Community West Bancshares (CWBC) 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021 or

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

For the transition period from _________ to _________

Commission File Number:  000-23575

COMMUNITY WEST BANCSHARES

(Exact name of registrant as specified in its charter)

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

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

(805) 692-5821

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock of the registrant issued and outstanding of 8,589,166 as of July 30, 2021.

Table of Contents

Index			Page
Part I.  Financial Information
	Item 1 – Financial Statements
		Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020	2
		Consolidated Income Statements for the three and six months ended June 30, 2021 and 2020 (unaudited)	3
		Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (unaudited)	4
		Consolidated Statement of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited)	5
		Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)	6
		Notes to Unaudited Consolidated Financial Statements	7
	The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk		49
	Item 4 – Controls and Procedures		49
Part II. Other Information
	Item 1 – Legal Proceedings		50
	Item 1A – Risk Factors		50
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		50
	Item 3 – Defaults Upon Senior Securities		50
	Item 4 – Mine Safety Disclosures		50
	Item 5 – Other Information		50
	Item 6 – Exhibits		51
Signatures			51

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY WEST BANCSHARES

CONSOLIDATED BALANCE SHEETS

	June 30, 2021		December 31, 2020
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks and federal funds sold	$	2,638	$	1,587
Interest-earning demand in other financial institutions		109,642		58,953
Cash and cash equivalents		112,280		60,540
Investment securities - available-for-sale, at fair value; amortized cost of $19,473 at June 30, 2021 and $17,266 at December 31, 2020		19,679		17,308
Investment securities - held-to-maturity, at amortized cost; fair value of $3,563 at June 30, 2021 and $4,854 at December 31, 2020		3,370		4,586
Investment securities - measured at fair value; amortized cost of $66 at June 30, 2021 and December 31, 2020.		198		149
Federal Home Loan Bank stock, at cost		3,068		3,260
Federal Reserve Bank stock, at cost		1,373		1,373
Loans:
Held for sale, at lower of cost or fair value		27,252		31,229
Held for investment, net of allowance for loan losses of $10,240 at June 30, 2021 and $10,194 at December 31, 2020		855,777		816,154
Total loans		883,029		847,383
Other assets acquired through foreclosure, net		2,572		2,614
Premises and equipment, net		6,830		7,154
Other assets		30,629		31,068
Total assets	$	1,063,028	$	975,435
Liabilities:
Deposits:
Non-interest-bearing demand	$	202,293	$	181,837
Interest-bearing demand		449,649		398,101
Savings		19,700		18,736
Certificates of deposit ($250,000 or more)		19,791		30,536
Other certificates of deposit		173,145		136,975
Total deposits		864,578		766,185
Other borrowings		90,000		105,000
Other liabilities		12,993		15,243
Total liabilities		967,571		886,428
Stockholders’ equity:
Common stock — 0 par value, 60,000,000 shares authorized; 8,589,166 shares issued and outstanding at June 30, 2021 and 8,473,063 at December 31, 2020		43,780		42,909
Retained earnings		51,527		46,063
Accumulated other comprehensive income		150		35
Total stockholders’ equity		95,457		89,007
Total liabilities and stockholders’ equity	$	1,063,028	$	975,435

See the accompanying notes.

