increase was in total loans of $87.3 million, or 16.1%, to $630.8 million. Total commercial real estate loans increased by 51.6% to $272.1 million at
December 31, 2016 compared to 2015, and comprised 43.1% of the total loan portfolio. Manufactured housing loans increased by 9.2% to $194.2
million at December 31, 2016 compared to 2015, and represented 30.8% of the total loan portfolio. Total commercial loans including commercial
agriculture loans decreased 2.1% to $105.3 million at December 31, 2016 compared to 2015, and represented 16.7% of the total loan portfolio.
Total liabilities increased $86.0 million, or 15.4% to $645.2 million at December 31, 2016 from $559.3 million at December 31, 2015. The majority of this
increase was due to deposit growth. Total deposits increased by $67.9 million, or 12.5% to $612.2 million at December 31, 2016 from $544.3 million at
December 31, 2015. Non-interest bearing demand deposits increased by $23.9 million to $100.4 million at December 31, 2016 from $76.5 million at
December 31, 2015. Certificates of deposit increased by $41.2 million to $244.8 million at December 31, 2016 compared to $203.7 million at December
31, 2015. Interest-bearing demand deposits increased by $2.5 million to $253.0 million at December 31, 2016 compared to 2015. Savings deposits
increased slightly to $14.0 million at December 31, 2016 compared to $13.7 million at December 31, 2015. Other borrowings increased by $18.5 million
to $29.0 million at December 31, 2016 compared to 2015 due to increased FHLB advances which were $25.0 million at December 31, 2016 compared to
$5.0 million at December 31, 2015.
Total stockholders’ equity increased to $65.3 million at December 31, 2016 from $61.9 million at December 31, 2015. This increase was primarily from
2016 net income of $5.2 million reduced by common stock repurchases of $1.3 million and quarterly common stock dividends of $1.1 million.
21
Index
The following tables present the Company’s average balances as of the dates indicated:
ASSETS:
Cash and due from banks
Interest-earning deposits in other institutions
Federal funds sold
Investment securities available-for-sale
Investment securities held-to-maturity
FRB and FHLB stock
Loans - held for sale, net
Loans - held for investment, net
Servicing assets
Other assets acquired through foreclosure, net
Premises and equipment, net
Other assets
TOTAL ASSETS
LIABILITIES:
Deposits:
Non-interest bearing demand
Interest-bearing demand
Savings
Time certificates of $100,000 or more
Other time certificates
Total deposits
Other borrowings
Other liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Preferred stock
Common stock
Retained earnings
Accumulated other comprehensive (loss) income
-
41,716
22,131
10
63,857
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 644,549
Total stockholders' equity
22
2016
Amount Percent
December 31,
2015
Amount Percent
(dollars in thousands)
2014
Amount Percent
$
2,660
25,087
16
23,809
7,672
3,387
61,792
504,197
289
123
3,122
12,395
$ 644,549
$
80,611
251,644
14,138
177,122
42,531
566,046
10,699
3,947
580,692
1,763
0.4% $
29,590
3.9%
22
0.0%
23,516
3.7%
7,595
1.2%
3,206
0.5%
9.6%
65,266
78.2% 441,101
349
0.1%
236
0.0%
2,994
0.5%
12,731
1.9%
100.0% $ 588,369
1,642
0.3% $
26,273
5.0%
23
0.0%
21,118
4.0%
9,008
1.3%
3,116
0.5%
11.1%
67,361
75.0% 422,237
479
0.1%
1,961
0.0%
2,977
0.5%
6,279
2.2%
100.0% $ 562,474
12.5% $
70,864
39.0% 257,785
2.2%
14,479
27.5% 153,388
12,506
6.6%
87.8% 509,022
9,415
1.7%
0.6%
3,856
90.1% 522,293
12.0% $
58,456
43.8% 271,744
2.5%
15,923
26.1% 103,633
19,721
2.1%
86.5% 469,477
21,476
1.6%
0.7%
3,921
88.8% 494,874
0.0%
6.5%
3.4%
0.0%
9.9%
4,936
42,162
19,006
(28)
66,076
100.0% $ 588,369
11,287
0.8%
41,590
7.2%
14,840
3.2%
(117)
0.0%
11.2%
67,600
100.0% $ 562,474
0.3%
4.7%
0.0%
3.8%
1.6%
0.6%
12.0%
75.0%
0.1%
0.3%
0.5%
1.1%
100.0%
10.4%
48.3%
2.8%
18.4%
3.5%
83.5%
3.8%
0.7%
88.0%
2.0%
7.4%
2.6%
0.0%
12.0%
100.0%
Index
Loan Portfolio
Market Summary
Total loans increased by $87.3 million during 2016 to $630.8 million. The majority of this increase was driven by $42.7 million of organic growth as
the Company expanded into the San Luis Obispo County market. Total commercial real estate loans increased by $92.6 million and manufactured
housing loans increased by $16.3 million. Total commercial loans including commercial agriculture loans decreased slightly by $2.2 million. SBA
and single family real estate declined by $11.4 million and $6.3 million, respectively as the Company no longer originates SBA loans outside of
California and did not focus on this product in 2016. The Company exited from the single family real estate origination business in 2015 and the
remaining portfolio balance will continue to decrease. With the recent rise in interest rates and our expansion into the San Luis Obispo and Oxnard
markets we believe the Company is well positioned for continued growth.
The table below summarizes the distribution of the Company’s loans (including loans held for sale) at the year-end:
2016
2015
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Mortgage loans held for sale
Total loans
Less:
Allowance for loan losses
Deferred fees (costs), net
Discount on SBA loans
Total loans, net
Percentage to Total Loans:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Mortgage loans held for sale
Commercial Loans
$
$
194,222
272,142
105,290
36,659
10,292
12,750
87
-
631,442
7,464
453
170
623,355
$
$
30.8%
43.1%
16.7%
5.8%
1.6%
2.0%
0.0%
0.0%
100.0%
$
December 31,
2014
(in thousands)
169,662
$
159,432
74,792
62,201
13,481
14,957
178
785
495,488
177,891
179,491
107,510
48,071
10,934
19,073
123
-
543,093
6,916
(560)
191
536,546
$
7,877
118
237
487,256
$
32.8%
33.0%
19.8%
8.9%
2.0%
3.5%
0.0%
0.0%
100.0%
34.2%
32.2%
15.1%
12.6%
2.7%
3.0%
0.0%
0.2%
100.0%
2013
2012
172,055
142,678
62,420
71,692
15,418
10,150
184
-
474,597
12,208
45
339
462,005
$
$
36.3%
30.1%
13.2%
15.1%
3.2%
2.1%
0.0%
0.0%
100.0%
177,391
126,677
37,266
86,389
17,852
9,939
232
8,223
463,969
14,464
(128)
432
449,201
38.2%
27.3%
8.0%
18.6%
3.8%
2.2%
0.1%
1.8%
100.0%
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants
a maximum loan amount, which remains available to the business during the loan term. The collateral for these loans typically are secured by
Uniform Commercial Code (“UCC-1”) lien filings, real estate and personal guarantees. The Company does not extend material loans of this type in
excess of two years.
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing, commercial and
industrial properties. This loan category also includes SBA 504 loans and land loans.
Commercial and industrial real estate loans are primarily secured by nonresidential property. Office buildings or other commercial property primarily
secure these types of loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75% of appraised value of
the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 70% of appraised value
of the underlying real property.
23
Index
The Company makes real estate construction loans on commercial properties and single family dwellings. These loans are collateralized by first and
second trust deeds on real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan
to appraised value of 80%.
SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or
acquire machinery and equipment. The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed
which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50% conventional first loan and 40%
debenture. Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%. Conventional and
investor loans are sometimes funded by our secondary-market partners and CWB receives a premium for these transactions.
SBA Loans
SBA loans consist of SBA 7(a) and Business and Industry loans (“B&I”). The SBA 7(a) loan proceeds are used for working capital, machinery and
equipment purchases, land and building purposes, leasehold improvements and debt refinancing. At present, the SBA guarantees as much as 85%
on loans up to $150,000 and 75% on loans more than $150,000. The SBA’s maximum exposure amount is $3,750,000. The Company may sell a
portion of the loans, however, under the SBA 7(a) loan program; the Company is required to retain a minimum of 5% of the principal balance of each
loan it sells into the secondary market.
B&I loans are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 80% for loans of $5 million or less. B&I loans
are similar to the SBA 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.
Agricultural Loans for real estate and operating lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops,
equipment and livestock. The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service
Agency (“FSA”), and the USDA B&I loan program. The FSA loans typically have a 90% guarantee up to $1,399,000 (amount adjusted annually
based on inflation) for up to 40 years, but not always. The Company had $63.4 million of these loans at December 31, 2016.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs.
Under the Farmer Mac I program, loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac. CWB does some servicing such
as collecting client information, processing payments and performing site visits. CWB receives an origination fee and an ongoing field servicing fee
for maintaining the relationship with the borrower and performing certain loan compliance monitoring, and other duties as directed by the Central
Servicer. CWB underwrites loans under the Farmer Mac 1 program which are funded by Farmer Mac and do not have a guarantee. Eligible loans
include FSA and B&I loans.
Manufactured Housing Loans
CWB originates loans secured by manufactured homes located in approved rental, co-operative ownership, condominium and planned unit
development mobile home parks in Santa Barbara, Ventura and San Luis Obispo Counties as well as along the California coast from San Diego to
San Francisco. The loans are made to borrowers for purchasing or refinancing new or existing manufactured homes. The loans are made under
either fixed rate programs for terms of 10 to 20 years or adjustable rate programs with terms of 25 to 30 years. The adjustable rate loans have an
initial fixed rate period of five to 10 years and then adjust annually subject to interest rate caps.
HELOC
The Bank holds a portfolio of lines of credit collateralized by residential real estate, home equity lines of credit (“HELOC”), for consumer related
purposes. Typically, HELOCs are collateralized by a second deed of trust. The combined loan-to-value, first trust deed and second trust deed, are
not to exceed 75% on all HELOCs. The Bank is not actively originating new HELOCs.
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.
Single Family Real Estate Loans
Until the third quarter of 2015, the Company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-
four family homes. These loans were made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate
reduction or home improvement.
The following table sets forth the amount of loans outstanding by type of loan as of December 31, 2016 that were contractually due in one year or
less, more than one year and less than five years, and more than five years based on remaining scheduled repayments of principal. Lines of credit
or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less. The tables also present
an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from
contractual maturities due to prepayment, refinancing or other factors.
24
Index
Manufactured housing
Floating rate
Fixed rate
Commercial real estate
Floating rate
Fixed rate
Commercial
Floating rate
Fixed rate
SBA
Floating rate
Fixed rate
HELOC
Floating rate
Fixed rate
Single family real estate
Floating rate
Fixed rate
Consumer
Floating rate
Fixed rate
Total
Due in one
year or less
Due after
one year to
five years
Due after
five years
Total
(in thousands)
$
3,929 $
8,162
18,314 $
19,266
116,604 $
27,947
33,670
5,035
17,846
2,502
2,676
-
20
-
300
75
48,286
20,089
15,836
7,952
9,246
-
1,586
-
1,919
722
150,573
14,489
60,826
328
24,737
-
8,686
-
8,457
1,277
138,847
55,375
232,529
39,613
94,508
10,782
36,659
-
10,292
-
10,676
2,074
-
87
74,302 $
-
-
143,216 $
-
-
413,924 $
-
87
631,442
$
At December 31, 2016, total loans consisted of 82.9% with floating rates and 17.1% with fixed rates. Manufactured housing loans which are
generally fixed rate for the first five years are included in floating rate loans during the fixed period.
The following table presents total gross loans based on remaining scheduled contractual repayments of principal as of the periods indicated:
2016
2015
December 31,
2014
(in thousands)
2013
2012
Less than one year
One to five years
Over five years
Total
Fixed
Rate
$ 15,861
48,029
44,041
$107,931
Variable
Rate
$ 58,441
95,187
369,883
$ 523,511
Fixed
Rate
$ 15,564
36,106
28,047
$ 79,717
Variable
Rate
$ 42,274
95,485
325,617
$ 463,376
Fixed
Rate
$ 14,791
46,432
33,525
$ 94,748
Variable
Rate
$ 36,900
92,232
271,608
$ 400,740
Fixed
Rate
$ 14,625
59,842
30,675
$105,142
Variable
Rate
$ 40,840
78,197
250,418
$ 369,455
Fixed
Rate
$ 19,274
73,550
40,027
$132,851
Variable
Rate
$ 31,754
100,061
199,303
$ 331,118
Percentage of total
17.1%
82.9%
14.7%
85.3%
19.1%
80.9%
22.2%
77.8%
28.6%
71.4%
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the
Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company
makes manufactured housing, commercial, SBA, construction, commercial real estate and consumer loans to customers through branch offices
located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant
credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2016 and 2015, manufactured
housing loans comprised 30.8% and 32.7%, of total loans, respectively. As of December 31, 2016 and 2015, commercial real estate loans accounted
for approximately 43.1% and 33.0% of total loans, respectively. Approximately 32.3% and 53.7% of these commercial real estate loans were owner
occupied at December 31, 2016 and 2015, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios
of 54.6% and 50.3% at December 31, 2016 and 2015, respectively. The Company was within established policy limits at December 31, 2016 and 2015.
25
Index
Interest Reserves
Interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and land
development loan. The Company’s practice is to monitor the construction, sales and/or leasing progress to determine the feasibility of ongoing
construction and development projects. If, at any time during the life of the loan, the project is determined not to be viable, the Company
discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and/or legal action as
deemed appropriate. At December 31, 2016, the Company had 15 loans with an outstanding balance of $21.7 million with available interest reserves
of $2.9 million. Total construction and land loans are approximately 5% and 3% of the Company’s loan portfolio and December 31, 2016 and 2015.
Impaired loans
A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments
of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience
insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considers the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral
method to measure impairment. All other loans are measured for impairment based on the present value of future cash flows. Impairment is
measured on a loan-by-loan basis for all loans in the portfolio.
A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial
difficulty. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is
rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans are also considered impaired.
The recorded investment in loans that are considered impaired is as follows:
Impaired loans without specific valuation allowances
Impaired loans with specific valuation allowances
Specific valuation allowance related to impaired loans
Impaired loans, net
Average investment in impaired loans
$
$
$
4,463
13,080
(759)
16,784
$
$
2016
2015
Year Ended December 31,
2014
(in thousands)
3,821
$
20,108
(854)
23,075
7,591
11,940
(573)
18,958
$
$
$
2013
2012
4,980
15,140
(1,439)
18,681
$
$
17,484
12,163
(1,794)
27,853
17,285
$
16,302
$
17,741
$
24,435
$
42,555
The following schedule summarizes impaired loans and specific reserves by loan class as of the periods indicated:
Impaired Loans as of December 31, 2016:
Recorded Investment:
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Related Allowance for Credit Losses
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Total impaired loans, net
$
Manufactured
Housing
Commercial
Real Estate Commercial SBA HELOC
(in thousands)
Single
Family
Real
Estate Consumer
Total
Loans
$
6,065 $
2,846
1,112 $
-
3,749 $
70 $
31 1,067
45 $ 2,039 $
191
328
- $13,080
- 4,463
8,911
1,112
3,780 1,137
373 2,230
- 17,543
548
-
17
-
165
-
-
-
1
-
28
-
548
8,363 $
17
1,095 $
165
-
3,615 $ 1,137 $
1
28
372 $ 2,202 $
-
-
759
-
759
-
- $16,784
$1.0 million of the above impaired loans are government guaranteed.
26
Index
Manufactured
Housing
Commercial
Real Estate Commercial SBA HELOC
Single Family
Real Estate Consumer
Total
Loans
Impaired Loans as of December 31, 2015:
Recorded Investment:
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Related Allowance for Credit Losses
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Total impaired loans, net
$
$
(in thousands)
4,914 $
3,672
376 $
2,247
2,966 $ 1,695 $
44 1,052
19 $
294
1,970 $
282
- $11,940
- 7,591
8,586
2,623
3,010 2,747
313
2,252
- 19,531
483
-
3
-
45
-
25
-
-
-
483
8,103 $
3
2,620 $
45
25
2,965 $ 2,722 $
-
313 $
17
-
17
2,235 $
-
-
573
-
573
-
- $18,958
$2.4 million of the above impaired loans are government guaranteed.
Total impaired loans decreased by $2.0 million at December 31, 2016 compared to December 31, 2015. The SBA impaired loans decreased by $1.6
million and commercial real estate impaired loans decreased by $1.5 million in 2016 compared to 2015. Partially offsetting these decreases were
increased impaired commercial loans of $0.7 million, impaired manufactured housing of $0.3 million and impaired HELOC loans of $0.1 million,
respectively. SBA impaired loans declined due to $1.9 million in upgrades and $0.5 million of loan pay-offs partially offset by $0.8 million additions
to impaired SBA loans in 2016 compared to 2015. Impaired commercial real estate loans decreased due to $1.2 million in loan pay-offs and pay-
downs, one loan upgrade of $0.2 million and one loan charged-off of $0.1 million. Impaired commercial loans increased for 2016 compared to 2015
due to five newly impaired loans partially offset by payments on existing loans and one small loan pay-off. Impaired manufactured housing loans
increased by $0.3 million in 2016 compared to 2015. The number of impaired manufactured housing loans increased, with approximately 142 impaired
manufactured housing loans at December 31, 2015 compared to 136 at December 31, 2015. The Company added 26 newly impaired manufactured
housing loans in 2016 and decreased by 19 impaired manufactured housing loans mostly due to payoffs.
The following schedule reflects recorded investment in certain types of loans at the dates indicated:
Total nonaccrual loans
Government guaranteed portion of loans included above
$
Total nonaccrual loans without government guarantees $
3,117
$
(742)
$
2,375
2016
2015
Year Ended December 31,
2014
(in thousands)
17,883
6,956
$
$
(6,856)
(1,943)
$
11,027
$
5,013
TDR loans, gross
$
Loans 30 through 89 days past due with interest accruing $
Allowance for loan losses to gross loans held for
investment
Interest income recognized on impaired loans
Interest income that would have been recorded under the
original terms of nonaccrual loans
$
$
14,437
-
$
$
13,741
-
$
$
9,685
-
$
$
12,308
161
$
$
1.31%
$
1,148
1.44%
$
933
1.84%
$
825
2.98%
$
876
3.66%
1,406
412
$
761
$
1,276
$
1,754
$
2,692
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days
delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is usually no longer recognized on the loan.
Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for
on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and
interest amounts contractually due are brought current and future payments are reasonably assured.
27
2013
2012
23,263
$
(6,426)
$
16,837
29,643
(7,218)
22,425
19,931
521
Index
The following table summarizes the composite of nonaccrual loans:
$
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total nonaccrual loans
$
At Decmber 31, 2016
At December 31, 2015
Nonaccrual
Balance
%
Percent of
Total Loans
Nonaccrual
Balance
(dollars in thousands)
%
Percent of
Total Loans
800
853
31
868
373
192
-
3,117
25.67%
27.37%
0.99%
27.84%
11.97%
6.16%
-
100.00%
0.15% $
0.16%
0.01%
0.16%
0.07%
0.04%
-
0.57% $
1,615
2,356
44
2,346
313
282
-
6,956
23.22%
33.87%
0.63%
33.73%
4.50%
4.05%
-
100.00%
0.30%
0.43%
0.01%
0.43%
0.06%
0.05%
-
1.28%
Nonaccrual balances include $0.7 million and $1.9 million, respectively of loans that are government guaranteed at December 31, 2016 and 2015,
respectively. Nonaccrual loans net of government guarantees decreased $2.6 million or 52%, from $5.0 million at December 31, 2015 to $2.4 million at
December 31, 2016. The percentage of nonaccrual loans to the total loan portfolio has decreased to 0.57% as of December 31, 2016 from 1.28% at
December 31, 2015.