2

COMMUNITY WEST BANCSHARES

CONSOLIDATED INCOME STATEMENTS (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020		2021			2020
Interest income:	(in thousands, except per share amounts)
Loans, including fees	$	11,433		$	10,585	$	22,289		$	21,249
Investment securities and other		218			192		417			503
Total interest income		11,651			10,777		22,706			21,752
Interest expense:
Deposits		771			1,500		1,513			3,622
Other borrowings		194			496		465			886
Total interest expense		965			1,996		1,978			4,508
Net interest income		10,686			8,781		20,728			17,244
Provision for loan losses		(41	)		762		(214	)		1,154
Net interest income after provision for loan losses		10,727			8,019		20,942			16,090
Non-interest income:
Other loan fees		310			283		623			624
Gains from loan sales, net		130			97		248			287
Document processing fees		138			108		244			232
Service charges		74			62		141			196
Other		220			90		513			251
Total non-interest income		872			640		1,769			1,590
Non-interest expenses:
Salaries and employee benefits		4,379			4,574		8,944			8,972
Occupancy, net		780			776		1,559			1,534
Professional services		430			559		770			942
Data processing		332			260		672			543
Depreciation		198			206		403			414
FDIC assessment		121			133		212			277
Advertising and marketing		164			265		347			418
Stock based compensation		58			95		126			180
Other		207			135		496			452
Total non-interest expenses		6,669			7,003		13,529			13,732
Income before provision for income taxes		4,930			1,656		9,182			3,948
Provision for income taxes		1,379			496		2,610			1,190
Net income	$	3,551		$	1,160	$	6,572		$	2,758
Earnings per share:
Basic	$	0.42		$	0.14	$	0.77		$	0.33
Diluted	$	0.41		$	0.14	$	0.76		$	0.32
Weighted average number of common shares outstanding:
Basic		8,549			8,472		8,522			8,472
Diluted		8,717			8,498		8,661			8,541
Dividends declared per common share	$	0.070		$	0.045	$	0.130		$	0.100

See the accompanying notes.

3

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020		2021		2020
	(in thousands)
Net income		$	3,551	$	1,160	$	6,572	$	2,758
Other comprehensive income, net:
Unrealized income on securities available-for-sale (AFS), net (tax effect of $96, $24, $115 and $10 for each respective period presented)			160		59		115		25
Net other comprehensive income			160		59		115		25
Comprehensive income		$	3,711	$	1,219	$	6,687	$	2,783

See the accompanying notes.

4

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

Three Months Ended June 30, 2021	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, March 31, 2021:		8,524	$	43,227	$	(10	)	$	48,574		$	91,791
Net income		—		0		0			3,551			3,551
Exercise of stock options		65		494		0			0			494
Stock based compensation		0		59		0			0			59
Dividends on common stock		0		0		0			(598	)		(598	)
Other comprehensive income, net		—		0		160			0			160
Balance, June 30, 2021		8,589	$	43,780	$	150		$	51,527		$	95,457

Three Months Ended June 30, 2020	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, March 31, 2020:		8,472	$	42,671	$	(112	)	$	40,602		$	83,161
Net income		—		0		0			1,160			1,160
Exercise of stock options		0		0		0			0			0
Stock based compensation		0		95		0			0			95
Dividends on common stock		0		0		0			(382	)		(382	)
Other comprehensive income, net		—		0		59			0			59
Balance, June 30, 2020		8,472	$	42,766	$	(53	)	$	41,380		$	84,093

Six Months Ended June 30, 2021	Common Stock				Accumulated Other Comprehensive		Retained			Total Stockholders’
	Shares		Amount		Income (Loss)		Earnings			Equity
	(in thousands)
Balance, December 31, 2020:		8,473	$	42,909	$	35	$	46,063		$	89,007
Net income		—		0		0		6,572			6,572
Exercise of stock options		116		745		0		0			745
Stock based compensation		0		126		0		0			126
Dividends on common stock		0		0		0		(1,108	)		(1,108	)
Other comprehensive income, net		—		0		115		0			115
Balance, June 30, 2021		8,589	$	43,780	$	150	$	51,527		$	95,457

Six Months Ended June 30, 2020	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, December 31, 2019:		8,472	$	42,586	$	(78	)	$	39,470		$	81,978
Net income		—		0		0			2,758			2,758
Exercise of stock options		0		0		0			0			0
Stock based compensation		0		180		0			0			180
Dividends on common stock		0		0		0			(848	)		(848	)
Other comprehensive income, net		—		0		25			0			25
Balance, June 30, 2020		8,472	$	42,766	$	(53	)	$	41,380		$	84,093

See the accompanying notes.