CWB or the SBA repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days. After the
foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance. Therefore, although these balances do not earn
interest during this period, they generally do not result in a loss of principal to CWB.
28
Index
Allowance for Loan Losses
The following table summarizes the activity in our allowance for loan losses for the periods indicated.
Allowance for loan losses:
Balance at beginning of period
Provisions charged to operating expenses:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total provision (credit)
Recoveries of loans previously charged-off:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total recoveries
Loans charged-off:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total charged-off
Net charge-offs (recoveries)
Balance at end of period
2016
2015
Year Ended December 31,
2014
(dollars in thousands)
2013
2012
$
6,916
$
7,877
$
12,208
$
14,464
$
15,270
(1,329)
1,722
166
(490)
(29)
(87)
(1)
(48)
128
132
136
266
86
93
-
841
123
-
-
121
-
-
1
245
(596)
7,464
$
(415)
(151)
(469)
(1,069)
(107)
(63)
-
(2,274)
205
545
422
454
10
3
-
1,639
297
-
-
-
-
29
-
326
(1,313)
6,916
$
(682)
(1,934)
(1,227)
(1,107)
(164)
(21)
-
(5,135)
143
857
149
393
24
4
-
1,570
543
16
-
171
-
36
-
766
(804)
7,877
$
206
(969)
(324)
(794)
(318)
218
37
(1,944)
257
1,243
212
559
3
8
-
2,282
1,294
349
149
547
39
179
37
2,594
312
12,208
$
$
4,824
30
116
(1,358)
311
356
2
4,281
144
756
131
837
50
6
5
1,929
3,652
1,687
656
623
76
314
8
7,016
5,087
14,464
1.02%
3.12%
Net charge-offs (recoveries) to average loans outstanding
Allowance for loan losses to gross loans including held
(0.10)%
(0.26)%
(0.16)%
0.07%
for sale loans
1.18%
1.27%
1.59%
2.57%
29
Index
The following table summarizes the allocation of allowance for loan losses by loan type. However allocation of a portion of the allowance to one
category of loans does not preclude its availability to absorb losses in other categories:
2016
2015
% of
Loans in
Each
Category
to Gross
Loans
Amount
% of
Loans in
Each
Category
to Gross
Loans
Amount
December 31,
2014
(dollars in thousands)
% of
Loans in
Each
Category
to Gross
Loans
Amount
2013
2012
% of
Loans in
Each
Category
to Gross
Loans
% of
Loans in
Each
Category
to Gross
Loans
Amount
Amount
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
$ 2,201
3,707
1,241
106
100
109
-
$ 7,464
29.5% $ 3,525
1,853
49.7%
939
16.6%
451
1.4%
43
1.3%
103
1.5%
2
0.0%
100.0% $ 6,916
51.0% $ 4,032
1,459
26.8%
986
13.6%
1,066
6.5%
140
0.6%
192
1.5%
2
0.0%
100.0% $ 7,877
51.2% $ 5,114
2,552
18.5%
2,064
12.5%
1,951
13.6%
280
1.8%
245
2.4%
2
0.0%
100.0% $ 12,208
41.9% $ 5,945
2,627
20.9%
2,325
16.9%
2,733
16.0%
634
2.3%
198
2.0%
2
0.0%
100.0% $ 14,464
38.2%
27.3%
8.0%
18.6%
3.8%
4.0%
0.1%
100.0%
Total allowance for loan losses increased by $0.6 million from $6.9 million at December 31, 2015 to $7.5 million at December 31, 2016 mostly the result
of loan growth and increased specific impairment reserves. In addition, the Company had net recoveries of $0.6 million in 2016 compared to net
recoveries of $1.3 million in 2015.
Potential Problem Loans
The Company classifies loans consistent with federal banking regulations. These loan grades are described in further detail in “Item 8. Note 1,
“Summary of Significant Accounting Policies” of this Form 10-K. The following table presents information regarding potential problem loans
consisting of loans graded watch or worse, but still performing:
December 31, 2016
Number
of Loans
Loan
Balance (1)
Percent
(dollars in thousands)
Percent
of Total
Loans
5 $
5
7
10
1
1
-
29 $
417
3,331
7,778
1,935
248
5
-
13,714
3.04%
24.29%
56.71%
14.11%
1.81%
0.04%
0.00%
100.00%
0.07%
0.53%
1.23%
0.31%
0.04%
0.00%
0.00%
2.17%
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
(1) Loan balance includes $2.9 million guaranteed by government agencies.
30
Index
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
December 31, 2015
Number
of Loans
Loan
Balance (1)
Percent
(dollars in thousands)
Percent
of Total
Loans
24 $
9
10
14
3
2
-
62 $
1,044
7,519
7,551
464
573
113
-
17,264
6.05%
43.55%
43.74%
2.69%
3.32%
0.65%
0.00%
100.00%
0.19%
1.38%
1.39%
0.09%
0.11%
0.02%
0.00%
3.18%
(1) Of the $17.3 million of potential problem loans, $3.2 million are guaranteed by the U.S. government.
Investment Securities
Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including
asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at
amortized cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to
maturity based upon asset/liability management decisions. Investment securities identified as available-for-sale are carried at fair value. Unrealized
gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity. Amortization of
premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits and to manage
liquidity, capital, and interest rate risk.
The carrying value of investment securities for the years indicated was as follows:
U.S. government agency notes
U.S. government agency mortgage backed securities ("MBS")
U.S. government agency collateralized mortgage obligations ("CMO")
Equity securities: Farmer Mac class A stock
2016
December 31,
2015
(in thousands)
2014
$
$
5,572 $
9,002
16,994
115
31,683 $
11,147 $
7,025
12,231
63
30,466 $
7,862
8,447
14,271
61
30,641
The weighted average yields of investment securities by maturity period were as follows at December 31, 2016:
Less than One Year
Amount Yield
One to Five Years
Amount Yield
Securities available-for-sale
U.S. government agency
December 31, 2016
Five to Ten Years
Amount Yield
(dollars in thousands)
Over Ten Years
Amount Yield
Total
Amount Yield
notes
$
1,973
2.6% $
1,963
0.8% $
1,636
1.3% $
-
-
$
5,572
1.6%
U.S. government agency
CMO
Farmer Mac class A stock
Total
-
-
1,973
$
-
-
2.6% $
2,063
-
4,026
1.9% 11,827
-
1.4% $ 13,463
-
1.1%
-
1.1% $
3,104
-
3,104
1.5% 16,994
115
1.5% $ 22,681
-
1.2%
-
1.3%
Securities held-to-maturity
U.S. government agency
MBS
Total
$
$
-
-
-
-
$
$
797
797
5.0% $
5.0% $
5,531
5,531
3.2% $
3.2% $
2,674
2,674
2.5% $
2.5% $
9,002
9,002
3.2%
3.2%
31
Index
Expected maturities may differ from contractual maturities because borrowers or issuers have the right to call or prepay certain investment
securities. Changes in interest rates may also impact prepayment or call options.
The Company does not own any subprime mortgage backed securities (“MBS”) in its investment portfolio. Gross unrealized losses at December 31,
2016 are primarily caused by interest rate fluctuations, credit spread widening and reduced liquidity in applicable markets. The Company has
reviewed all securities on which there was an unrealized loss in accordance with its accounting policy for other than temporary impaired (“OTTI”)
described in “Item 8. Note 2 in this Form 10-K, “Investment Securities” and determined no impairment was required. At December 31, 2016, the
Company had the intent and the ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
Balance, beginning of period
Additions
Proceeds from dispositions
Gains (losses) on sales, net
Balance, end of period
2016
December 31,
2015
(in thousands)
2014
$
$
198 $
350
(395)
(16)
137 $
137 $
609
(538)
(10)
198 $
3,811
1,879
(5,988)
435
137
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets
(primarily manufactured housing) are classified as other real estate owned and other repossessed assets and are reported at fair value at the time of
foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets are capitalized and costs related to holding the
assets are charged to expense. At December 31, 2015, the Company had a valuation allowance on foreclosed assets of $35,000 and no valuation
allowance on foreclosed assets at December 31, 2016 and 2014. At December 31, 2016, the Company had no mortgage loans in process of
foreclosure.
Deposits
The average balances by deposit type as of the dates presented below:
2016
Average
Balance
Percent of
Total
Year Ended December 31,
2015
Average
Balance
Percent of
Total
(dollars in thousands)
2014
Average
Balance
Percent of
Total
Non-interest bearing demand deposits
Interest-bearing demand deposits
Savings
Time deposits of $100,000 or more
Other time deposits
Total deposits
$
$
80,611
251,644
14,138
177,122
42,531
566,046
14.2% $
44.5%
2.5%
31.3%
7.5%
100.0% $
70,864
257,785
14,479
153,388
12,506
509,022
13.9% $
50.7%
2.8%
30.1%
2.5%
100.0% $
58,456
271,744
15,923
103,633
19,721
469,477
12.5%
57.9%
3.4%
22.1%
4.2%
100.0%
Total deposits increased to $612.2 million at December 31, 2016 from $544.3 million at December 31, 2015, an increase of $67.9 million. This increase
was primarily from certificates of deposit and non-interest bearing demand deposits. Certificates of deposits increased by $41.1 million to $244.8
million at December 31, 2016 compared to 2015. Non-interest bearing demand deposits increased by $23.9 million to $100.4 million at December 31,
2016 compared to $76.5 million at December 31, 2015. Deposits have been the primary source of funding the Company’s asset growth. In addition
the bank is a member of Certificate of Deposit Account Registry Service (“CDARS”). CDARS provides a mechanism for obtaining FDIC insurance
for large deposits. At December 31, 2016 and 2015, the Company had $46.8 million and $24.3 million, respectively of CDARS deposits.
32
Index
Time Certificates of Deposits
The following table presents TCD maturities:
Less than three months
Three to six months
Six to twelve months
Over twelve months
Total deposits
December 31,
2016
2015
TCDs Over
$ 100,000
Other
TCDs
TCDs Over
$ 100,000
Other
TCDs
$
$
64,945 $
54,126
23,698
78,276
221,045 $
12,827 $
1,867
2,080
7,015
23,789 $
23,509 $
63,724
29,957
65,292
182,482 $
1,651
11,263
1,374
6,900
21,188
The Company’s deposits may fluctuate as a result of local and national economic conditions. Management does not believe that deposit levels are
influenced by seasonal factors.
The Company utilizes money desk and brokered deposits in accordance with strategic and liquidity planning.
Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
FHLB Advances
Maximum month-end balance
Balance at year end
Average balance
Other Borrowings
Maximum month-end balance
Balance at year end
Average balance
Total borrowed funds
Weighted average interest rate at end of year
Weighted average interest rate during the year
FHLB and FRB Advances
2016
25,000
25,000
5,453
December 31,
2015
(in thousands)
20,000
$
5,000
8,466
$
5,500
4,000
5,246
29,000
$
1.13%
2.35%
5,500
5,500
949
10,500
$
2.35%
1.34%
$
$
2014
30,000
10,000
21,235
1,442
-
241
10,000
2.74%
2.85%
The Company utilizes borrowed funds to support liquidity needs. The Company’s borrowing capacity at FHLB and FRB is determined based on
collateral pledged, generally consisting of securities and loans. At December 31, 2016, no advances were outstanding from the FRB.
Other Borrowing
In October of 2015, the Company entered into a one year revolving line of credit agreement for up to $10.0 million. At December 31, 2015, the
balance was $5.5 million at a rate of 3.993%. The Company must maintain a compensating deposit with the lender of 25% of the outstanding
principal balance in a non-interest bearing deposit account which was $1.0 million and $1.4 million at December 31, 2016 and 2015, respectively. In
addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a minimum total
risked based capital ratio of 10.0%. The Company incurred a quarterly unused commitment fee of 50 basis points per annum on the average
available balance. The outstanding balance of the revolving line of credit converted to a five-year term loan on October 31, 2016 and maturity date
of October 31, 2021. At December 31, 2016, the balance was $4.0 million at a rate of 4.521%. On January 31, 2017, the Company made a principal
reduction payment of $2.0 million.
33
Index
Preferred Stock
The Company’s Series A Preferred Stock paid cumulative dividends at a rate of 5% per year until February 15, 2014 then increased to a rate of 9%
per year. The Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up of the Company.
During 2015 and 2014 the Company redeemed the 15,600 shares of Series A Preferred Stock for $15.4 million and recognized discounts on the
redemptions of $0.3 million. Total preferred dividends for both years was $1.4 million.
There are no shares issued and outstanding as of December 31, 2016 and 2015.
Capital Resources
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding
company. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital
framework with a phase-in period beginning January 1, 2015 and ending January 1, 2019. The Final Rules implement the third installment of the
Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III redefines the regulatory
capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted
assets and adds a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes
preferred equity.
The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of December 31, 2016 and
2015. The Federal Reserve’s fully phased-in guidelines applicable on January 1, 2019 are also summarized.
Total Capital (To
Risk-Weighted
Assets)
Tier 1 Capital (To
Risk-Weighted
Assets)
Common Equity Tier
1 (To Risk-
Weighted Assets)
Leverage Ratio/Tier1
Capital (To Average
Assets)
December 31, 2016
CWB's actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully-phased in
capital conservation buffer (2019)
December 31, 2015
CWB's actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully-phased in
capital conservation buffer (2019)
Contractual Obligations and Off-Balance Sheet Arrangements
12.27%
8.00%
10.00%
10.50%
13.70%
8.00%
10.00%
10.50%
11.04%
6.00%
8.00%
8.50%
12.45%
6.00%
8.00%
8.50%
11.04%
4.50%
6.50%
7.00%
12.45%
4.50%
6.50%
7.00%
10.08%
4.00%
5.00%
N/A
10.38%
4.00%
5.00%
N/A
The Company enters into contracts for services in the ordinary course of business that may require payment for services to be provided in the
future and may contain penalty clauses for early termination of the contracts. To meet the financing needs of customers, the Company has financial
instruments with off-balance sheet risk, including commitments to extend credit and standby letters of credit. The Company does not believe that
these off-balance sheet arrangements have or are reasonably likely to have a material effect on its financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that
such arrangements will not have a future effect.
34
Index
The following table sets forth our significant contractual obligations as of December 31, 2016.
Time deposit maturities
FHLB advances
Other borrowings
Purchase obligations
Operating lease obligations
Total
$
$
244,834 $
25,000
4,000
4,943
7,992
286,769 $
Total
Less Than 1
Year
Payments Due by Period
1 to 3
Years
(dollars in thousands)
79,168 $
-
1,562
1,281
1,980
83,991 $
159,543 $
25,000
800
1,250
1,057
187,650 $
3 to 5
Years
After 5
Years
6,123 $
-
1,638
1,223
1,719
10,703 $
-
-
-
1,189
3,236
4,425
Purchase obligations primarily related to contracts for software licensing and maintenance and outsourced service providers. Off-balance sheet
commitments associated with outstanding letters of credit, commitments to extend credit, and overdraft lines as of December 31, 2016 are
summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown
do not necessarily reflect the actual future cash funding requirements.
Amount of Commitment By Period of Expiration
Commitments to extend credit
Standby letters of credit
Total
Critical Accounting Policies
$
$
82,954 $
-
82,954 $
Total
Commitments
Less Than 1
Year
1 to 3
Years
(dollars in thousands)
51,031 $
-
51,031 $
23,835 $
-
23,835 $
3 to 5
Years
After 5
Years
904 $
-
904 $
7,184
-
7,184
The Notes to Consolidated Financial Statements contain a discussion of our significant accounting policies, including information regarding
recently issued accounting pronouncements, our adoption of such policies and the related impact of their adoption. We believe that certain of
these policies, along with various estimates that we are required to make in recording our financial transactions, are important to have a complete
understanding of our financial position. In addition, these estimates require us to make complex and subjective judgments, many of which include
matters with a high degree of uncertainty. See “Item 8. Financial Statements and Supplementary Data - Note 1. Summary of Significant Accounting
Policies for a discussion of these critical accounting policies and significant estimates.
Liquidity
Liquidity 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. Our liquidity, represented by cash and amounts due from banks, federal funds sold and non-pledged marketable securities, is a result of
our operating, investing and financing activities and related cash flows. In order to ensure funds are available when necessary, on at least a
quarterly basis, we project the amount of funds that will be required, and we strive to maintain relationships with a diversified customer base.
Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. The Company has federal funds
borrowing lines at correspondent banks totaling $20.0 million. In addition, loans and securities are pledged to the FHLB providing $56.8 million in
available borrowing capacity as of December 31, 2016. Loans pledged to the FRB discount window provided $95.1 million in borrowing capacity.
As of December 31, 2016, there were no outstanding borrowings from the FRB.
The Company has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are
available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or
increased loan demand, in a timely and cost effective manner. The most important factor in the preservation of liquidity is maintaining public
confidence that facilitates the retention and growth of core deposits. Ultimately, public confidence is gained through profitable operations, sound
credit quality and a strong capital position. The Company’s liquidity management is viewed from a long-term and short-term perspective, as well as
from an asset and liability perspective. Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and
deposit forecasts to minimize funding risk. The Company has asset/liability committees (“ALCO”) at the Board and Bank management level to
review asset/liability management and liquidity issues.
35
Index
The Company through CWB has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s
eligible loans and securities. Total FHLB advances were $25.0 million and $5.0 million at December 31, 2016 and 2015, respectively, borrowed at fixed
rates. At December 31, 2016, CWB had pledged to FHLB, securities of $31.7 million at carrying value and loans of $161.3 million and had $67.8
million available for additional borrowing. At December 31, 2015, the Company had pledged to FHLB, securities of $30.5 million at carrying value
and loans of $140.0 million, and had $67.8 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. There were no advances
outstanding as of December 31, 2016 and unused borrowing capacity was $95.1 million.
The Company also maintains federal funds purchased lines with a total borrowing capacity of $20.0 million. There was no amount outstanding as of
December 31, 2016 and 2015.
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for
core deposits. The liquidity ratio of the Company was 17% and 20%, at December 31, 2016 and December 31, 2015, respectively. The Company’s
liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and due from banks, deposits in
other financial institutions, available for sale investments, federal funds sold and loans held for sale, divided by total assets.
CWBC’s routine funding requirements primarily consisted of certain operating expenses, preferred and common stock dividends and interest
payments on the other borrowings. CWBC obtains funding to meet its obligations from dividends collected from CWB and has the capability to
issue debt securities. Federal banking laws regulate the amount of dividends that may be paid by a banking subsidiary without prior approval.
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include: lag, repricing, basis and prepayment risk.
Lag risk results from the inherent timing difference between the repricing of the Company’s adjustable rate assets and liabilities. For instance,
certain loans tied to the prime rate index may only reprice on a quarterly basis. However, at a community bank such as CWB, when rates are rising,
funding sources tend to reprice more slowly than the loans. Therefore, for CWB, the effect of this timing difference is generally favorable during a
period of rising interest rates and unfavorable during a period of declining interest rates. This lag can produce some short-term volatility,
particularly in times of numerous prime rate changes.