5

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended June 30,
	2021			2020
	(in thousands)
Cash flows from operating activities:
Net income	$	6,572		$	2,758
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		(214	)		1,154
Depreciation		403			414
Stock based compensation		126			180
Deferred income taxes		(77	)		(217	)
Net accretion of discounts and premiums for investment securities		39			46
(Gains) Losses on:
Sale of loans, net		(248	)		(287	)
Sale of assets, net		0			25
Loans originated for sale and principal collections, net		3,977			6,956
Changes in:
Investment securities held at fair value		(49	)		39
Other assets		350			(3,717	)
Other liabilities		(1,890	)		993
Servicing assets, net		(64	)		(125	)
Net cash provided by operating activities		8,925			8,219
Cash flows from investing activities:
Principal pay downs and maturities of available-for-sale securities		2,273			2,342
Purchase of available-for-sale securities		(4,500	)		(1,500	)
Principal pay downs and maturities of held-to-maturity securities		1,196			449
Loan originations and principal collections, net		(39,297	)		(87,105	)
Redemption (purchase) of restricted stock, net		192			(931	)
Purchase of premises and equipment, net		(79	)		(112	)
Net cash used in investing activities		(40,215	)		(86,857	)
Cash flows from financing activities:
Net (decrease) increase in deposits		98,393			(776	)
Net (decrease) increase in borrowings		(15,000	)		145,103
Exercise of stock options		745			0
Cash dividends paid on common stock		(1,108	)		(848	)
Net cash provided by financing activities		83,030			143,479
Net increase cash and cash equivalents		51,740			64,841
Cash and cash equivalents at beginning of period		60,540			82,661
Cash and cash equivalents at end of period	$	112,280		$	147,502
Supplemental disclosure:
Cash paid during the period for:
Interest	$	2,128		$	2,134
Income Taxes	$	3,367		$	0
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net		136			106

See the accompanying notes.

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the 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 the fair value of securities available for sale.  Although Management believes these estimates to be reasonably accurate, actual amounts may differ.  In the opinion of Management, all necessary adjustments have been reflected in the financial statements during their preparation.

Interim Financial Information

The accompanying unaudited consolidated financial statements as of June 30, 2021 and 2020, and for the three months, have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by GAAP for complete financial statements.  These statements have been prepared on a basis that is substantially consistent with the accounting principles applied to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Reclassifications

Certain amounts in the consolidated financial statements as of December 31, 2020 and for the three and six months ended June 30, 2020 have been reclassified to conform to the current presentation.  The reclassifications have no effect on net income, comprehensive income or stockholders’ equity as previously reported.

COVID-19 pandemic

The COVID-19 pandemic, first identified in the United States during the first quarter of 2020, has had adverse effects on the economy in the United States, generally, and in our service area, in particular. The assistance the government supported programs under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act (CAA), including the Paycheck Protection Program (PPP), have lessened the disruptive effects of the COVID-19 pandemic.  CWB has actively worked to assist clients in applying for and receiving assistance through the PPP, and CWB has implemented a distinct COVID-19 relief program of payment deferrals, fee waivers and suspension of residential property foreclosures. While the origination fees recognized by CWB in providing these loans have been beneficial to CWB and, in turn CWBC, the full impact of the COVID-19 pandemic is not known at this time and the extent to which the COVID-19 pandemic will continue to affect our clients and our business is dependent on future developments.  These include the scope and duration of the pandemic, the effectiveness of vaccines and other therapies in treating and preventing the disease, the financial impact of the pandemic on our employees, clients, vendors, and services area, and what further actions the federal and state governments and other third parties may take in response to the pandemic.  The clients in our service area have experienced workforce challenges, business closures, and business slowdowns.  All of this may lead to increased credit ratings downgrades, loan delinquencies, defaults, reductions in asset values, and foreclosures, any of which could have an adverse effect on our business, financial condition, and results of operations.

7

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 commercial agriculture and Small Business Association (‘‘SBA”).  The Company did not incur any lower of cost or fair value provision in the three and six months ended June 30, 2021 and 2020.

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 client’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.

When loans are repaid or forgiven, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for through interest income.

Nonaccrual loans:  For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest.  Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of principal and collection of interest is unlikely.  The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection.  Other personal loans are typically charged off no later than 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 client 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 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 predominately term extensions.  A TDR loan is also considered impaired.  Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.

Guidance on Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by banking regulators and titled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encouraged financial institutions to work prudently with borrowers unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) further provided that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 ( the extension of the expiration date was passed as part of the Bipartisan-Bicameral Omnibus COVID Relief Deal on December 21, 2020) or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we offered short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals. With the passage of The Economic Aid Act, the Company modified and extended its payment deferral program. The new program is for 90 days. As of June 30, 2021, the outstanding balance of these deferred loans was $0.6 million, or 0.1% of the Bank’s total loan portfolio.

8

Allowance for Loan Losses and Provision for Loan Losses

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

Substantially Risk Free – These borrowers have virtually no probability of default or loss given default and present no identifiable or potential adverse risk to the Company.  Documented repayment is either backed by the full faith and credit of the United States Government or secured by cash collateral of the principal borrowed.  The collateral must be in the possession of the Company and free from potential claim.  In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.

Nominal Risk – This rating is for the highest quality borrowers with nominal probability of default or loss given default from the transaction.  Typically, this is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity, and excellent debt service ability.  The borrower’s financial outlook is stable due to a broad range of operations or products and is able to weather an economic downturn without significant impact to liquidity or net worth.  Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade.  In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.  Transaction can include marketable securities as collateral, properly margined.

Pass/Watch – The loans in the 4 remaining pass categories range from minimal risk to moderate risk to acceptable risk to Watch risk rating. Loans rated in the first 3 categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in the minimal and moderate risk categories are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment. Loans rated Watch indicate that although the borrower meets the criteria for a rating of acceptable risk or better, the credit possesses an identified and elevated risk level that should be resolved in a short period of time.  Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in the submission of financial reporting or covenant violations that are not indicative of a protracted trend.

Special Mention - A Special Mention loan has potential weaknesses that require Management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date.  Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize full collection of amounts due.  They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.

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

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

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

9

Commercial, CRE (which includes SBA 504, Land, and Construction) 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 value, the loan is generally charged-off in full.  Unsecured loans which are delinquent over 90 days are, without clear support, 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 cash secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or 5 payments delinquent.

The ALL calculation for the different loan portfolios is as follows:

• Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer – Migration analysis combined with risk rating is used to determine the required ALL for all non-impaired loans.  In addition, the migration results are adjusted based upon qualitative factors that affect the specific portfolio category.  Reserves on impaired loans are determined based upon the individual characteristics of the loan.

• Manufactured Housing – The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency.  In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.

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

• The expected future cash flows are estimated and then discounted at the effective interest rate.

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

• The loan’s observable market price.

Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.

The Company determines the appropriate ALL on a monthly basis.  Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL determination and adjusted as deemed necessary.  The review of the appropriateness of the allowance takes into consideration such factors as concentrations of credit, changes in the growth, size, and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees, and economic and environmental conditions that may affect the borrowers’ ability to pay and/or the value of the underlying collateral.  Additional factors considered include geographic location of borrowers, changes in the Company’s product-specific credit policy and lending staff experience.  These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.

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

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• Concentrations of credit

• Trends in volume, maturity, and composition of loans

• Volume and trend in delinquency, nonaccrual, and classified assets

• Economic conditions

• Geographic distance

• Policy and procedures or underwriting standards

• Staff experience and ability

• Value of underlying collateral

• Competition, legal, or regulatory environment

• 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 client 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 client’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 to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations.  The estimate for loan losses on off-balance sheet instruments is included within other liabilities and the charge to income that establishes this liability is included in non-interest expense.