Repricing risk is caused by the mismatch in the maturities or repricing periods between interest-earning assets and interest-bearing liabilities. If
CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This happens
because loans tend to reprice more quickly than funding sources.
Basis risk is due to item pricing tied to different indices which tend to react differently, however, most of CWB’s variable products are priced off the
prime rate.
Prepayment risk results from borrowers paying down or paying off their loans prior to maturity. Prepayments on fixed-rate products increase in
falling interest rate environments and decrease in rising interest rate environments. A majority of CWB’s loans have adjustable rates and are reset
based on changes in the prime rate resulting in little lag time on the reset. CWB generally has not experienced significant loan prepayments.
The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. In addition, increases in
interest rates may reduce the amount of loan and commitment fees received by CWB.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and
maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as funding
sources. CWB sells mortgage products and can sell a portion of its SBA loan originations. While the Company has some interest rate exposure in
excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. The Company has not used derivative
instruments to help manage risk, but will consider such instruments in the future if the perceived need should arise.
For further discussion regarding the impact to the Company of interest rate changes, see “Item 7A. Quantitative and Qualitative Disclosure about
Market Risk.”
Litigation
See “Part 1. Item 3: Legal Proceedings” beginning on page 11 of this Form 10-K.
36
Index
SUPERVISION AND REGULATION
Introduction
CWBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated and
examined by the Board of Governors of the Federal Reserve System (the “FRB”). In addition to the regulation of the Company by the FRB, CWB is
subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency (“OCC”). The Federal Deposit
Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain prescribed limits. The Company is also subject to jurisdiction of the
Securities and Exchange Commission ("SEC") and to the disclosure and regulatory requirements of the Securities Act and the Securities Exchange
Act, and through the listing of the common stock on the NASDAQ Capital Select Market is subject to the rules of NASDAQ.
Banking is a complex, highly regulated industry. The primary goals of the rules and regulations are to maintain a safe and sound banking system,
protect depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress
and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding
companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by
Management decisions and general economic conditions, but also by the requirements of applicable state and federal statues, regulations and the
policies of various governmental regulatory authorities.
From time to time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting or expanding the scope of
permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change
the laws and regulations governing the operations of banks and bank holding companies are frequently made in Congress and by various bank and
other regulatory agencies. Future changes in the laws, regulations or polices that impact CWBC and CWB cannot necessarily be predicted, but
they may have a material effect on the business and earnings of the Company.
Securities Registration and Listing
CWBC’s common stock is registered with the SEC under the Exchange Act and, therefore, is subject to the information, proxy solicitation, insider
trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act of 1933 (the
“Securities Act”), both administered by the SEC. CWBC is required to file annual, quarterly and other current reports with the SEC. The SEC
maintains an Internet site, http://www.sec.gov, at which CWBC’s filings with the SEC may be accessed. CWBC’s SEC filings are also available on
its website at www.communitywest.com.
CWBC’s common stock is listed on the NASDAQ Capital Market and trade under the symbol “CWBC.” As a company listed on the NASDAQ
Capital Market, CWBC is subject to NASDAQ standards for listed companies. CWBC is also subject to certain provisions of the Sarbanes-Oxley
Act of 2002 (“SOX”), the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank”), and other federal and state laws and regulations that govern financial presentations, corporate
governance requirements for board audit and compensation committees and their members, and disclosure of controls and procedures and internal
control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.
NASDAQ has also adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently
monitor the performance of companies and their directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, Dodd-Frank was signed into law to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-
Frank created a Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to
take control of and liquidate financial firms. Dodd-Frank additionally created an independent federal regulator to administer federal consumer
protection laws. Dodd-Frank is expected to have a significant impact on our business operations as its provisions take effect. Among the
provisions that may affect the Company are the following:
Holding Company Capital Requirements. Dodd-Frank requires the FRB to apply consolidated capital requirements to depository institution
holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred
securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15
billion in assets. Dodd-Frank additionally requires capital requirements to be countercyclical so that the required amount of capital increases in
times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
Deposit Insurance. Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to
$250,000 per depositor, retroactive to January 1, 2009. Dodd-Frank also broadens the base for FDIC insurance assessments. Assessments are now
based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank requires the FDIC to increase the
reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay
dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective July 21, 2011, Dodd-Frank eliminated the
federal statutory prohibition against the payment of interest on business checking accounts.
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Index
Corporate Governance. Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at
their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden
parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The legislation also
authorized the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.
Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of
depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or
not. Dodd-Frank gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Interstate Branching. Dodd-Frank authorized national and state banks to establish branches in other states to the same extent as a bank chartered
by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted
out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Limits on Derivatives. Dodd-Frank prohibits state-chartered banks from engaging in derivatives transactions unless the loans to one borrower
limits of the state in which the bank is chartered takes into consideration credit exposure to derivatives transactions. For this purpose, derivative
transaction includes any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of any interest in, or any
quantitative measure or the occurrence of any event relating to, one or more commodities securities, currencies, interest or other rates, indices or
other assets.
Transactions with Affiliates and Insiders. Dodd-Frank expanded the definition of “affiliate” for purposes of quantitative and qualitative limitations
of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act will
apply Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase
agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with
affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. Dodd-Frank
also prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market
terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.
Consumer Financial Protection Bureau. Dodd-Frank created an independent federal agency called the Consumer Financial Protection Bureau
(“CFPB”), which has been granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection
laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt
Collection Practices Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. CFPB has
examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are
subject to rules promulgated by CFPB but are still examined and supervised by their federal banking regulators for consumer compliance purposes.
CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank
authorized CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s
ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified
mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those
adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws
and regulations.
On February 3, 2017, President Donald Trump issued an executive order designed to reduce the perceived regulatory burdens of the Dodd-Frank
Act. The executive order proclaims that the policy of President Trump’s administration will be to “regulate the United States financial system in a
manner consistent with the following principles of regulation.”
(cid:120)
(cid:120)
(cid:120)
empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build
individual wealth;
prevent taxpayer-funded bailouts;
foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and
market failures, such as moral hazard and information asymmetry;
enable American companies to be competitive with foreign firms in domestic and foreign markets;
advance American interests in international financial regulatory negotiations and meetings;
(cid:120)
(cid:120)
(cid:120) make regulation efficient, effective, and appropriately tailored; and
(cid:120)
restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
President Trump’s order directs the Secretary of the Treasury to consult with the heads of the member agencies of the Financial Stability Oversight
Council on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government
policies promote his administration’s regulatory principles and to identify what actions have been taken, and are currently being taken, to promote
and support these principles.
38
Index
In light of President Trump’s executive order, the Company cannot predict which provisions of the Dodd-Frank Act will be repealed, put in to effect,
delayed or enforced under the current Administration and, therefore, cannot predict the effect, if any, that the Dodd-Frank Act will have on the
Company’s future operations and financial condition.
Financial Institutions Capital Rules
In addition to Dodd-Frank, the international oversight body of the Basel Committee on Banking Supervision, or Basel III, reached agreements that
introduced a minimum common equity tier 1 capital requirement of 4.50 percent, along with a capital conservation buffer of 2.50 percent to bring total
common equity capital requirements to 7.00 percent. The federal banking agencies issued final rules that implemented Basel III and certain other
revisions to the Basel capital framework, as well as the minimum leverage and risk-based capital requirements of Dodd Frank. Federal regulators
periodically propose amendments to the risk-based capital guidelines and the related regulatory framework and consider changes to the capital
standards that could significantly increase the amount of capital needed to meet applicable standards. The timing of adoption, ultimate form and
effect of any such proposed amendments cannot be determined at this time.
The following are among the requirements that were phased in beginning January 1, 2015:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
A new category and a required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a subset of Tier 1
capital limited to common equity;
A minimum non-risk-based leverage ratio is set at 4.00% eliminating a 3.00% exception for higher rated banks;
Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain
deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities;
An additional capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios will be phased in
beginning January 2016 at 0.625% of risk-weighted assets until fully implemented in January 2019. This conservation buffer level
must be met to avoid limitations on the ability to pay dividends, repurchase shares or pay discretionary bonuses;
The risk weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility
commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and
certain mortgage-backed and other securities exposures; and
An additional “countercyclical capital buffer” is required for larger and more complex institutions.
Including the capital conservation buffer of 2.5% above, the regulatory minimum capital ratios established under the final capital rule resulted in the
following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The
countercyclical capital buffer is not applicable to CWB or CWBC.
The final rules also revised the prompt corrective action framework. Under the prompt corrective action requirements, which are designed to
complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level
requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased
from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
Under Dodd Frank, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank
holding company with less than $15 billion in assets.
While the final capital rule sets higher regulatory capital standards for CWBC and CWB, bank regulators may also continue their past policies of
expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the capital rules or more stringent
requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact their net income and return on
equity, restrict the ability to pay dividends and require the raising of additional capital.
39
Index
Final Volcker Rule
In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of Dodd-Frank commonly referred to as the
“Volcker Rule.” Under these rules and subject to certain exceptions, banking entities, including CWBC and CWB, will be restricted from engaging
in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that
are considered “covered funds.” These rules were originally scheduled to become effective on April 1, 2014; however, the FRB granted banking
institutions two additional one-year extensions to conform their ownership interests in and sponsorship of these covered funds. Certain
collateralized loan obligations (“CLO”) securities backed by trust preferred securities were initially defined as covered funds subject to the
investment prohibitions of the final rule. Action taken by the FRB in January 2014 exempted many such securities to address the concern that many
community banks holding such CLO securities may have been required to recognize losses on those securities.
At December 31, 2016, neither CWBC nor CWB held any investment positions which were subject to the Volcker Rule. Therefore, while these new
rules may require CWBC and CWB to conduct certain internal analyses and reporting, we believe that the rules will not require any material changes
in their respective operations or business.
CWBC
General. As a bank holding company, CWBC is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to
regulation by the FRB. According to FRB Policy, CWBC is expected to act as a source of financial strength for CWB, to commit resources to
support it in circumstances where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to periodic examination by the FRB.
CWBC is also required to file periodic reports of its operations and any additional information regarding its activities and those of its subsidiaries as
may be required by the FRB.
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct from CWB. CWBC has the ability to raise capital on its own
behalf or borrow from external sources, CWBC may also obtain additional funds from dividends paid by, and fees charged for services provided to,
CWB. However, regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC.
Transactions with Affiliates and Insiders. CWBC and any subsidiaries it may purchase or organize are deemed to be affiliates of CWB within the
meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans
by CWB to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of
CWB’s capital, in the case of any one affiliate, and is limited to 20% of CWB’s capital, in the case of all affiliates. In addition, transactions between
CWB and other affiliates must be on terms and conditions that are consistent with safe and sound banking practices, in particular, a bank and its
subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent
a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are
secured by marketable collateral of designated amounts. CWBC and CWB are also subject to certain restrictions with respect to engaging in the
underwriting, public sale and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding
company’s executive officers, directors and principal shareholders; any company controlled by any such executive officer, director or shareholder;
or any political or campaign committee controlled by such executive officer, director or principal shareholder. Additionally, such loans or extensions
of credit must comply with loan-to-one-borrower limits; require prior full board approval when aggregate extensions of credit to the person exceed
specified amounts; must be made on substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the
time for comparable transactions with non-insiders; must not involve more than the normal risk of repayment or present other unfavorable features;
and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities. Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly
or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or
substantially all of the assets of another bank; (iii) or merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is
prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to
applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository
institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to
exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has
determined to be “so closely related to banking as to be a proper incident thereto.” CWBC, therefore, is permitted to engage in a variety of banking-
related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities,
including insurance, securities and merchant banking. CWBC has not elected to qualify for these financial services.
40
Index
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the
extension of credit. Thus, for example, CWB may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for
any of the foregoing on the condition that:
(cid:120)
(cid:120)
(cid:120)
the customer must obtain or provide some additional credit, property or services from or to CWB other than a loan, discount, deposit or
trust services;
the customer must obtain or provide some additional credit, property or service from or to CWBC or any subsidiaries; or
the customer must not obtain some other credit, property or services from competitors, except reasonable requirements to assure
soundness of credit extended.
Capital Adequacy. Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If
capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “Supervision and Regulation – CWB –
Regulatory Capital Guidelines,” assign various risk percentages to different categories of assets and capital is measured as a percentage of risk
assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets
and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk
profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate
account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading
activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under
the expanded powers under the Gramm-Leach-Bliley Act, would be expected to maintain capital ratios, including tangible capital positions, well
above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500 allows CWBC to pay a dividend to its shareholders only to the extent
that CWBC has retained earnings and, after the dividend, CWBC’s:
(cid:131)
(cid:131)
assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and
other deferred credits); and
current assets would be at least equal to current liabilities.
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income
or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses
enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations.
The Sarbanes-Oxley Act of 2002 (“SOX”). SOX became effective on July 30, 2002, and represents the most far reaching corporate and accounting
reform legislation since the enactment of the Securities Act and the Exchange Act. SOX is intended to provide a permanent framework that
improves the quality of independent audits and accounting services, improves the quality of financial reporting, strengthens the independence of
accounting firms and increases the responsibility of management for corporate disclosures and financial statements.
SOX provisions are significant to all companies that have a class of securities registered under Section 12 of the Exchange Act, or are otherwise
reporting to the SEC (or the appropriate federal banking agency) pursuant to Section 15(d) of the Exchange Act, including CWBC (collectively,
“public companies”). In addition to SEC rulemaking to implement SOX, NASDAQ has adopted corporate governance rules intended to allow
shareholders to more easily and effectively monitor the performance of companies and directors.
As a result of SOX, and its regulations, CWBC has incurred substantial cost to interpret and ensure compliance with the law and its regulations
including, without limitation, increased expenditures by CWBC in auditors’ fees, attorneys’ fees, outside advisors fees, and increased errors and
omissions insurance premium costs. Future changes in the laws, regulation, or policies that impact CWBC cannot necessarily be predicted and may
have a material effect on the business and earnings of CWBC.
CWB
General. CWB, as a national banking association which is a member of the Federal Reserve System, is subject to regulation, supervision and
regular examination by the OCC and FDIC. CWB’s deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of
these agencies govern most aspects of CWB's business and establish a comprehensive framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established minimum capital standards known as risk-based capital guidelines.
These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based
capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s
assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various
types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with
each category assigned a particular risk weighting from 0% to 150%.
41
Index
The following table sets forth the regulatory capital for CWB and CWBC (on a consolidated basis) at December 31, 2016.
Adequately
Capitalized
Well
Capitalized
CWB
CWBC
(consolidated)
Total risk-based capital
Tier 1 risk-based capital ratio
Common Equity Tier 1
Tier 1 leverage capital ratio
8.00%
6.00%
4.50%
4.00%
10.00%
8.00%
6.50%
5.00%
12.27%
11.04%
11.04%
10.08%
11.80%
10.57%
10.57%
9.64%
Prompt Corrective Action Authority. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems
of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
“well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage
capital ratio of 5% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure;
“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized”;
“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a
leverage capital ratio that is less than 4% (3% under certain circumstances)
“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than
3% or a leverage capital ratio that is less than 3%; and
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required,
banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be
“undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching
restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by
its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes
and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks.
Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as
though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines
that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital
levels to be categorized as “well capitalized,” will be deemed to be “adequately capitalized,” if the bank is subject to a written agreement requiring
that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The
federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such
treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the
federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the
case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through
injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not
granted.
The OCC, as the primary regulator for national banks, also has a broad range of enforcement measures, from cease and desist powers and the
imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
42
Index
Brokered Deposit Restrictions. Well-capitalized banks are not subject to limitations on brokered deposits, while an adequately capitalized bank is
able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such
deposits. Undercapitalized banks are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2016, CWB is
deemed to be “well capitalized” and, therefore, is eligible to accept brokered deposits.
FDIC Insurance and Insurance Assessments. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments
which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II,
III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy,
Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all
significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.
Dodd-Frank requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of
insured deposits by 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository
institutions with total consolidated assets of less than $10 billion. Dodd-Frank also broadens the base for FDIC insurance assessments so that
assessments will be based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its
insured deposits. The FDIC has adopted a new restoration plan to increase the reserve ratio to 1.35% by September 30, 2020 and will issue
additional rules regarding the method to be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with assets less
than $10 billion in assets.
The FDIC may terminate its insurance of deposits if it finds that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Anti-Money Laundering and OFAC Regulation
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist
financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations requires CWB to take steps to prevent the use of it or its
systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective
Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring
adequate training and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”)
significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.
Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client
identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices)
and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money
laundering and terrorist financing.
CWB must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its
effectiveness. The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of
BSA and AML. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and
others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules.
The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following
elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and
exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or
providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially
designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property
in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or
transferred in any manner without a license from OFAC.
Failure of CWB to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could
have serious legal and reputational consequences for the institution. CWB has augmented its systems and procedures to accomplish this. CWB
believes that the ongoing cost of compliance with the BSA, AML and OFAC programs is not likely to be material to CWB
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while
operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in
examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and
moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions or holding company formations.
43
Index
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based
evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to
which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings
range from “outstanding” to a low of “substantial noncompliance.”
CWB had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Safeguarding of Customer Information and Privacy. The FRB and other bank regulatory agencies have adopted guidelines for safeguarding
confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive
written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated
threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer. CWB has adopted a customer information security program to comply with such
requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about
consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures
regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information
except as provided in CWB’s policies and procedures. CWB has implemented privacy policies addressing these restrictions which are distributed
regularly to all existing and new customers of CWB.
Consumer Compliance and Fair Lending Laws. CWB is subject to a number of federal and state laws designed to protect borrowers and promote
lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax Compliance Act
(effective 2013), CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity
Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National
Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of Dodd-Frank.
The enforcement of Fair Lending laws has been an increasing area of focus for regulators, including the FDIC and CFPB.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit
the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated
third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of
certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the GLB Act
and certain state laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their
personal information.
Other Aspects of Banking Law. CWB is also subject to federal statutory and regulatory provisions covering, among other things, security
procedures, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings.
There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk is interest rate risk (“IRR”). To minimize the volatility of net interest income at risk (“NII”) and the impact on
economic value of equity (“EVE”), the Company manages its exposure to changes in interest rates through asset and liability management activities
within guidelines established by the Board’s Asset Liability Committee (“ALCO”). ALCO has the responsibility for approving and ensuring
compliance with asset/liability management policies, including IRR exposure.
To mitigate the impact of changes in interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the Company actively
manages the amounts and maturities. While the Company has some assets and liabilities in excess of five years, it has internal policy limits
designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk, but will
consider such instruments in the future if the perceived need should arise.
The Company uses a simulation model, combined with downloaded detailed information from various application programs, and assumptions
regarding interest rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates.
The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase in interest rates compared to a flat interest
rate scenario. The prior rate environment precluded a decrease in rates for the analysis. The model assumes that the rate change shock occurs
immediately.
44
Index
The following table presents the impact of that analysis in dollars and percentages at December 31, 2016.