Foreclosed Real Estate and Repossessed Assets

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

Income Taxes

The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements.  Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting.  These items represent “temporary differences.”  Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  A valuation allowance is established for deferred tax assets if, based on 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.

11

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.  Diluted earnings per share include the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include stock options.

Recent Accounting Pronouncements

In June 2016, the FASB issued updated guidance codified within ASU-2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which amends the guidance for recognizing credit losses from an “incurred loss” methodology that delays recognition of credit losses until it is probable a loss has been incurred to an expected credit loss methodology. The guidance requires the use of the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The standard is effective for the Company as of January 1, 2023. The Company is currently evaluating the impact of the amended guidance and has not yet determined the effect of the standard on its ongoing financial reporting.

In March 2020, the FASB issued updated guidance codified within ASU-2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable, or transaction based and less susceptible to manipulation. The Company is currently evaluating the impact of the amended guidance. The adoption of this standard is not anticipated to have a material impact on the Company’s Consolidated Financial Statements.

2. INVESTMENT SECURITIES

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

	June 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	5,957	$	37	$	0		$	5,994
U.S. government agency collateralized mortgage obligations (“CMO”)		6,016		35		(10	)		6,041
Other securities		7,500		144		0			7,644
Total	$	19,473	$	216	$	(10	)	$	19,679
Securities held-to-maturity
U.S. government agency mortgage-backed securities (“MBS”)	$	3,370	$	194	$	(1	)	$	3,563
Total	$	3,370	$	194	$	(1	)	$	3,563
Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	132	$	0		$	198
Total	$	66	$	132	$	0		$	198

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	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	6,501	$	1	$	(30	)	$	6,472
U.S. government agency collateralized mortgage obligations (“CMO”)		7,765		33		(13	)		7,785
Other securities		3,000		53		(2	)		3,051
Total	$	17,266	$	87	$	(45	)	$	17,308
Securities held-to-maturity
U.S. government agency mortgage-backed securities (“MBS”)	$	4,586	$	269	$	(1	)	$	4,854
Total	$	4,586	$	269	$	(1	)	$	4,854
Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	83	$	0		$	149
Total	$	66	$	83	$	0		$	149

At June 30, 2021 and December 31, 2020, $15.4 million and $18.9 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.

The maturity periods and weighted average yields of investment securities at the period ends indicated were as follows:

	June 30, 2021
	Less than One Year					One to Five Years					Five to Ten Years					Over Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale	(dollars in thousands)
U.S. government agency notes	$	0		0		$	763		0.6	%	$	5,231		1.3	%	$	0		0		$	5,994		1.2	%
U.S. government agency CMO		85		2.0	%		4,886		0.4	%		210		0.4	%		860		0.8	%		6,041		0.6	%
Other securities		0		0			7,644		3.9	%		0		0.0	%		0		0			7,644		3.9	%
Total	$	85		2.0	%	$	13,293		2.5	%	$	5,441		1.2	%	$	860		0.8	%	$	19,679		2.1	%
Securities held-to-maturity
U.S. government agency MBS	$	0		0		$	2,612		2.8	%	$	758		3.6	%	$	0		0		$	3,370		3.0	%
Total	$	0		0		$	2,612		2.8	%	$	758		3.6	%	$	0		0		$	3,370		3.0	%
Securities measured at fair value
Farmer Mac class A stock	$	—		—		$	—		—		$	—		—		$	—		—		$	198		0
Total	$	—		—		$	—		—		$	—		—		$	—		—		$	198		0