Sensitivity of Net Interest Income
Down 100
Base
Interest income
Interest expense
Net interest income
% change
$
$
$
31,115
1,993
29,122
$
-2.5%
Up 100
Interest Rate Scenario (change in basis point from Base)
Up 200
(dollars in thousands)
$
Up 300
$
$
35,485
5,826
29,659
$
-0.7%
37,749
8,334
29,415
$
-1.5%
40,074
10,842
29,232
$
-2.1%
33,188 $
3,318
29,870 $
At December 31, 2015, the following table presents the impact of that analysis in dollars and percentages:
Sensitivity of Net Interest Income
Down 100
Base
Interest income
Interest expense
Net interest income
% change
$
$
$
27,872
1,636
26,236
$
-3.0%
Up 100
Interest Rate Scenario (change in basis point from Base)
Up 200
(dollars in thousands)
$
Up 300
$
$
31,722
3,959
27,763
$
2.7%
33,703
5,245
28,458
$
5.3%
35,753
6,531
29,222
$
8.1%
29,712 $
2,673
27,039 $
Up 400
Up 500
$
42,411
13,350
29,061
$
-2.7%
44,584
15,858
28,726
-3.8%
Up 400
Up 500
$
37,810
7,817
29,993
$
10.9%
39,285
9,103
30,182
11.6%
As of December 31, 2016 the Fed Funds target rate was a range of 0.50% to 0.75% and the prime rate was 3.75%. As of December 31, 2015, the Fed
Funds target rate was a range of 0.25% to 0.50% and the prime rate was 3.50%.
Economic Value of Equity. We measure the impact of market interest rate changes on the net present value of estimated cash flows from our
assets, liabilities and off-balance sheet items, defined as economic value of equity, using a simulation model. This simulation model assesses the
changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase
or decrease (shock) in market interest rates.
At December 31, 2016 and 2015, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the
current guidelines established by us. The following tables show projected change in economic value of equity for this set of rate shocks.
Economic Value of Equity
Down 100
Base
Assets
Liabilities
Net present value
% change
$
$
$
717,826
632,987
84,839
$
5.0%
Down 100
Base
Assets
Liabilities
Net present value
% change
$
$
$
637,662
554,205
83,457
$
-3.7%
Up 100
Interest Rate Scenario (change in basis point from Base)
Up 200
(dollars in thousands)
$
Up 300
$
$
679,315
606,434
72,881
$
-9.8%
664,298
596,260
68,038
$
-15.8%
652,452
586,768
65,684
$
-18.7%
698,123 $
617,359
80,764 $
Economic Value of Equity
Up 100
Interest Rate Scenario (change in basis point from Base)
Up 200
(dollars in thousands)
$
Up 300
$
$
605,770
516,046
89,724
$
3.5%
591,246
497,410
93,836
$
8.3%
580,664
481,266
99,398
$
14.7%
621,530 $
534,882
86,648 $
Up 400
Up 500
$
640,693
577,898
62,795
$
-22.2%
626,206
569,595
56,611
-29.9%
Up 400
Up 500
$
570,127
467,106
103,021
$
18.9%
547,419
442,500
104,919
21.1%
For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity Management - Interest Rate Risk.”
45
Index
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in this Form 10-K begin on page 50 immediately following the index to
consolidated financial statements page to this Form 10-K.
46
Index
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders’
Community West Bancshares
We have audited the accompanying consolidated balance sheets of Community West Bancshares as of December 31, 2016 and 2015, and the related
consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community
West Bancshares as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
/s/ RSM US LLP
Las Vegas, Nevada
March 3, 2017
47
Index
Report of Independent Registered Public Accounting Firm – Ernst & Young LLP
The Board of Directors and Stockholders of Community West Bancshares
We have audited the accompanying consolidated income statement, and statements of comprehensive income, stockholders’ equity, and cash
flows of Community West Bancshares (the Company) for the year ended December 31, 2014. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash
flows of Community West Bancshares for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Los Angeles, California
March 6, 2015
48
Index
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
49
PAGE
47
49
50
51
52
53
54
55
Index
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
Assets:
Cash and due from banks
Federal funds sold
Interest-earning demand in other financial institutions
Cash and cash equivalents
Money market investments
Investment securities - available-for-sale, at fair value; amortized cost of $22,731 at December 31, 2016 and
$23,558 at December 31, 2015
Investment securities - held-to-maturity, at amortized cost; fair value of $9,149 at December 31, 2016 and
$7,399 at December 31, 2015
Federal Home Loan Bank stock, at cost
Federal Reserve Bank stock, at cost
Loans:
Held for sale, at lower of cost or fair value
Held for investment, net of allowance for loan losses of $7,464 at December 31, 2016 and $6,916 at
December 31, 2015
Total loans
Other assets acquired through foreclosure, net
Premises and equipment, net
Other assets
Total assets
Liabilities:
Deposits:
Non-interest-bearing demand
Interest-bearing demand
Savings
Certificates of deposit
Total deposits
Other borrowings
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock — no par value, 20,000,000 shares authorized; 8,096,039shares issued and outstanding at
December 31, 2016 and 8,205,858 at December 31, 2015
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See the accompanying notes.
50
December 31,
2016
2015
(in thousands, except share amounts)
$
$
$
$
2,385 $
16
31,715
34,116
—
22,681
9,002
2,070
1,373
2,768
21
32,730
35,519
99
23,441
7,025
1,886
1,373
61,416
64,488
561,939
623,355
137
3,931
13,907
710,572 $
100,372 $
253,023
14,007
244,834
612,236
29,000
4,000
645,236
41,575
23,790
(29)
65,336
710,572 $
472,058
536,546
198
2,993
12,133
621,213
76,469
250,509
13,690
203,670
544,338
10,500
4,431
559,269
42,355
19,657
(68)
61,944
621,213
Index
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
Interest income:
Loans, including fees
Investment securities and other
Total interest income
Interest expense:
Deposits
Other borrowings
Total interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision for loan losses
Non-interest income:
Other loan fees
Document processing fees
Service charges
Gains from loan sales, net
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Occupancy, net
Professional services
Data processing
Depreciation
Advertising and marketing
FDIC assessment
Stock based compensation
Loan servicing and collection
Net loss (gain) on sales/write-downs of foreclosed real estate and repossessed assets
Loan litigation settlement, net
Other
Total non-interest expenses
Income before provision for income taxes
Provision for income taxes
Net income
Dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
Net income available to common stockholders
Earnings per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Dividends declared per common share
See the accompanying notes.
51
Year Ended December 31,
2016
2014
2015
(in thousands, except per share amounts)
$
$
$
$
$
31,097 $
1,119
32,216
2,851
276
3,127
29,089
(48)
29,137
1,042
496
403
—
312
2,253
14,383
2,264
873
793
678
616
376
338
209
16
—
2,002
22,548
8,842
3,613
5,229
—
—
5,229 $
0.64 $
0.62 $
8,114
8,444
0.135 $
29,139 $
1,083
30,222
2,383
133
2,516
27,706
(2,274)
29,980
1,014
466
372
132
325
2,309
12,904
1,943
993
533
399
466
342
412
395
10
7,095
1,789
27,281
5,008
2,138
2,870
445
(129)
2,554 $
0.31 $
0.30 $
8,203
8,491
0.11 $
27,166
838
28,004
2,663
612
3,275
24,729
(5,135)
29,864
904
394
306
186
407
2,197
12,154
1,833
1,551
570
324
608
338
308
845
(435)
—
1,985
20,081
11,980
4,934
7,046
937
(159)
6,268
0.77
0.75
8,141
8,505
0.04
Index
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), net:
Unrealized income (loss) on securities available-for-sale (AFS), net (tax effect of ($28), $69,
($212) for each respective period presented)
Net other comprehensive income (loss)
Comprehensive income
See the accompanying notes.
52
2016
Year Ended December 31,
2015
(in thousands)
2014
$
5,229 $
2,870 $
7,046
39
39
5,268 $
(99)
(99)
2,771 $
305
305
7,351
$
Index
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock
Common Stock
Shares Amount Shares Amount
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
Stockholders'
Equity
Balance, December 31, 2013:
Net income
Exercise of stock options
Conversion of debentures
Stock based compensation
Preferred stock redemption and discount
Dividends on preferred stock
Dividends on common stock
Other comprehensive income, net
Balance, December 31, 2014:
Net income
Exercise of stock options
Stock based compensation
Preferred stock redemption and discount
Common stock repurchase
Dividends on preferred stock
Dividends on common stock
Other comprehensive (loss), net
Balance, December 31, 2015:
Net income
Exercise of stock options
Stock based compensation
Common stock repurchase
Dividends on common stock
Other comprehensive income, net
Balance, December 31, 2016
See the accompanying notes.
(in thousands)
16 $ 15,600
—
—
—
—
—
—
—
—
(8,586)
(9)
—
—
—
—
—
—
7,014
7
—
—
—
—
—
—
(7,014)
(7)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
-
— $
—
18
318
—
—
—
—
—
8,203
—
7
—
—
(4)
—
—
—
8,206
—
74
—
(184)
—
—
7,867 $ 40,165 $
—
54
1,430
308
—
—
—
—
41,957
—
14
412
—
(28)
—
—
—
42,355
—
220
338
(1,338)
—
—
8,096 $ 41,575 $
12,065 $
(274) $
7,046
—
—
—
—
—
—
—
159
—
(937)
—
(328)
—
—
305
18,005
31
2,870
—
—
—
—
—
129
—
—
—
(445)
—
(902)
—
—
(99)
19,657
(68)
5,229
—
—
—
—
—
—
—
(1,096)
—
39
—
(29) $ 23,790 $
67,556
7,046
54
1,430
308
(8,427)
(937)
(328)
305
67,007
2,870
14
412
(6,885)
(28)
(445)
(902)
(99)
61,944
5,229
220
338
(1,338)
(1,096)
39
65,336
53
Index
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Provision (credit) for loan losses
Depreciation
Stock-based compensation
Deferred income taxes
Net (accretion) amortization of discounts and premiums for investment securities
(Gains)/Losses on:
Sale of repossessed assets, net
Sale of loans, net
Sale of assets, net
Loans originated for sale and principal collections, net
Changes in:
Other assets
Other liabilities
Servicing assets, net
Net cash provided by operating activities
Cash flows from investing activities:
Principal pay downs and maturities of available-for-sale securities
Purchase of available-for-sale securities
Purchases of securities held-to-maturity
Proceeds from principal pay downs and maturities of securities held-to-maturity
Loan originations and principal collections, net
Purchase of bank owned life insurance
(Purchase) liquidation of restricted stock, net
Net increase in interest-bearing deposits in other financial institutions
Purchase of premises and equipment, net
Proceeds from sale of other real estate owned and repossessed assets, net
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase (decrease) in borrowings
Exercise of stock options
Cash dividends paid on common stock
Common stock repurchase
Redemption of preferred stock
Cash dividends paid on preferred stock
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
Supplemental disclosure:
Cash paid during the period for:
Interest
Income taxes
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net
Conversion of debentures
See the accompanying notes.
$
$
54
2016
Year Ended December 31,
2015
(in thousands)
2014
$
5,229 $
2,870 $
7,046
(48)
678
338
(409)
(82)
16
—
—
3,072
(551)
(431)
58
7,870
10,730
(9,810)
(2,697)
709
(90,183)
(900)
(184)
99
(1,616)
395
(93,457)
67,898
18,500
220
(1,096)
(1,338)
—
—
84,184
(1,403)
35,519
34,116 $
3,072 $
5,250
350
—
(2,274)
399
412
(21)
(12)
10
(132)
32
2,403
1,986
1,283
56
7,012
9,981
(11,370)
—
1,407
(49,896)
—
(170)
—
(371)
538
(49,881)
67,254
500
14
(902)
(28)
(6,885)
(524)
59,429
16,560
18,959
35,519 $
2,436 $
675
609
—
(5,135)
324
308
1,222
51
(435)
(186)
—
(2,174)
4,407
814
197
6,439
3,927
(7,132)
—
1,190
(19,740)
—
154
—
(394)
5,213
(16,782)
40,949
(20,034)
54
(328)
—
(8,427)
(2,390)
9,824
(519)
19,478
18,959
3,323
3,101
1,984
1,408
Index
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full service
banking through its wholly-owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”). These entities are collectively referred to
herein as the “Company”.
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States
(“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiary are
included in these Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and fair value of investment securities
available for sale. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of
Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended December 31, 2015 and 2014 have been reclassified to
conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Business Segments
Reportable business segments are determined using the “management approach” and are intended to present reportable segments consistent with
how the chief operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of
December 31, 2016, 2015 and 2014, the Company had only one reportable business segment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of
clearing), and federal funds sold. Cash flows from loans originated by the Company and deposits are reported net.
The Company maintains amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
Cash Reserve Requirement
Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in cash or with the
Federal Reserve Bank (“FRB”). The amount of the reserve varies by bank as the bank is permitted to meet this requirement by maintaining the
specified amount as an average balance over a two-week period. The total reserve balance requirement was approximately $1.6 million and $1.0
million as of December 31, 2016 and 2015.
Investment Securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or trading. The appropriate classification is initially
decided at the time of purchase. Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to
hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at
amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is
considered a maturity for purposes of classification and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of
AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired
securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values
of trading securities are reported in non-interest income. Securities classified as AFS are debt securities the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors,
including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in
credit quality, and regulatory capital considerations. The Company does not currently have any investment securities classified as trading.
55
Index
Interest income is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of
premiums paid over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are
considered in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1) the length of time and the extent to which the
fair value has been less than amortized cost, 2) the financial condition and near term prospects of the issuer, 3) the impact of changes in market
interest rates, and 4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated
recovery in fair value and it is not more likely than not the Company would be required to sell the security.
Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when
identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend
to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis,
the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) market or other factors is
recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost.
For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the
other than temporary impairment is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the
balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and
accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is
recognized on a cash basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
The Company’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”) system and maintains an investment in capital stock of the
FHLB. The bank also maintains an investment in FRB stock. These investments are considered equity securities with no actively traded market.
These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is
reported in interest income. We conduct a periodic review and evaluation of our FHLB stock to determine if any impairment exists.
Servicing Assets
The guaranteed portion of certain Small Business Administration (“SBA”) loans can be sold into the secondary market. Servicing assets are
recognized as separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of,
estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment experience in estimating the
expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based
upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-
by-loan basis and aggregated by predominate risk characteristics. The initial servicing asset and resulting gain on sale are calculated based on the
difference between the best actual par and premium bids on an individual loan basis.
Loans Held For Sale
Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an
aggregate basis. Valuation adjustments, if any are recognized through a valuation allowance by charges to lower of cost or fair value provision.
Loans held for sale are mostly comprised of SBA and commercial agriculture. In 2015, the Company exited from originating single family residential
loans for sale. The Company did not incur any lower of cost or fair value provision in the years ended December 31, 2016, 2015 and 2014.
Loans Held for Investment and Interest and Fees from Loans
Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off. Unearned income
includes deferred loan origination fees reduced by loan origination costs. Unearned income on loans is amortized to interest income over the life of
the related loan using the level yield method.
Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the
origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest
income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the
contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest
income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused
line of credit and fees related to standby letters of credit are recognized over the commitment period.
56
Index
When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on
purchased loans are accounted for though interest income.
Nonaccrual loans: For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must
determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases
recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of
principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days
delinquent if they are well secured by collateral and in the process of collection. Other personal loans are typically charged off no later than 120
days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period
in which the status is changed. Subsequent payments received from the customer are applied to principal and no further interest income is
recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as
contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining
principal balance is not in doubt.
Impaired loans: A loan is considered impaired when, based on current information; it is probable that the Company will be unable to collect the
scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments.
Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management
considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's
prior payment record and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company
uses the fair value of collateral method to measure impairment. The collateral-dependent loans that recognize impairment are charged down to the
fair value less costs to sell. All other loans are measured for impairment either based on the present value of future cash flows or the loan’s
observable market price.
Troubled debt restructured loan (“TDR”): A TDR is a loan on which the Company, for reasons related to the borrower’s financial difficulties,
grants a concession to the borrower that the Company would not otherwise consider. These concessions included but are not limited to term
extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are
predominately term extensions. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may
no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by
the restructuring agreement.
Allowance for Loan Losses and Provision for Loan Losses
The Company maintains a detailed, systematic analysis and procedural discipline to determine the amount of the allowance for loan losses (“ALL”).
The ALL is based on estimates and is intended to be appropriate to provide for probable losses inherent in the loan portfolio. This process
involves deriving probable loss estimates that are based on migration analysis and historical loss rates, in addition to qualitative factors that are
based on management’s judgment. The migration analysis and historical loss rate calculations are based on the annualized loss rates utilizing a
twelve-quarter loss history. Migration analysis is utilized for the Commercial Real Estate (“CRE”), Commercial, Commercial Agriculture, Small
Business Administration (“SBA”), Home Equity Line of Credit (“HELOC”), Single Family Residential, and Consumer portfolios. The historical loss
rate method is utilized primarily for the Manufactured Housing portfolio. The migration analysis takes into account the risk rating of loans that are
charged off in each loan category. Loans that are considered Doubtful are typically charged off. The following is a description of the
characteristics of loan ratings. Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual
basis.
Outstanding – This is the highest quality rating that is assigned to any loan in the portfolio. These loans are made to the highest quality
borrowers with strong financial statements and unquestionable repayment sources. Collateral securing these types of credits are generally
cash deposits in the bank or marketable securities held in custody.
Good – Loans rated in this category are strong loans, underwritten well, that bear little risk of loss to the Company. Loans in this category are
loans to quality borrowers with very good financial statements that present an identifiable strong primary source and good secondary source
of repayment. Generally, these credits are well collateralized by good quality and liquid assets or low loan to value market real estate.
Pass - Loans rated in this category are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in
this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary
source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure
income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment.
Watch – Acceptable credit that requires a temporary increase in attention by management. This can be caused by declines in sales, margins,
liquidity or working capital. Generally the primary weakness is lack of current financial statements and industry issues.
Special Mention - A Special Mention loan has potential weaknesses that require management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution's credit position at some future
date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
57
Index
Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the
collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due. They are
characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.
Doubtful - A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may
work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be
determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional
collateral and refinancing plans.
Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable loans is not warranted.
This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer
writing off this loan even though partial recovery may be realized in the future. Losses are taken in the period in which they are considered
uncollectible.
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans.
The allowance is charged for losses when management believes that full recovery on the loan is unlikely. The following is the Company’s policy
regarding charging off loans.
Commercial, CRE and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible. A loan is considered
impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or
interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays
or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged-down to the fair value of the collateral, if, based
on a current assessment of the value, an apparent deficiency exists. In the event there is no perceived equity, the loan is charged-off in full.
Unsecured loans which are delinquent over 90 days are also charged-off in full.
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which
principal or interest is due and unpaid for 90 days, are evaluated for impairment. Loan balances are charged-off to the fair value of the property, less
estimated selling costs, if, based on a current appraisal, an apparent deficiency exists. In the event there is no perceived equity, the loan is
generally fully charged-off.
Consumer Loans
All consumer loans (excluding real estate mortgages, HELOCs and savings secured loans) are charged-off or charged-down to net recoverable
value before becoming 120 days or five payments delinquent.
The ALL calculation for the different loan portfolios is as follows:
(cid:120)
Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis
combined with risk rating is used to determine the required ALL for all non-impaired loans. In addition, the migration results are adjusted
based upon qualitative factors that affect the specific portfolio category. Reserves on impaired loans are determined based upon the
individual characteristics of the loan.
(cid:120) Manufactured Housing – The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.
In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.
The Company evaluates and individually assesses for impairment loans classified as substandard or doubtful in addition to loans either on
nonaccrual, considered a TDR or when other conditions exist which lead management to review for possible impairment. Measurement of
impairment on impaired loans is determined on a loan-by-loan basis and in total establishes a specific reserve for impaired loans. The amount of
impairment is determined by comparing the recorded investment in each loan with its value measured by one of three methods:
(cid:120)
(cid:120)
The expected future cash flows are estimated and then discounted at the effective interest rate.
The value of the underlying collateral net of selling costs. Selling costs are estimated based on industry standards, the Company’s actual
experience or actual costs incurred as appropriate. When evaluating real estate collateral, the Company typically uses appraisals or
valuations, no more than twelve months old at time of evaluation. When evaluating non-real estate collateral securing the loan, the
Company will use audited financial statements or appraisals no more than twelve months old at time of evaluation. Additionally, for both
real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
58
Index
(cid:120)
The loan’s observable market price.
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in
accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
The Company determines the appropriate ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior
month are reflected in the current period in determining the appropriate ALL and adjusted as deemed necessary. The review of the appropriateness
of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size and composition of the loan
portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental
conditions that may affect the borrowers' ability to pay and/or the value of the underlying collateral. Additional factors considered include:
geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience. These estimates depend
on the outcome of future events and, therefore, contain inherent uncertainties.
Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the
loan pools is based on changes in any of the following factors:
Concentrations of credit
International risk
Trends in volume, maturity, and composition of loans
(cid:120)
(cid:120)
(cid:120)
(cid:120) Volume and trend in delinquency, nonaccrual, and classified assets
Economic conditions
(cid:120)
(cid:120) Geographic distance
Policy and procedures or underwriting standards
(cid:120)
Staff experience and ability
(cid:120)
(cid:120) Value of underlying collateral
(cid:120)
(cid:120)
Competition, legal, or regulatory environment
Results of outside exams and quality of loan review and Board oversight
Off Balance Sheet and Credit Exposure
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They
involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be
experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower,
which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide
for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each
customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan
collateral.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its off-balance sheet obligations in determining an
estimate of losses inherent in these contractual obligations. The estimate for loan losses on off-balance sheet instruments is included within other
liabilities and the charge to income that establishes this liability is included in non-interest expense.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are amortized over the terms of the leases or the estimated useful
lives of the improvements, whichever is shorter. Generally, the estimated useful lives of other items of premises and equipment are as follows:
Building and improvements
Furniture and equipment
Electronic equipment and software
Years
31.5
5 – 10
3 – 5
59
Index
Foreclosed Real Estate and Repossessed Assets
Foreclosed real estate and other repossessed assets are recorded at fair value at the time of foreclosure less estimated costs to sell. Any excess of
loan balance over the fair value less estimated costs to sell of the other assets is charged-off against the allowance for loan losses. Any excess of
the fair value less estimated costs to sell over the loan balance is recorded as a loan loss recovery to the extent of the loan loss previously charged-
off against the allowance for loan losses; and, if greater, recorded as a gain on foreclosed assets. Subsequent to the legal ownership date, the
Company periodically performs a new valuation and the asset is carried at the lower of carrying amount or fair value less estimated costs to sell.
Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.
Income Taxes
The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable
amounts that have been recognized in the consolidated financial statements. Due to tax regulations, certain items of income and expense are
recognized in different periods for tax return purposes than for financial statement reporting. These items represent “temporary differences.”
Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets may not be realized. Any interest or penalties assessed by the taxing
authorities is classified in the financial statements as income tax expense. Deferred tax assets are included in other assets on the consolidated
balance sheets.
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of
negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required
to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at
the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes a more likely than not threshold for the
financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
Bank Owned Life Insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other non-interest income in the consolidated income
statements. The cash surrender value of the underlying policies was $4.3 million and $3.3 million as of December 31, 2016 and 2015, respectively.
There are no loans offset against cash surrender values, and there are no restrictions as to the use of proceeds.
Fair Value of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value
Measurements and Disclosures (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure
of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the measurement
date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use
in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are
inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based
on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
(cid:120)
(cid:120)
(cid:120)
Level 1— Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities.
Level 2— Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or
indirectly in the market.
Level 3— Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These
unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques may include use of discounted cash flow models and similar techniques.
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models
or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of
judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value
hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair
value measurement in its entirety.
60
Index
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an
entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions
that market participants would use to estimate the fair value of the financial instrument at the measurement date.
FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in
any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily
indicative of the amounts the Company could have realized in a sales transaction at December 31, 2016 or 2015. The estimated fair value amounts
for December 31, 2016 and 2015 have been measured as of period-end, and have not been reevaluated or updated for purposes of these
consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the
reporting date may be different than the amounts reported at the period-end.
The information presented in Note 15, “Fair Value Measurement,” should not be interpreted as an estimate of the fair value of the entire Company
since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s
disclosures and those of other companies or banks may not be meaningful.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.
Money market investments
The carrying amounts reported in the consolidated balance sheets for money market investments approximate their fair value.
Investment securities
The fair value of Farmer Mac class A stock is based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.
The fair value of other investment securities were determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes
observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are
generally categorized as Level 2 in the fair value hierarchy.
FRB and FHLB stock
CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintain an investment in FRB stock.
These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a
periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair
value hierarchy.
Loans
Fair value for loans is estimated based on discounted cash flows using interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value
based on a third party independent valuation. As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values of
impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.
Deposit liabilities
The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-
rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount
rate that approximates the prevailing rates offered to depositors as of the measurement date. The fair value measurement of deposit liabilities is
categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses, based on the market rates for similar types of
borrowing arrangements. The other borrowings have been categorized as Level 3 in the fair value hierarchy. The FHLB advances have been
categorized as Level 2 in the fair value hierarchy.
61
Index
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently
charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the
net income (loss) available to common shareholders. Diluted earnings per share include the effect of all dilutive potential common shares for the
period. Potentially dilutive common shares include stock options and warrants.
Recent Accounting Pronouncements
In May 2014, the FASB issued guidance codified within ASU 2014-09, “Revenue Recognition - Revenue from Contracts with Customers,” which
amends the guidance in former Topic 605, Revenue Recognition. The new revenue recognition standard will supersede virtually all revenue
guidance in U.S. GAAP, including industry specific guidance. The guidance in this Update affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope
of other standards. ASU 2014-09 is effective for the Company for annual reporting periods beginning after December 15, 2016. In August 2015, this
effective date was extended for the Company to December 15, 2017. The Company may elect to apply the amendments of this Update using one of
the following two methods: 1) retrospectively to each prior reporting period presented or 2) retrospectively with the cumulative effect of initially
applying this Update recognized at the date of initial application. The Company has made significant progress in evaluating the impact of the new
standard on our revenue sources, and continues to evaluate its effect on our financial statement disclosures. A preliminary evaluation including
the selection of an adoption method is expected to be completed by the end of the first part of 2017. The Company believes it is following an
appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption of the standard effective the beginning of 2018 and
does not expect the adoption of this standard to have a material impact on the Company’s Consolidated Financial Statements.
In January 2016, the FASB issued guidance codified within ASU 2016-01, “Financial Instruments – Overall, Subtopic 825-10: Recognition and
Measurement of Financial Assets and Financial Liabilities,” which amends certain guidance on classification and measurement of financial
instruments. The update is intended to enhance the reporting model for financial instruments to provide users of financial instruments with more
decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments.
ASU 2016-01 is effective for the Company for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the
impact of the provisions in this standard on the Company’s Consolidated Financial Statements. The adoption of this standard is not anticipated to
have a material impact on the Company’s Consolidated Financial Statements.
In February 2016, the FASB amended its standards with respect to the accounting for leases. The amended guidance serves to replace all current
U.S. GAAP guidance on this topic and requires that an operating lease be recognized on the statement of financial condition as a “right-to-use”
asset along with a corresponding liability representing the rent obligation. Key aspects of current lessor accounting remain unchanged from
existing guidance. This standard is expected to result in an increase to assets and liabilities recognized and, therefore, increase risk-weighted assets
for regulatory capital purposes. The guidance requires the use of the modified retrospective transition approach for existing leases that have not
expired before the date of initial application and will become effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. The standard is effective for the Company as of January 1, 2019. The Company is currently evaluating the impact of the
amended guidance on the Company’s Consolidated Financial Statements and has not yet determined the effect of the standard on our ongoing
financial reporting.
In March 2016, the FASB issued update guidance codified within ASU-2016-09, “Compensation – Stock Compensation (Topic 718), Improvements
to Employee Share-Based Payment Accounting,” which amends the guidance on certain aspects of share-based payments to employees. The new
guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. The
guidance requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning
of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2017. The Company is currently
evaluating the impact of the amended guidance on the Company’s Consolidated Financial Statements. The adoption of this standard is not
anticipated to have a material impact on the Company’s Consolidated Financial Statements.
In June of 2016, the FASB issued update guidance codified within ASU-2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement
of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that
delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The guidance requires the
use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which
the guidance is adopted. The standard is effective for the Company as of January 1, 2020. The Company is currently evaluating the impact of the
amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.
62
Index
2.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as follows:
Securities available-for-sale
U.S. government agency notes
U.S. government agency collateralized mortgage obligations ("CMO")
Equity securities: Farmer Mac class A stock
Total
Securities held-to-maturity
U.S. government agency mortgage backed securities ("MBS")
Total
Securities available-for-sale
U.S. government agency notes
U.S. government agency collateralized mortgage obligations ("CMO")
Equity securities: Farmer Mac class A stock
Total
Securities held-to-maturity
U.S. government agency mortgage backed securities ("MBS")
Total
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair
Value
Amortized
Cost
5,634 $
17,031
66
22,731 $
(in thousands)
- $
48
49
97 $
(62) $
(85)
-
(147) $
5,572
16,994
115
22,681
9,002 $
9,002 $
298 $
298 $
(151) $
(151) $
9,149
9,149
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Fair
Value
Amortized
Cost
11,257 $
12,235
66
23,558 $
(in thousands)
5 $
54
-
59 $
(115) $
(58)
(3)
(176) $
11,147
12,231
63
23,441
7,025 $
7,025 $
374 $
374 $
- $
- $
7,399
7,399
$
$
$
$
$
$
$
$
At December 31, 2016 and 2015, $31.7 million and $30.5 million of securities at carrying value, respectively, were pledged to the Federal Home Loan
Bank (“FHLB”), as collateral for current and future advances.
The Company had no investment security sales in 2016 or 2015.
The maturity periods and weighted average yields of investment securities at December 31, 2016 and 2015 were as follows:
Less than One Year
Amount Yield
One to Five Years
Amount Yield
Securities available-for-sale
U.S. government agency
December 31, 2016
Five to Ten Years
Amount Yield
(dollars in thousands)
Over Ten Years
Amount Yield
Total
Amount Yield
notes
$
1,973
2.6% $
1,963
0.8% $
1,636
1.3% $
-
-
$
5,572
1.6%
U.S. government agency
CMO
Farmer Mac class A stock
Total
-
-
1,973
$
-
-
2.6% $
2,063
-
4,026
1.9% 11,827
-
1.4% $ 13,463
-
1.1%
-
1.1% $
3,104
-
3,104
1.5% 16,994
115
1.5% $ 22,681
-
1.2%
-
1.3%
Securities held-to-maturity
U.S. government agency
MBS
Total
$
$
-
-
-
-
$
$
797
797
5.0% $
5.0% $
5,531
5,531
3.2% $
3.2% $
2,674
2,674
2.5% $
2.5% $
9,002
9,002
3.2%
3.2%
63
Index
Less than One
Year
Amount Yield
One to Five Years
Amount Yield
Securities available-for-sale
U.S. government agency
December 31, 2015
Five to Ten Years
Amount Yield Amount Yield Amount Yield
(dollars in thousands)
Over Ten Years
Total
notes
$
8,957
2.9% $
-
-
$
2,190
0.9% $
-
-
$ 11,147
2.5%
U.S. government agency
CMO
Farmer Mac class A stock
Total
-
-
8,957
$
-
-
2.9% $
4,337
-
4,337
1.3%
-
1.3% $
4,527
-
6,717
0.7%
-
0.8% $
3,367
-
3,367
1.2% 12,231
63
1.2% $ 23,441
-
1.0%
-
1.7%
Securities held-to-maturity
U.S. government agency
MBS
Total
$
$
-
-
-
-
$
$
1,746
1,746
3.6% $
3.6% $
5,279
5,279
3.1% $
3.1% $
-
-
-
-
$
$
7,025
7,025
3.2%
3.2%
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
Securities available for sale
Due in one year or less
After one year through five years
After five years through ten years
After ten years
Farmer Mac class A stock
Securities held to maturity
Due in one year or less
After one year through five years
After five years through ten years
After ten years
December 31,
2016
2015
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
$
$
$
1,995 $
4,027
13,508
3,135
66
22,731 $
- $
797
5,531
2,674
9,002 $
(in thousands)
1,973 $
4,026
13,463
3,104
115
22,681 $
- $
864
5,762
2,523
9,149 $
9,053 $
4,335
6,713
3,391
66
23,558 $
- $
1,746
5,279
-
7,025 $
8,957
4,337
6,717
3,367
63
23,441
-
1,888
5,511
-
7,399
Actual maturities may differ from contractual maturities as borrowers or issuers have the right to prepay or call the investment securities. Changes
in interest rates may also impact prepayments.
The following tables show all securities that are in an unrealized loss position:
December 31, 2016
Less Than Twelve Months
More Than Twelve Months
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale
U.S. government agency notes
U.S. government agency CMO
Equity securities: Farmer Mac class A
stock
Securities held-to-maturity
U.S. Government-agency MBS
Total
$
$
$
$
29 $
35
-
64 $
151 $
151 $
(in thousands)
33 $
50
1,636 $
1,601
-
83 $
- $
- $
3,237 $
- $
- $
62 $
85
-
147 $
151 $
151 $
5,572
9,531
-
15,103
3,312
3,312
3,936 $
7,930
-
11,866 $
3,312 $
3,312 $
64
Index
December 31, 2015
Less Than Twelve Months
More Than Twelve Months
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale
U.S. government agency notes
U.S. government agency CMO
Equity securities: Farmer Mac class A
stock
Securities held-to-maturity
U.S. Government-agency MBS
Total
$
$
$
$
48 $
9
-
57 $
- $
- $
7,224 $
1,654
-
8,878 $
- $
- $
(in thousands)
67 $
49
3
119 $
- $
- $
1,924 $
1,945
63
3,932 $
- $
- $
115 $
58
3
176 $
- $
- $
9,148
3,599
63
12,810
-
-
As of December 31, 2016 and 2015, there were 17 and nine securities, respectively, in an unrealized loss position. Declines in the fair value of held-
to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other than temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the
fair value has been less than cost (ii) the financial condition and near-term prospects of the issuer and (iii) the Company’s intent to sell an impaired
security and if it is not more likely than not it will be required to sell the security before the recovery of its amortized basis.
The unrealized losses are primarily due to increases in market interest rates over the yields available at the time the underlying securities were
purchased. The fair value is expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2016
and 2015, management believes the impairments detailed in the table above are temporary and no other than temporary impairment loss has been
realized in the Company’s consolidated income statements.
3. LOAN HELD FOR SALE
SBA and Agriculture Loans
As of December 31, 2016 and 2015, the Company had approximately $26.5 million and $34.3 million, respectively, of SBA loans included in loans held
for sale. As of December 31, 2016 and 2015, the principal balance of SBA loans serviced for others was $14.2 million and $18.7 million, respectively.
The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops,
equipment and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry
loan program.
As of December 31, 2016 and 2015, the Company had $34.9 million and $30.2 million of USDA loans included in loans held for sale, respectively. As
of December 31, 2016 and 2015, the principal balance of USDA loans serviced for others was $1.2 million and $1.4 million, respectively.
65
Index
4. LOANS HELD FOR INVESTMENT
The composition of the Company’s loans held for investment loan portfolio follows:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Allowance for loan losses
Deferred (fees) costs, net
Discount on SBA loans
Total loans held for investment, net
December 31,
2016
2015
(in thousands)
$
$
194,222 $
272,142
70,369
10,164
10,292
12,750
87
570,026
(7,464)
(453)
(170)
561,939 $
177,891
179,491
77,349
13,744
10,934
19,073
123
478,605
(6,916)
560
(191)
472,058
The following tables present the contractual aging of the recorded investment in past due held for investment loans by class of loans:
Current
30-59 Days*
Past Due
60-89 Days*
Past Due
December 31, 2016
Over 90
Days*
Past Due
(in thousands)
Total
Past Due
Total
Recorded
Investment
Over 90 Days
and Accruing
Manufactured housing $
Commercial real estate:
Commercial real
estate
SBA 504 1st trust
deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
$
194,058 $
164 $
- $
- $
164 $
194,222 $
214,389
23,879
3,167
30,707
70,368
10,143
10,292
12,750
87
569,840 $
-
-
-
-
1
-
-
-
-
165 $
-
-
-
-
-
21
-
-
-
21 $
-
-
-
-
-
-
-
-
- $
-
214,389
-
-
-
1
21
-
-
-
186 $
23,879
3,167
30,707
70,369
10,164
10,292
12,750
87
570,026 $
-
-
-
-
-
-
-
-
-
-
-
* Table reports past dues based on Call Report definitions of number of payments past due.
66
Index
Manufactured housing $
Commercial real estate:
Commercial real
estate
SBA 504 1st trust
deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
$
December 31, 2015
Current
30-59 Days*
Past Due
60-89 Days*
Past Due
Over 90 Days*
Past Due
(in thousands)
Total
Past Due
Total
Recorded
Investment
Over 90 Days
and Accruing
177,480 $
- $
372 $
39 $
411 $
177,891 $
138,004
25,099
2,895
12,016
77,305
13,743
10,934
19,073
123
476,672 $
-
-
-
-
-
1
-
-
-
1 $
-
612
612
138,616
-
-
402
-
-
-
-
774 $
463
-
-
44
-
-
-
-
1,158 $
463
-
402
44
1
-
-
-
1,933 $
25,562
2,895
12,418
77,349
13,744
10,934
19,073
123
478,605 $
-
-
-
-
-
-
-
-
-
-
-
* Table reports past dues based on Call Report definitions of number of payments past due.
Allowance for Loan Losses
The following table summarizes the changes in the allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Net recoveries
Provision (credit)
Ending balance
2016
December 31,
2015
(in thousands)
2014
$
$
6,916 $
(245)
841
596
(48)
7,464 $
7,877 $
(326)
1,639
1,313
(2,274)
6,916 $
12,208
(766)
1,570
804
(5,135)
7,877
As of December 31, 2016 and 2015, the Company had reserves for credit losses on undisbursed loans of $125,000 and $61,000 which were included
in Other liabilities.
67
Index
The following tables summarize the changes in the allowance for loan losses by portfolio type:
For the Year Ended December 31,
Manufactured
Housing
Commercial
Real Estate Commercial
HELOC
Single Family
Real Estate Consumer
Total
2016
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
2015
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
2014
Beginning balance
Charge-offs
Recoveries
Net (charge-offs)
recoveries
Provision (credit)
Ending balance
$
$
$
$
$
$
3,525 $
(123)
128
5
(1,329)
2,201 $
4,032 $
(297)
205
(92)
(415)
3,525 $
5,114 $
(543)
143
(400)
(682)
4,032 $
1,853 $
-
132
132
1,722
3,707 $
1,459 $
-
545
545
(151)
1,853 $
939 $
-
136
136
166
1,241 $
986 $
-
422
422
(469)
939 $
SBA
(in thousands)
451 $
(121)
266
145
(490)
106 $
1,066 $
-
454
454
(1,069)
451 $
2,552 $
(16)
857
841
(1,934)
1,459 $
2,064 $
-
149
1,951 $
(171)
393
149
(1,227)
986 $
222
(1,107)
1,066 $
43 $
-
86
86
(29)
100 $
140 $
-
10
10
(107)
43 $
280 $
-
24
24
(164)
140 $
103 $
-
93
93
(87)
109 $
192 $
(29)
3
(26)
(63)
103 $
245 $
(36)
4
(32)
(21)
192 $
2 $
(1)
-
(1)
(1)
- $
2 $
-
-
-
-
2 $
2 $
-
-
-
-
2 $
6,916
(245)
841
596
(48)
7,464
7,877
(326)
1,639
1,313
(2,274)
6,916
12,208
(766)
1,570
804
(5,135)
7,877
The following tables present impairment method information related to loans and allowance for loan losses by loan portfolio segment:
Manufactured
Housing
Commercial
Real Estate Commercial SBA HELOC
Single Family
Real Estate Consumer
Total
Loans
Loans Held for Investment as of December 31,
2016:
Recorded Investment:
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
Unpaid Principal Balance
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
Related Allowance for Credit Losses
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
$
$
$
$
$
$
(in thousands)
6,065 $
2,846
1,112 $
-
3,749 $
70 $
31 1,067
45 $
328
8,911
185,311
194,222 $
1,112
271,030
272,142 $
373
3,780 1,137
66,589 9,027
9,919
70,369 $10,164 $ 10,292 $
6,133 $
4,369
1,253 $
-
3,749 $
70 $
31 1,538
57 $
348
10,502
185,311
195,813 $
1,253
271,030
272,283 $
405
3,780 1,608
66,589 9,027
9,919
70,369 $10,635 $ 10,324 $
548 $
-
548
1,653
2,201 $
17 $
-
17
3,690
3,707 $
68
165 $
-
- $
-
1 $
-
165
1,076
1,241 $
-
106
106 $
1
99
100 $
2,039 $
191
2,230
10,520
12,750 $
2,039 $
226
2,265
10,520
12,785 $
28 $
-
28
81
109 $
- $ 13,080
4,463
-
- 17,543
87 552,483
87 $570,026
- $ 13,301
6,512
-
- 19,813
87 552,483
87 $572,296
- $
-
-
-
- $
759
-
759
6,705
7,464
Index
Manufactured
Housing
Commercial
Real Estate Commercial SBA HELOC
Single Family
Real Estate Consumer
Total
Loans
Loans Held for Investment as of December 31,
2015:
Recorded Investment:
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
Unpaid Principal Balance
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
Related Allowance for Credit Losses
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for
impairment
Loans collectively evaluated for impairment
Total loans held for investment
$
$
$
$
$
$
(in thousands)
4,914 $
3,672
376 $
2,247
2,966 $ 1,695 $
44 1,052
19 $
294
8,586
169,305
177,891 $
2,623
176,868
179,491 $
313
3,010 2,747
74,339 10,997 10,621
77,349 $13,744 $ 10,934 $
4,964 $
3,975
439 $
2,734
2,966 $ 1,909 $
50 1,553
19 $
309
8,939
169,305
178,244 $
3,173
176,868
180,041 $
3,016 3,462
328
74,339 10,997 10,621
77,355 $14,459 $ 10,949 $
483 $
-
483
3,042
3,525 $
3 $
-
3
1,850
1,853 $
45 $
-
25 $
-
45
894
939 $
25
426
451 $
- $
-
-
43
43 $
1,970 $
282
2,252
16,821
19,073 $
1,970 $
352
2,322
16,821
19,143 $
17 $
-
17
86
103 $
- $ 11,940
7,591
-
- 19,531
123 459,074
123 $478,605
- $ 12,267
8,973
-
- 21,240
123 459,074
123 $480,314
- $
-
-
2
2 $
573
-
573
6,343
6,916
Included in impaired loans are $1.0 million and $2.2 million of loans guaranteed by government agencies at December 31, 2016 and 2015,
respectively. A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In
certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when
applicable in the table above as “Impaired loans without specific valuation allowance under ASC 310.” The valuation allowance disclosed above is
included in the allowance for loan losses reported in the consolidated balance sheets as of December 31, 2016 and 2015.
The table below reflects recorded investment in loans classified as impaired:
Impaired loans with a specific valuation allowance under ASC 310
Impaired loans without a specific valuation allowance under ASC 310
Total impaired loans
Valuation allowance related to impaired loans
The following table presents impaired loans by class:
Manufactured housing
Commercial real estate :
Commercial real estate
SBA 504 1st trust deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
69
December 31,
2016
2015
(in thousands)
13,080 $
4,463
17,543 $
759 $
11,940
7,591
19,531
573
$
$
$
December 31,
2016
2015
$
(in thousands)
8,911 $
142
970
-
-
3,780
1,137
373
2,230
-
17,543 $
$
8,586
875
1,748
-
-
3,010
2,747
313
2,252
-
19,531
Index
The following table summarizes the average investment in impaired loans by class and the related interest income recognized:
2016
Average Investment
in Impaired Loans
Interest
Income
Year Ended December 31,
2015
Average Investment
in Impaired Loans
Interest
Income
2014
Average Investment
in Impaired Loans
Interest
Income
$
8,495 $
678 $
(in thousands)
7,607 $
572
1,445
-
-
3,276
931
400
2,166
-
17,285 $
3
38
-
-
215
98
8
108
-
1,148 $
1,420
1,485
-
-
2,925
1,089
172
1,604
-
16,302 $
$
692 $
-
80
-
-
-
69
11
81
-
933 $
7,915 $
2,485
1,076
55
-
3,377
1,697
437
699
-
17,741 $
564
-
63
-
-
90
97
8
3
-
825
Manufactured housing
Commercial real estate:
Commercial real estate
SBA 504 1st
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
The Company is not committed to lend significant additional funds on these impaired loans.
The following table reflects the recorded investment in certain types of loans at the periods indicated:
Nonaccrual loans
SBA guaranteed portion of loans included above
Troubled debt restructured loans, gross
Loans 30 through 89 days past due with interest accruing
Interest income recognized on impaired loans
Foregone interest on nonaccrual and troubled debt restructured loans
Allowance for loan losses to gross loans held for investment
2016
3,117
742
December 31,
2015
(in thousands)
6,956
$
1,943
$
2014
$
$
17,883
6,856
$
14,437
$
-
$
1,148
412
$
1.31%
$
13,741
$
-
$
933
761
$
1.44%
9,685
-
825
1,276
1.84%
$
$
$
$
$
$
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally at the time the loan is 90 days
delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is no longer recognized on the loan. Interest
income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
70
Index
The following table presents the composition of nonaccrual loans by class of loans:
Manufactured housing
Commercial real estate:
Commercial real estate
SBA 504 1st trust deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
December 31,
2016
2015
$
(in thousands)
800 $
141
712
-
-
31
868
373
192
-
3,117 $
$
1,615
875
1,481
-
-
44
2,346
313
282
-
6,956
Included in nonaccrual loans are $0.7 million and $1.9 million of loans guaranteed by government agencies at December 31, 2016 and 2015,
respectively.
The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA
directly. After the foreclosure and collection process is complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA.
Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore a repurchase
reserve has not been established related to these loans.
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s
risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. For
a detailed discussion on these risk classifications see “Note 1 Summary of Significant Accounting Policies – Allowance for Loan Losses and
Provision for Loan Losses” of this Form 10-K. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at
some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse
classification. Risk rates are updated as part of the normal loan monitoring process, at a minimum, annually.
The following tables present gross loans by risk rating:
Manufactured housing
Commercial real estate:
Commercial real estate
SBA 504 1st trust deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total, net
SBA guarantee
Total
Pass
Special
Mention
$
191,784 $
December 31, 2016
Substandard
(in thousands)
- $
2,438 $
Doubtful
Total
- $
194,222
212,259
22,664
3,167
30,707
63,002
8,297
9,671
12,553
87
554,191 $
-
554,191 $
71
$
$
1,988
-
-
-
7,268
108
-
-
-
9,364 $
-
9,364 $
142
1,215
-
-
99
389
621
197
-
5,101 $
1,370
6,471 $
-
-
-
-
-
-
-
-
- $
-
- $
214,389
23,879
3,167
30,707
70,369
8,794
10,292
12,750
87
568,656
1,370
570,026
Index
Manufactured housing
Commercial real estate:
Commercial real estate
SBA 504 1st trust deed
Land
Construction
Commercial
SBA
HELOC
Single family real estate
Consumer
Total, net
SBA guarantee
Total
Pass
Special
Mention
$
173,971 $
December 31, 2015
Substandard
(in thousands)
- $
3,920 $
Doubtful
Total
- $
177,891
131,857
23,231
2,895
12,418
66,788
10,733
10,115
18,678
123
450,809 $
-
450,809 $
2,481
583
-
-
6,805
158
-
-
-
10,027 $
-
10,027 $
4,278
1,748
-
-
3,756
547
819
395
-
15,463 $
2,242
17,705 $
$
$
-
-
-
-
-
64
-
-
-
64 $
-
64 $
138,616
25,562
2,895
12,418
77,349
11,502
10,934
19,073
123
476,363
2,242
478,605
Troubled Debt Restructured Loan (TDR)
A TDR is a loan on which the bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the bank
would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not
limited to, a reduction in the stated interest rate, an extension of the maturity or renewal of the loan at an interest rate below current market, a
reduction in the face amount of the debt, a reduction in the accrued interest, extensions, deferrals, renewals and rewrites. The majority of the bank’s
modifications are extensions in terms or deferral of payments which result in no lost principal or interest followed by reductions in interest rates or
accrued interest. A TDR is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be
disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the
restructuring agreement.
The following tables summarize the financial effects of TDR loans by class for the periods presented:
`
For the Year Ended December 31, 2016
Number
of Loans
Pre-
Modification
Recorded Investment
Post
Modification
Recorded Investment
Balance of
Loans with
Rate Reduction
Balance of
Loans with
Term Extension
Effect on
Allowance for
Loan Losses
(dollars in thousands)
Manufactured housing
Commercial
SBA
HELOC
Single family real estate
Total
25 $
5
1
1
1
33 $
1,903 $
1,075
92
257
105
3,432 $
72
1,903 $
1,075
92
257
105
3,432 $
1,903 $
-
-
-
105
2,008 $
1,903 $
1,075
92
257
105
3,432 $
112
13
0
-
7
132
Index
`
Manufactured housing
Commercial real estate
SBA
HELOC
Single family real estate
Total
`
For the Year Ended December 31, 2015
Number
of Loans
Pre-
Modification
Recorded Investment
Post
Modification
Recorded Investment
Balance of
Loans with
Rate Reduction
Balance of
Loans with
Term Extension
Effect on
Allowance for
Loan Losses
(dollars in thousands)
27 $
1
1
1
1
31 $
2,400 $
161
297
54
1,917
4,829 $
2,390 $
161
297
54
1,917
4,819 $
2,087 $
161
-
54
1,917
4,219 $
2,243 $
161
297
54
1,917
4,672 $
109
2
5
-
35
151
For the Year Ended December 31, 2014
Number
of Loans
Pre-
Modification
Recorded Investment
Post
Modification
Recorded Investment
Balance of
Loans with
Rate Reduction
Balance of
Loans with
Term Extension
Effect on
Allowance for
Loan Losses
(dollars in thousands)
Manufactured housing
Total
5 $
5 $
272 $
272 $
272 $
272 $
272 $
272 $
272 $
272 $
10
10
The average rate concession was 78 basis points and 83 basis points for the twelve months ended December 31, 2016 and 2015, respectively. The
average term extension in months was 147 and 154 for the twelve months ended December 31, 2016 and 2015, respectively.
The following tables present TDR's by class that occurred in the past twelve months for which there was a payment default during the period:
2016
Number
of Loans
Recorded
Investment
Effect on
Allowance for
Loan Losses
Number
of Loans
(dollars in thousands)
-
-
- $
- $
Year Ended December 31,
2015
2014
Recorded
Investment
Effect on
Allowance for
Loan Losses
Number
of Loans
Recorded
Investment
Effect on
Allowance for
Loan Losses
Manufactured housing
Total
- $
- $
- $
- $
- $
- $
-
-
1 $
1 $
18 $
18 $
1
1
A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to
repossessed assets. The Company had no TDR’s with payment defaults for the twelve months ended December 31, 2016 or 2015.
At December 31, 2016, there were no material loan commitments outstanding on TDR loans.
Related Parties
Principal stockholders, directors, and executive officers of the Company, together with companies they control and family members, are considered
to be related parties. In the ordinary course of business, the Company has extended credit to these related parties. Federal banking regulations
require that any such extensions of credit not be offered on terms more favorable than would be offered to non-related party borrowers of similar
creditworthiness.
The following table summarizes the aggregate activity in such loans:
Balance, beginning
New loans
Repayments and other
Balance, ending
73
Year Ended December 31,
2016
2015
$
$
(in thousands)
4,294 $
125
(3,476)
943 $
4,479
225
(410)
4,294
Index
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because
of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December
31, 2016 or 2015.
Unfunded loan commitments outstanding with related parties total approximately $0.3 million and $0.6 million at December 31, 2016 and 2015,
respectively.
5. PREMISES AND EQUIPMENT
Bank premises and land
Furniture, fixtures and equipment
Leasehold improvements
Construction in progress
Accumulated depreciation
Premises and equipment, net
Lease Obligations
Year Ended December 31,
2016
2015
(in thousands)
1,355 $
9,387
3,036
454
14,232
(10,301)
3,931 $
1,353
8,805
2,454
6
12,618
(9,625)
2,993
$
$
The Company leases certain premises under non-cancelable operating leases expiring through 2027. The following is a schedule of future minimum
rental payments under these leases at December 31, 2016:
2017
2018
2019
2020
2021
Thereafter
(in thousands)
1,057
$
990
990
913
806
3,236
7,992
$
The Company leases the majority of its office locations and many of these leases contain multiple renewal options and provisions for increased
rents. Total rent expense of $1.0 million, $0.9 million and $0.8 million is included in occupancy expenses for the years ended December 31, 2016, 2015
and 2014, respectively. Total depreciation expense of $0.7 million, $0.4 million, and $0.3 million is included in occupancy expenses for the each of
the years ended December 31, 2016, 2015 and 2014, respectively.
6. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE
The following table summarizes the changes in other assets acquired through foreclosure:
Balance, beginning of period
Additions
Proceeds from dispositions
Gains (losses) on sales, net
Balance, end of period
2016
December 31,
2015
(in thousands)
2014
$
$
198 $
350
(395)
(16)
137 $
137 $
609
(538)
(10)
198 $
3,811
1,879
(5,988)
435
137
74
Index
7.
INCOME TAXES
The provision for income taxes consisted of the following:
Current:
Federal
State
Deferred:
Federal
State
Total provision for income taxes
2016
December 31,
2015
(in thousands)
2014
$
$
3,000 $
1,022
4,022
(338)
(71)
(409)
3,613 $
1,569 $
590
2,159
4
(25)
(21)
2,138 $
2,880
832
3,712
754
468
1,222
4,934
The reconciliation between the statutory income tax rate and the Company’s effective tax rate follows:
Federal income tax at statutory rate
State franchise tax, net of federal benefit
Other
Total provision (benefit) for income taxes
The cumulative tax effects of the primary temporary differences are as shown in the following table:
Deferred Tax Assets:
Allowance for loan losses
Unrealized loss on AFS securities
Other
Total gross deferred tax assets
Deferred tax asset valuation allowance
Total deferred tax assets
Deferred Tax Liabilities:
Deferred state taxes
Depreciation
Other
Total deferred tax liabilities
Net deferred tax asset
2016
December 31,
2015
2014
34.0%
7.2
(0.3)
40.9%
34.0%
7.2
1.5
42.7%
34.0%
7.2
-
41.2%
December 31,
2016
2015
(in thousands)
3,006 $
20
1,734
4,760
-
4,760
(319)
(197)
(511)
(1,027)
3,733 $
2,835
48
1,333
4,216
-
4,216
(295)
(249)
(320)
(864)
3,352
$
$
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets of $3.7 million at December
31, 2016 are reported in the consolidated balance sheet as a component of total assets.
Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established
against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance
is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax
assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which
considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable
income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management
determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred
tax assets may not be realized.
75
Index
There was no valuation allowance on deferred tax assets at December 31, 2016 or December 31, 2015.
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740). ASC 740 prescribes a more likely than not threshold for the
financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance
on uncertain tax positions. There were no uncertain tax positions at December 31, 2016.
The Company is subject to income taxation in the United States and certain state jurisdictions. The Company’s federal and state income tax returns
are filed on a consolidated basis. The Company is generally open to examination by tax authorities for the years 2011 and later. Although the
Company is unable to determine the outcome under examination, it has evaluated whether there are any uncertain tax positions in accordance with
ASC 740-10 and concluded that there are no significant uncertain tax positions requiring recognition in the financial statements.
8. DEPOSITS
The table below summarizes deposits by type:
Non-interest bearing demand deposits
Interest-bearing deposits:
NOW accounts
Money market deposit account
Savings accounts
Time deposits of $250,000 or more
Other time deposits
Total deposits
December 31,
2016
2015
(in thousands)
$
100,372 $
76,469
18,111
234,912
14,007
77,509
167,325
612,236 $
19,170
231,339
13,690
66,722
136,948
544,338
$
Of the total deposits at December 31, 2016, $367.4 million may be immediately withdrawn. Time certificates of deposit are the only deposits which
have a specified maturity.
The summary of the contractual maturities for all time deposits is as follows:
2017
2018
2019
2020
2021
Thereafter
(in thousands)
159,543
$
47,849
31,319
3,121
3,002
-
244,834
$
The Company through the bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”), which provides Federal Deposit
Insurance Corporation (“FDIC”) insurance for large deposits. Federal banking law and regulation place restrictions on depository institutions
regarding brokered deposits as they pose increased liquidity risk for institutions that gather significant amounts of brokered deposits. At
December 31, 2016 and 2015, the Company had $46.7 million and $24.3 million, respectively, of reciprocal CDARS deposits.
The Company also accepts deposits from related parties which totaled $20.5 million at December 31, 2016 and $21.0 million at December 31, 2015.
76
Index
9. OTHER BORROWINGS
The following table summarizes the Company’s FHLB advances by maturity date:
Contractual Maturity Date
January 3, 3017
January 9, 2017
January 23, 2017
March 20, 2017
April 17, 2017
September 30, 2016
Total FHLB advances
Weighted average rate
2016
Amount
December 31,
Rate
(dollars in thousands)
Amount
2015
Rate
$
$
5,000
5,000
5,000
5,000
5,000
-
25,000
0.52% $
0.47%
0.59%
0.67%
0.70%
-
$
0.59%
-
-
-
-
-
5,000
5,000
-
-
-
-
-
0.55%
0.55%
The Company through the bank has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s
eligible loans and securities. Total FHLB advances were $25.0 million and $5.0 million at December 31, 2016 and 2015, respectively, borrowed at fixed
rates. The Company also had $115.0 million of letters of credit with FHLB at December 31, 2016 to secure public funds. At December 31, 2016, the
Company had pledged to the FHLB, $31.7 million of securities and $161.3 million of loans. At December 31, 2016, the Company had $56.8 million
available for additional borrowing. At December 31, 2015, the Company had pledged to the FHLB, $30.5 million of securities and $140.0 million of
loans. At December 31, 2015, CWB had $67.8 million available for additional borrowing. Total FHLB interest expense for the years ended December
31, 2016, 2015 and 2014 was $30,000, $0.1 million and $0.6 million, respectively.
Other Borrowing – In October of 2015, the Company entered into a one-year revolving line of credit agreement for up to $10.0 million. At December
31, 2015, the balance was $5.5 million at a rate of 3.993%. The Company must maintain a compensating deposit with the lender of 25% of the
outstanding principal balance in a non-interest bearing deposit account which was $1.0 million and $1.4 million at December 31, 2016 and 2015,
respectively. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% and a
minimum total risked based capital ratio of 10.0%. The Company incurred a quarterly unused commitment fee of 50 basis points per annum on the
average available balance. The outstanding balance of the revolving line of credit converted to a 5-year amortizing term loan on October 31, 2016
with a maturity date of October 31, 2021. At December 31, 2016, the balance was $4.0 million at a rate of 4.521%.
Federal Reserve Bank – The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans for
up to 28 days. There were no outstanding FRB advances as of December 31, 2016 and 2015. Available borrowing capacity was $95.1 million and
$94.0 million as of December 31, 2016 and 2015, respectively.
Convertible Debentures - In 2010, the Company completed an offering of $8.1 million convertible subordinated debentures. The debentures were a
general unsecured obligation and were subordinated in right of payment to all present and future senior indebtedness. The debentures paid
interest at 9% until conversion, redemption or maturity. Effective March 10, 2014, the Company exercised its early redemption rights and called the
outstanding debentures. During 2014, $1.4 million debentures were converted to 317,550 shares of common stock and $34,000 to cash.
Federal Funds Purchased Lines – The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There was no
amount outstanding as of December 31, 2016 and 2015.
10. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the consolidated balance sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrowers’ current financial condition may indicate less
ability to pay than when the commitment was originally made. In the case of standby letters of credit, the risk arises from the possibility of the
failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit
to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the
Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
77
Index
Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing
arrangements. Typically, letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
Commitments to extend credit
Standby letters of credit
Total
Year Ended December 31,
2016
2015
$
$
(in thousands)
82,954 $
-
82,954 $
46,855
64
46,919
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit
arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized
by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these
commitments, they are not reported as loans outstanding. Credit losses related to these commitments are not included in the allowance for credit
losses reported in Note 4, “Loans Held For Investment” of these Consolidated Financial Statements and are accounted for as a separate loss
contingency as a liability. This loss contingency for unfunded loan commitments and letters of credit was $125,000 and $61,000 as of December 31,
2016 and 2015, respectively. Changes to this liability are adjusted through other non-interest expense.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the
Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company
makes manufactured housing, commercial, SBA, construction, commercial real estate and consumer loans to customers through branch offices
located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant
credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2016 and 2015, manufactured
housing loans comprised 30.8% and 32.7%, respectively of total loans. As of December 31, 2016 and 2015, commercial real estate loans accounted
for approximately 43.1% and 33.0% of total loans, respectively. Approximately 32.3% and 53.7% of these commercial real estate loans were owner
occupied at December 31, 2016 and 2015, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios
of 54.6% and 50.3% at December 31, 2016 and 2015, respectively. The Company was within established policy limits at December 31, 2016 and 2015.
Loan Sales and Servicing
The Company retains a certain level of risk relating to the servicing activities and retained interest in sold loans. In addition, during the period of
time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower
default, foreclosure and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential
purchasers.
In connection with certain loan sales, the Company enters agreements which generally require the company to repurchase or substitute loans in the
event of a breach of a representation or warranty made by the Company to the loan purchaser, any misrepresentation during the loan origination
process or, in some cases, upon any fraud or early default on such loans.
The Company has sold loans that are guaranteed or insured by government agencies for which the Company retained all servicing rights and
responsibilities. The Company is required to perform certain monitoring functions in connection with these loans to preserve the guarantee by the
government agency and prevent loss to the Company in the event of nonperformance by the borrower. Management believes that the Company is
in compliance with these requirements. The outstanding balance of the loans serviced for others was approximately $15.4 million and $20.1 million
at December 31, 2016 and 2015, respectively.
78
Index
Salary Continuation
The Company has agreements with certain key officers, which provide for a monthly cash payment to the officers or beneficiaries in the event of
death, disability or retirement, beginning in the month after the retirement date or death and extending for a period of fifteen years subject to
vesting. The Company purchased life insurance policies of $2.9 million as an investment. The income from the policy investments will help fund
this liability.
Additionally, the Company has an agreement with a former officer which provides for $50,000 per year in monthly cash payments. The remaining
contractual obligation at December 31, 2016 is two years. At December 31, 2016 and 2015, the Company had accrued salary continuation liability for
these agreements of $0.4 million and $0.3 million, respectively. The cash surrender value of the life insurance policies was $4.3 million at December
31, 2016, and is included in other assets.
Other
The Company is involved in various other litigation matters of a routine nature that are being handled and defended in the ordinary course of the
Company’s business. In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters will
not have a material impact on the Company’s financial position or results of operations.
11. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company’s Series A Preferred Stock paid cumulative dividends at a rate of 5% per year until February 15, 2014 then increased to a rate of 9%
per year. The Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up of the Company.
In 2014, the Company redeemed 8,586 shares of the Series A Preferred Stock for $8.5 million and recognized a discount on the partial redemption of
$0.2 million.
During 2015, the Company redeemed the remaining 7,014 shares of Series A Preferred Stock for $6.9 million and recognized a discount on the
redemption of $0.1 million.
During the years ended December 31, 2015 and 2014, the Company recorded $0.4 million and $0.9 million, respectively of dividends and accretion of
the discount on preferred stock.
Common Stock Warrant
The Warrant issued as part of the TARP provides for the purchase of up to 521,158 shares of the common stock, at an exercise price of $4.49 per
share (“Warrant Shares”). The Warrant is immediately exercisable and has a 10-year term. The exercise price and the ultimate number of shares of
common stock that may be issued under the Warrant are subject to certain anti-dilution adjustments, such as upon stock splits or distributions of
securities or other assets to holders of the common stock, and upon certain issuances of the common stock at or below a specified price relative to
the then current market price of the common stock. In the second quarter of 2013, the Treasury sold its warrant position to a private investor.
Pursuant to the Securities Purchase Agreement, the private investor has agreed not to exercise voting power with respect to any Warrant Shares.
Common Stock
During the years ended December 31, 2016 and 2015, the Company recorded $1.1 million and $0.9 million, respectively of dividends on common
stock.
During 2014, the Company issued 316,872 shares of common stock respectively, in conjunction with debenture conversions.
The Company has authorized a $3.0 million common stock repurchase program. The repurchase program is expected to be executed over no more
than a two-year period. To date under the common stock repurchase program, the Company repurchased 187,569 common stock shares at an
average price of $7.25 per share.
Stock Option Plans
The Company has two stock option plans available for option grants. Stock options granted in 2016 generally have a vesting period of 5 years and
a contractual life of 10 years. The Company recognizes compensation cost for options ratably over the requisite service period for all awards. As of
December 31, 2016, 123,750 options were available for future grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions
noted in the following table. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value
estimate. The expected volatility is based on the historical volatility of the stock of the Company over the expected life of the options. The risk-free
rate for the periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend
rate assumption was the dividend yield at grant date. A summary of the assumptions used in calculating the fair value of option awards during the
years ended December 31, 2016, 2015 and 2014 are as follows:
79
Index
Expected life in years
Risk-free interest rate
Expected volatility
Annual dividend rate
A summary of option activity under the plan is presented below:
Outstanding options, beginning of period
Granted
Exercised
Forefeited or expired
Outstanding options, end of period
Options exerciseable, end of period
Options expected to vest, end of period
Outstanding options, beginning of period
Granted
Exercised
Forefeited or expired
Outstanding options, end of period
Options exerciseable, end of period
Options expected to vest, end of period
Outstanding options, beginning of period
Granted
Exercised
Forefeited or expired
Outstanding options, end of period
Options exerciseable, end of period
Options expected to vest, end of period
2016
December 31,
2015
2014
6.5
1.62%
49.5%
1.73%
6.5
1.77%
64.9%
1.41%
6.0
1.80%
73.4%
-%
Year Ended December 31, 2016
Option
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining Term
Aggregate
Intrinsic Value
(in thousands, except exercise price and contractual terms)
665 $
192
(74)
(78)
705 $
301 $
282 $
6.03
7.12
2.99
8.12
6.41
5.86
6.83
7.3 $
5.7 $
7.1 $
2,057
1,082
696
Year Ended December 31, 2015
Option
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining Term
Aggregate
Intrinsic Value
(in thousands, except exercise price and contractual terms)
457 $
243
(7)
(28)
665 $
322 $
233 $
5.61
6.70
2.08
5.82
6.03
5.75
6.08
7.4 $
6.0 $
7.1 $
914
666
219
Year Ended December 31, 2014
Option
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining Term
Aggregate
Intrinsic Value
(in thousands, except exercise price and contractual terms)
376 $
190
(19)
(90)
457 $
244 $
150 $
5.25
7.02
2.90
7.65
5.61
5.77
4.84
7.2 $
5.9 $
6.9 $
815
521
288
As of December 31, 2016, 2015 and 2014, there was $0.7 million, $0.7 million and $0.4 million, respectively, of total unrecognized compensation cost
related to unvested share-based compensation arrangements granted under the Company’s plan. That cost is expected to be recognized over a
weighted average period of 3.5 years, 3.8 years, and 3.9 years, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2016, 2015 and 2014, was $0.3 million, $34,000, and $71,000, respectively.
80
Index
The following table summarizes the change in unvested stock option shares during the year ended December 31, 2016:
Unvested options, beginning of period
Granted
Vested
Forefeited
Unvested options, end of period
12. EARNINGS PER SHARE
The following table presents a reconciliation of basic earnings per share and diluted earnings per share:
Number of
Option Shares
Weighted Average
Grant-Date
Fair Value
(in thousands, except per share data)
3.67
2.99
3.24
3.92
3.41
343 $
192
(87)
(44)
404 $
Net income
Less: dividends and accretion on preferred stock
discount on partial redemption
Net income available to common stockholders
Add: debenture interest expense and costs, net of income taxes
Net income for diluted calculation of earnings per common share
Weighted average number of common shares outstanding - basic
Weighted average number of common shares outstanding - diluted
Earnings per share:
Basic
Diluted
13. CAPITAL REQUIREMENTS
Year Ended December 31,
2014
2015
2016
(in thousands, except per share amounts)
$
$
$
$
$
5,229 $
-
-
5,229 $
-
5,229 $
8,114
8,444
0.64 $
0.62 $
2,870 $
445
(129)
2,554 $
-
2,554 $
8,203
8,491
0.31 $
0.30 $
7,046
937
(159)
6,268
103
6,371
8,141
8,505
0.77
0.75
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding
company. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital
framework with a phase-in period beginning January 1, 2015 and ending January 1, 2019. The Final Rules implement the third installment of the
Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III redefines the regulatory
capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted
assets and adds a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes
preferred equity.
The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of December 31, 2016 and
2015. The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.
December 31, 2016
CWB's actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully-phased in
capital conservation buffer (2019)
Total Capital (To
Risk-Weighted
Assets)
Tier 1 Capital (To
Risk-Weighted
Assets)
Common Equity Tier
1 (To Risk-
Weighted Assets)
Leverage Ratio/Tier1
Capital (To Average
Assets)
11.04%
6.00%
8.00%
8.50%
11.04%
4.50%
6.50%
7.00%
10.08%
4.00%
5.00%
N/A
12.27%
8.00%
10.00%
10.50%
81
Index
December 31, 2015
CWB's actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully-phased in
capital conservation buffer (2019)
14. EMPLOYEE BENEFIT PLANS
401(k) Plan:
Total Capital (To
Risk-Weighted
Assets)
Tier 1 Capital (To
Risk-Weighted
Assets)
Common Equity Tier
1 (To Risk-
Weighted Assets)
Leverage Ratio/Tier1
Capital (To Average
Assets)
13.70%
8.00%
10.00%
10.50%
12.45%
6.00%
8.00%
8.50%
12.45%
4.50%
6.50%
7.00%
10.38%
4.00%
5.00%
N/A
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants are able to defer up to a maximum of $18,000 (for
those under 50 years of age in 2016) of their annual compensation. The Company may elect to match a discretionary amount each year, which was
3% of the participant’s eligible compensation. The Company’s total contribution was $0.2 million for the years ended December 31, 2016, 2015 and
2014, respectively.
Deferred Compensation Plans:
A deferred compensation plan covers the executive officers. Under the plan, the Company pays each participant a percentage of their base salary
plus interest. Vesting occurs at age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred
compensation for each of the last three years was $0.1 million resulting in a deferred compensation liability of $0.6 million and $0.4 million as of the
year-end 2016 and 2015.
The Company also provides an unfunded nonqualified deferred compensation arrangement to provide supplemental retirement benefits for the
Participants which are a select group of management or highly compensated employees of the Company. The Participants may defer up to 30% of
their base salary and bonus each plan year. The 36 month certificate of deposit rate is paid on the vested balance.
15. FAIR VALUE MEASUREMENT
The fair value of an asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
occurring in the principal market for such asset or liability. ASC 820 establishes a fair value hierarchy that prioritizes the inputs and valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy under ASC 820 and the
methods and assumptions used by the Company in estimating the fair value of its financial instruments are described in “Note 1. Summary of
Significant Accounting Policies – Fair Value of Financial Instruments” of these Notes to the Consolidated Financial Statements.
The following tables summarize the fair value of assets measured on a recurring basis:
December 31, 2016
Assets:
Investment securities available-for-sale
Interest only strips
Servicing assets
Fair Value Measurements at the End of the Reporting Period
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
115 $
-
-
115 $
(in thousands)
22,566 $
-
-
22,566 $
- $
119
158
277 $
22,681
119
158
22,958
$
$
82
Index
December 31, 2015
Assets:
Investment securities available-for-sale
Interest only strips
Servicing assets
Fair Value Measurements at the End of the Reporting Period Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
$
$
63 $
-
-
63 $
(in thousands)
23,378 $
-
-
23,378 $
- $
226
182
408 $
23,441
226
182
23,849
Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are
determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of
asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market
valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
On certain SBA loan sales, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows
generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party
investors and (ii) contractual servicing fees. I/O strips are classified as level 3 in the fair value hierarchy. The fair value is determined on a quarterly
basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds. I/O strip valuation
adjustments are recorded as additions or offsets to loan servicing income.
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a
quarterly basis through a discounted cash flow analysis prepared by an independent third party using industry prepayment speeds. In connection
with the sale of certain SBA and USDA loans the Company recorded servicing assets and elected to measure those assets at fair value in
accordance with ASC 825-10. Significant assumptions in the valuation of servicing assets include estimated loan repayment rates, the discount
rate, and servicing costs, among others. Servicing assets are classified as Level 3 measurements due to the use of significant unobservable inputs,
as well as significant management judgment and estimation.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include
loans held for sale, foreclosed real estate and repossessed assets and loans that are considered impaired per generally accepted accounting
principles.
The following summarizes the fair value measurements of assets measured on a non-recurring basis:
As of December 31, 2016:
Impaired loans
Loans held for sale
Foreclosed real estate and repossessed assets
As of December 31, 2015:
Impaired loans
Loans held for sale
Foreclosed real estate and repossessed assets
Fair Value Measurements at the End of the Reporting Period
Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Active
Markets for
Similar
Assets
(Level 2)
(in thousands)
Total
Unobservable
Inputs
(Level 3)
2,008 $
64,954
137
67,099 $
4,545 $
69,262
198
74,005 $
$
$
$
$
83
- $
-
-
- $
- $
-
-
- $
2,008 $
64,954
137
67,099 $
4,545 $
69,262
198
74,005 $
-
-
-
-
-
-
-
-
Index
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered impaired an allowance for a loan loss is
established. The fair value measurement and disclosure requirement applies to loans measured for impairment using the practical expedients
method permitted by accounting guidance for impaired loans. Impaired loans are measured at an observable market price, if available or at the fair
value of the loan’s collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent
valuation. When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real
estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a
non-recurring valuation within Level 2 of the valuation hierarchy. For loans in which impairment is determined based on the net present value of
cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics or based on the agreed-upon sale price. As such, the Company classifies the fair value
of loans held for sale as a non-recurring valuation within Level 2 of the fair value hierarchy. At December 31, 2016 and 2015, the Company had loans
held for sale with an aggregate carrying value of $61.4 million and $64.5 million respectively.
Foreclosed real estate and repossessed assets are carried at the lower of book value or fair value less estimated costs to sell. Fair value is based
upon independent market prices obtained from certified appraisers or the current listing price, if lower. When the fair value of the collateral is based
on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2. When a current appraised
value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as
non-recurring Level 3.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of the Company’s financial instruments are as follows:
Financial assets:
Cash and cash equivalents
FRB and FHLB stock
Investment securities
Loans, net
Financial liabilities:
Deposits
Other borrowings
Carrying
Amount
Level 1
December 31, 2016
Fair Value
Level 2
(in thousands)
Level 3
Total
$
34,116 $
3,443
31,683
623,355
612,236
29,000
34,116 $
-
115
-
- $
3,443
31,715
599,919
- $
-
-
14,775
-
-
612,215
28,999
-
-
34,116
3,443
31,830
614,694
612,215
28,999
Financial assets:
Cash and cash equivalents
Interest-bearing deposits in other financial institutions
FRB and FHLB stock
Investment securities
Loans, net
$
Financial liabilities:
Deposits
Other borrowings
Interest rate risk
Carrying
Amount
Level 1
December 31, 2015
Fair Value
Level 2
(in thousands)
Level 3
Total
35,519 $
99
3,259
30,466
536,546
544,338
10,500
35,519 $
99
-
63
-
- $
-
3,259
30,777
527,988
- $
-
-
-
13,679
-
-
544,350
10,489
-
-
35,519
99
3,259
30,840
541,667
544,350
10,489
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal
operations. As a result, the fair values of the Company’s financial instruments as well as its future net interest income will change when interest
rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in the net portfolio value and net interest
income resulting from hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from
hypothetical interest rate changes are not within the limits established by the Board of Directors, the Board of Directors may direct management to
adjust the asset and liability mix to bring interest rate risk within board-approved limits. As of December 31, 2016, the Company’s interest rate risk
profile was within Board-approved limits.
84
Index
The Company’s subsidiary bank has an Asset and Liability Management Committee charged with managing interest rate risk within Board
approved limits. Such limits are structured to prohibit an interest rate risk profile that is significantly asset or liability sensitive.
Fair value of commitments
Loan commitments on which the committed interest rates were less than the current market rate are insignificant at December 31, 2016 and 2015. The
estimated fair value of standby letters of credit outstanding at December 31, 2015 was also insignificant.
16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in other comprehensive income by component, net of tax for the period indicated:
Beginning balance
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income
Ending Balance
Year Ended December 31,
2014
2015
2016
Unrealized holding gains (losses ) on AFS
(in thousands)
$
$
(68) $
39
-
39
(29) $
31 $
(99)
-
(99)
(68) $
(274)
305
-
305
31
There were no reclassifications out of accumulated other comprehensive income for the years ended December 31, 2016, 2015 and 2014.
17. PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of the holding company are presented in the following tables:
COMMUNITY WEST BANCSHARES
Condensed Balance Sheets
Assets:
Cash and cash equivalents (including interest-bearing deposits in other financial institutions)
Investment in subsidiary
Other assets
Total assets
Liabilities and Stockholders' Equity:
Other borrowings
Other liabilities
Total liabilities
Common stock
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
85
December 31,
2016
2015
(in thousands)
$
$
$
$
575 $
68,585
319
69,479 $
4,000 $
114
4,114
41,575
23,790
65,365
69,479 $
3,461
63,914
181
67,556
5,500
44
5,544
42,355
19,657
62,012
67,556
Index
COMMUNITY WEST BANCSHARES
Condensed Income Statements
Interest income
Interest expense
Net interest expense
Income from consolidated subsidiary
Other income
Total income
Total non-interest expenses
Income before income tax benefit
Income tax benefit
Net income
Preferred stock dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
Net income available to common stockholders'
COMMUNITY WEST BANCSHARES
Condensed Statements of Cash Flows
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
2016
December 31,
2015
(in thousands)
2014
$
$
5 $
247
(242)
5,671
-
5,429
495
4,934
(295)
5,229
-
-
5,229 $
3 $
44
(41)
3,335
-
3,294
571
2,723
(147)
2,870
445
(129)
2,554 $
8
30
(22)
7,446
-
7,424
599
6,825
(221)
7,046
937
(159)
6,268
2016
December 31,
2015
(in thousands)
2014
$
5,229 $
2,870 $
7,046
Equity in undistributed income from subsidiary
Stock-based compensation
Changes in:
Other assets
Other liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities:
Net dividends from and investment in subsidiary
Net cash provided by investing activities
Cash Flows from Financing Activities:
Net (decrease) increase from other borrowings
Redemption of convertible debentures
Preferred stock dividends paid
Redemption of preferred stock
Common stock dividends paid
Common stock repurchase
Proceeds from issuance of common stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(5,671)
338
(138)
70
(172)
1,000
1,000
(1,500)
-
-
-
(1,096)
(1,338)
220
(3,714)
(2,886)
3,461
575 $
(3,335)
412
41
45
33
5,131
5,131
5,500
-
(524)
(6,885)
(902)
(28)
14
(2,825)
2,339
1,122
3,461 $
(7,446)
308
(68)
(4)
(164)
9,184
9,184
-
(34)
(2,390)
(8,427)
(328)
-
54
(11,125)
(2,105)
3,227
1,122
$
86
Index
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
Net income available to common stockholders
Earnings per share:
Income per common share - basic
Income per common share - diluted
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision (benefit) for income taxes
Net income
Dividends and accretion on preferred stock
Discount on partial redemption of preferred stock
Net income available to common stockholders
Earnings per share:
Income per common share - basic
Income per common share - diluted
First
Quarter
December 31,
2016
Fourth
Third
Quarter
Quarter
(in thousands, except per share amounts)
Second
Quarter
Total
7,444 $
723
6,721
(247)
6,968
579
5,336
2,211
928
1,283
-
-
1,283 $
0.16 $
0.15 $
7,674 $
777
6,897
61
6,836
577
5,506
1,907
782
1,125
-
-
1,125 $
0.14 $
0.13 $
8,516 $
807
7,709
22
7,687
559
5,836
2,410
929
1,481
-
-
1,481 $
0.18 $
0.18 $
8,582 $
820
7,762
116
7,646
538
5,870
2,314
974
1,340
-
-
1,340 $
0.16 $
0.16 $
32,216
3,127
29,089
(48)
29,137
2,253
22,548
8,842
3,613
5,229
-
-
5,229
0.64
0.62
First
Quarter
December 31,
2015
Fourth
Third
Quarter
Quarter
(in thousands, except per share amounts)
Second
Quarter
Total
7,695 $
584
7,111
(584)
7,695
737
12,381
(3,949)
(1,607)
(2,342)
136
(110)
(2,368) $
(0.29) $
(0.29) $
7,375 $
593
6,782
(445)
7,227
554
5,038
2,743
1,152
1,591
125
-
1,466 $
0.18 $
0.17 $
8,135 $
673
7,462
(277)
7,739
538
5,091
3,186
1,335
1,851
44
-
1,807 $
0.22 $
0.21 $
30,222
2,516
27,706
(2,274)
29,980
2,309
27,281
5,008
2,138
2,870
445
(129)
2,554
0.31
0.30
7,017 $
666
6,351
(968)
7,319
480
4,771
3,028
1,258
1,770
140
(19)
1,649 $
0.20 $
0.19 $
87
$
$
$
$
$
$
$
$
Index
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, the Chief Executive Officer and the Chief Financial Officer
evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2016. Based on
and as of the time of such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to
be included in the Company’s reports that it files with or submits to the SEC under the Exchange Act.
Report on Management’s Assessment of Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting
principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission in Internal Control — Integrated Framework (2013 framework). Management concluded that based on its
assessment, the Company’s internal control over financial reporting was effective as of December 31, 2016.
Changes in Internal Control Over Financial Reporting
The Company’s management has also evaluated, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer,
whether there were any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter ended December
31, 2016. Based upon this evaluation, the Company’s management has determined that there were no changes in the Company’s internal control
over financial reporting that occurred during the Company’s fourth quarter ended December 31, 2016, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of
the Commission that permit the Company to provide only the management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
Not applicable.
88
Index
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information required by this Item regarding the Company’s directors and executive officers, and corporate governance, including information with
respect to beneficial ownership reporting compliance, will appear in the Proxy Statement we will deliver to our stockholders in connection with our
2017 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year. Such information is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. A copy of the code of ethics is available on the Company’s website at
www.communitywest.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2017 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement
we will deliver to our stockholders in connection with our 2017 Annual Meeting of Stockholders . Such information is incorporated herein by
reference.
Information relating to securities authorized for issuance under the Company’s equity compensation plans is contained under “Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Securities Authorized for Issuance Under
Equity Compensation Plans” herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2017 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2017 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.
89
Index
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are incorporated by reference from Item 8 hereto:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Income Statements for the three years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the three years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules other than those listed above have been omitted because they are either not applicable or the information is
otherwise included.
(3) Exhibits. The following is a list of exhibits filed as a part of this Annual Report.
EXHIBITS
Page 47
Page 50
Page 51
Page 52
Page 53
Page 54
Page 55
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
Articles of Incorporation (3)
Amended and Restated Articles of Incorporation (8)
Second Amended and Restated Articles of Incorporation (11)
Bylaws (3)
Certificate of Amendment of Bylaws (8)
Certificate of Determination of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (8)
Common Stock Certificate (2)
Warrant to Purchase 521,158 shares of Common Stock, dated December 19, 2008, issued to the United States Department of the Treasury
(9)
Form of Debenture (10)
Form of Subscription Certificate (10)
10.1*
1997 Stock Option Plan and Form of Stock Option Agreement (1)
10.3*
Salary Continuation Agreement between Goleta National Bank and Llewellyn Stone, President and CEO (3)
10.17
Indemnification Agreement between the Company and Charles G. Baltuskonis, dated March 18, 2003 (4)
10.21
Assistant Secretary’s Certificate of Adoption of Amendment No. 1 to Community West Bancshares 1997 Stock Option Plan (5)
10.22*
Community West Bancshares 2006 Stock Option Plan (6)
10.23*
Community West Bancshares 2006 Stock Option Plan form of Stock Option Agreement (6)
90
Index
10.25*
10.28
10.29
Employment and Confidentiality Agreement date July 1, 2007 among Community West Bank, Community West Bancshares and Charles
G. Baltuskonis (7)
Letter Agreement, dated December 19, 2008, between Community West Bancshares and the United States Department of the Treasury,
and the Securities Purchase Agreement - Standard Terms attached thereto and incorporated therein (9)
Letter Agreement, dated December 19, 2008, between Community West Bancshares and the United States Department of the Treasury
regarding the Number of Director Positions (9)
10.31*
Agreement, dated December 19, 2008, between Community West Bancshares and Charles Baltuskonis regarding modifications to Benefit
Plans (9)
10.34
10.36*
10.37*
Waiver of Charles Baltuskonis, dated December 19, 2008, waiving claims against Community West Bancshares and the United States
Department of the Treasury as a result of modifications to Benefit Plans (9)
Employment and Confidentiality Agreement, dated November 2, 2011, by and among Community West Bank, Community West
Bancshares and Martin E. Plourd (12)
Employment and Confidentiality Agreement, dated July 31, 2014, among Community West Bank, Community West Bancshares and
Kristine Price. (13)
10.38*
Salary Continuation Agreement, dated January 28, 2014, between Community West Bank and Martin E. Plourd. (14)
10.39*
Community West Bancshares 2014 Stock Option Plan and Form of Stock Option Agreement (15)
10.40*
10.41*
Employment and Confidentiality Agreement dated December 1, 2014, among Community West Bank, Community West Bancshares and
Charles Kohl (16)
Employment and Confidentiality Agreement, dated June 1, 2015, among Community West Bank, Community West Bancshares and
William F. Filippin. (17)
10.42
Promissory Note, dated October 29, 2015, between Community West Bancshares and Grandpoint Bank. (17)
21
23.1
23.2
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
(1)
(2)
(3)
(4)
(5)
(6)
Subsidiaries of the Registrant (6)
Consent of Ernst & Young LLP **
Consent of RSM US LLP**
Certification of the Chief Executive Officer **
Certification of the Chief Financial Officer **
Certification pursuant to 18 U.S.C. Section 1350 **
XBRL Taxonomy Instance Document***
XBRL Taxonomy Schema Document***
XBRL Taxonomy Calculation Linkbase Document***
XBRL Taxonomy Definition Linkbase Document***
XBRL Taxonomy Label Linkbase Document***
XBRL Taxonomy Presentation Linkbase Document***
Incorporated by reference from the Registrant's Registration Statement on Form S-8 filed with the Commission on December 31,
1997.
Incorporated by reference from the Registrant's Amendment to Registration Statement on Form 8-A filed with the Commission on
March 12, 1998.
Incorporated by reference from the Registrant's Annual Report on Form 10-K filed with the Commission on March 26, 1998.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Commission on March 31, 2003.
Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (File No 333-129898) filed with the
Commission on November 22, 2005.
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the
Commission on March 26, 2007.
(7)
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on July 2, 2007
91
Index
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
*
**
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on December 18, 2008
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on December 24, 2008
Incorporated by reference from the Registrant's Amendment No. 2 to Registration Statement on Form S-1 filed with the
Commission on April 30, 2010.
Incorporated by reference from the Registrant's Form 8-K filed with the Commission on June 6, 2011.
Incorporated by reference from the Registrant's Form 8-K filed with the Commission on November 3, 2011.
Incorporated by reference from Registrant’s Form 10-Q for the quarter and nine months ended September 30, 2014 filed with the
Commission on November 7, 2014.
Incorporated by reference from the Registrant’s Form 8-K filed with the Commission on January 29, 2014.
Incorporated by reference from Registrant’s Statement on Form S-8 (File No 333-201281) filed with the Commission on December
29, 2014,
Incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the
Commission on March 6, 2015.
Incorporated by reference from the Registrant’s Form 10-Q for the quarter and nine months ended September 30, 2015 filed with
the Commission on November 6, 2015.
Indicates a management contract or compensatory plan or arrangement.
Filed herewith.
***
Furnished herewith.
92
Index
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 3, 2017
COMMUNITY WEST BANCSHARES
(Registrant)
By: /s/ William R. Peeples
William R. Peeples
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William R. Peeples
William R. Peeples
Director and Chairman of the Board
March 3, 2017
/s/ Martin E. Plourd
Martin E. Plourd
/s/ Charles G. Baltuskonis
Charles G. Baltuskonis
/s/ Robert H. Bartlein
Robert H. Bartlein
/s/ Jean W. Blois
Jean W. Blois
/s/ John D. Illgen
John D. Illgen
/s/ James W. Lokey
James W. Lokey
/s/ Shereef Moharram
Shereef Moharram
/s/ Kirk B. Stovesand
Kirk B. Stovesand
President and Chief Executive Officer and
Director (Principal Executive Officer)
March 3, 2017
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
March 3 2017
Director
Director
March 3, 2017
March 3, 2017
Director and Secretary of the Board
March 3, 2017
Director
Director
Director
March 3, 2017
March 3, 2017
March 3, 2017
(Back To Top)
Section 2: EX-23.1 (EXHIBIT 23.1)
93
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statements (Form S-8 Nos. 333-43531 and 333-129898) pertaining to the 1997 Stock Option Plan of Community West Bancshares,
(2) Registration Statement (Form S-8 No. 333-136099) pertaining to the 2006 Stock Option Plan of Community West Bancshares, and
(3) Registration Statement (Form S-8 No. 333-201281) pertaining to the 2014 Stock Option Plan of Community West Bancshares,
Exhibit 23.1
of our report dated March 6, 2015, with respect to the consolidated income statement, and statements of comprehensive income, stockholders’
equity, and cash flows of Community West Bancshares for the year ended December 31, 2014, included in this Annual Report (Form 10-K) of
Community West Bancshares for the year ended December 31, 2016.
/s/ Ernst & Young LLP
Los Angeles, California
March 3, 2017
(Back To Top)
Section 3: EX-23.2 (EXHIBIT 23.2)
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statements (Nos. 333-43531, 333-129898, 333-201281 and 333-136099) on Form S-8
of our report dated March 3, 2017, relating to our audit of the consolidated financial statements of Community West Bancshares (which report
expresses an unqualified opinion), appearing in this Annual Report on Form 10-K of Community West Bancshares for the year ended December 31,
2016.
/s/ RSM US LLP
Las Vegas, Nevada
March 3, 2017
(Back To Top)
Section 4: EX-31.1 (EXHIBIT 31.1)
CERTIFICATION
Exhibit 31.1
I, Martin E. Plourd, President and Chief Executive Officer of Community West Bank, a California corporation, certify that:
1.
I have reviewed the annual report on Form 10-K of Community West Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting: and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Martin E. Plourd
Martin E. Plourd
President and Chief Executive Officer
Community West Bancshares
March 3, 2017
(Back To Top)
Section 5: EX-31.2 (EXHIBIT 31.2)
CERTIFICATION
Exhibit 31.2
I, Charles G. Baltuskonis, Executive Vice President and Chief Financial Officer of Community West Bancshares, a California corporation, certify that:
1.
I have reviewed the annual report on Form 10-K of Community West Bancshares;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and we have:
a. Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting: and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Charles G. Baltuskonis
Charles G. Baltuskonis
Executive Vice President and Chief Financial Officer
March 3, 2017
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Section 6: EX-32.1 (EXHIBIT 32.1)
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the filing of the Annual Report on Form 10-K for the year ended December 31, 2015 (“Report”) by Community West Bancshares
(“Registrant”), each of the undersigned hereby certifies that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Registrant as of and for the periods presented in the Report.
/s/ Martin E. Plourd
Martin E. Plourd
President and Chief Executive Officer
/s/ Charles G. Baltuskonis
Charles G. Baltuskonis
Executive Vice President and
Chief Financial Officer
March 3, 2017
A signed original of this written statement required by Section 906 has been provided to Community West Bancshares and will be furnished to the
Securities and Exchange Commission or its staff upon request.
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Locations & Corporate Information
Corporate Headquarters
Goleta Branch
Oxnard Branch
San Luis Obispo Branch
Santa Barbara Branch
Santa Maria Branch
Ventura Branch
Westlake Village Branch
Goleta
5827 Hollister Avenue
Goleta, CA 93117
(805) 683-4944
Oxnard
300 E. Esplanade Drive
Oxnard, CA 93036
(805) 597-4140
San Luis Obispo
4464 Broad Street
San Luis Obispo, CA 93401
(805) 597-3655
Santa Barbara
1501 State Street
Santa Barbara, CA 93101
(805) 962-7420
Santa Maria
122 E. Betteravia Road
Santa Maria, CA 93454
(805) 938-1690
Ventura
1463 S. Victoria Avenue
Ventura, CA 93003
(805) 650-1901
Westlake Village
951 S. Westlake Boulevard
Westlake Village, CA 91361
(805) 494-5172
Corporate Headquarters
445 Pine Avenue
Goleta, CA 93117
(805) 692-5821
www.communitywest.com
Investor Relations Contact
Martin E. Plourd
Annual Meeting
The Annual Meeting of Shareholders
of Community West Bancshares will be
held on May 25, 2017 at 6:30 pm PDT
at the La Cumbre Country Club,
4015 Via Laguna, Santa Barbara, CA
Transfer Agent & Registrar
Computershare Trust Co., NA
250 Royall Street
Canton, MA 02021
Independent Auditors
RSM US LLP
515 South Flower Street
Los Angeles, CA 90071
Corporate Counsel
Duane Morris LLP
865 S. Figueroa Street, Suite 3100
Los Angeles, CA 90017-5450
Board of Directors
William R. Peeples
Chairman of the Board,
Community West Bancshares
Private Investor
Martin E. Plourd
President and
Chief Executive Officer
Robert H. Bartlein
Chairman of the Board,
Community West Bank
President and CEO, Bartlein & Co.
Jean W. Blois
Independent Consultant
Former Mayor, City of Goleta
John D. Illgen
Vice President and Director,
Simulation Technologies/
Northrop Grumman
James W. Lokey
Retired Bank
Chairman and CEO
Shereef Moharram
Partner, Price, Postel
& Parma LLP
Kirk B. Stovesand
Partner, Walpole & Co.
Executive
Management Team
Senior
Management Team
Martin E. Plourd
President and CEO
Charles G. Baltuskonis
Executive Vice President
Chief Financial Officer
Maureen C. Clark
Executive Vice President
Chief Operating Officer and
Chief Information Officer
William F. Filippin
Executive Vice President
Chief Banking Officer
Kristine D. Price
Executive Vice President
Chief Credit Officer
Jason Bietz
Senior Vice President
Regional Market Manager
Seth Harvey
Senior Vice President
Commercial Underwriting Manager
Clay Dickens
Senior Vice President
Manufactured Home Lending
Cynthia M. Hooper
Senior Vice President
Loan Servicing
Bryan Easterly
Senior Vice President
Regional Market Manager
Chris Lem
Senior Vice President
Compliance Manager
Luis Garcia-Moreira
Senior Vice President
Cash Management Manager
Laura Maffei
Senior Vice President
Regional Agriculture Loan Manager
James D. Gray
Senior Vice President
Manufactured Home Lending
Janie Marlborough
Senior Vice President
Credit Administration Policy
and Project Manager
Kevin W. Moon
Senior Vice President
Director of Marketing
Brian Schwabecher
Senior Vice President
Regional Market Manager
Susan C. Thompson
Senior Vice President
Controller
Thomas Wetzel
Senior Vice President
Chief Risk Officer
Corporate Headquarters
445 Pine Avenue
Goleta, CA 93117
(805) 692-5821
Fax (805) 692-5835
www.communitywest.com
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