	December 31, 2020
	Less than One Year					One to Five Years					Five to Ten Years					Over Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale	(dollars in thousands)
U.S. government agency notes	$	0		0		$	784		0.6	%	$	5,688		1.7	%	$	0		0		$	6,472		1.2	%
U.S. government agency CMO		820		1.7	%		5,832		0.6	%		1,133		0.8	%		0		0			7,785		2.3	%
Other securities		0		0.0	%		3,051		4.8	%		0		0.0	%		0		0.0	%		3,051		4.8	%
Total	$	820		0		$	9,667		1.9	%	$	6,821		1.5	%	$	0		0		$	17,308		1.6	%
Securities held-to-maturity
U.S. government agency MBS	$	0		0		$	3,821		2.8	%	$	765		3.6	%	$	0		0		$	4,586		2.9	%
Total	$	0		0		$	3,821		2.8	%	$	765		3.6	%	$	0		0		$	4,586		2.9	%
Securities measured at fair value
Farmer Mac class A stock	$	—		—		$	—		—		$	—		—		$	—		—		$	149		0
Total	$	—		—		$	—		—		$	—		—		$	—		—		$	149		0

13

The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:

	June 30, 2021				December 31, 2020
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available-for-sale	(in thousands)
Due in one year or less	$	85	$	85	$	817	$	820
After one year through five years		13,107		13,293		9,594		9,667
After five years through ten years		5,419		5,441		6,855		6,821
After ten years		862		860		0		0
Total	$	19,473	$	19,679	$	17,266	$	17,308
Securities held-to-maturity
Due in one year or less	$	0	$	0	$	0	$	0
After one year through five years		2,612		2,703		3,821		3,965
After five years through ten years		758		860		765		889
After ten years		0		0		0		0
Total	$	3,370	$	3,563	$	4,586	$	4,854
Securities measured at fair value
Farmer Mac class A stock	$	66	$	198	$	66	$	149
Total	$	66	$	198	$	66	$	149

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:

	June 30, 2021
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	0	$	0	$	0	$	0	$	0	$	0
U.S. government agency CMO		0		0		10		1,069		10		1,069
Other securities		0		0		0		0		0		0
Total	$	0	$	0	$	10	$	1,069	$	10	$	1,069
Securities held-to-maturity
U.S. government agency MBS	$	1	$	178	$	0	$	0	$	1	$	178
Total	$	1	$	178	$	0	$	0	$	1	$	178
Securities measured at fair value
Farmer Mac class A stock	$	0	$	0	$	0	$	0	$	0	$	0
Total	$	0	$	0	$	0	$	0	$	0	$	0

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	December 31, 2020
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	0	$	0	$	7	$	784	$	7	$	784
U.S. government agency CMO		0		0		36		6,021		36		6,021
Other securities		2		1,498		0		0		2		1,498
Total	$	2	$	1,498	$	43	$	6,805	$	45	$	8,303
Securities held-to-maturity
U.S. government agency MBS	$	1	$	185	$	0	$	0	$	1	$	185
Total	$	1	$	185	$	0	$	0	$	1	$	185
Securities measured at fair value
Farmer Mac class A stock	$	0	$	0	$	0	$	0	$	0	$	0
Total	$	0	$	0	$	0	$	0	$	0	$	0

As of June 30, 2021 and December 31, 2020, there were  4 and 13 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 June 30, 2021 and December 31, 2020, Management believes the impairments detailed in the table above are temporary and no other-than-temporary impairment loss has been realized in the Company’s consolidated income statements.

3. LOANS HELD FOR SALE

SBA and Agriculture Loans

As of June 30, 2021 and December 31, 2020, the Company had approximately $8.0 million and $8.3 million, respectively, of SBA loans included in loans held for sale.  As of June 30, 2021 and December 31, 2020, the principal balance of SBA loans serviced for others was $3.7 million and $4.0 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 June 30, 2021 and December 31, 2020, the Company had $19.3 million and $22.9 million of USDA loans included in loans held for sale, respectively. As of June 30, 2021 and December 31, 2020, the principal balance of USDA loans serviced for others was $0.8 million.

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4. LOANS HELD FOR INVESTMENT

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

	June 30, 2021			December 31, 2020
	(in thousands)
Manufactured housing	$	286,552		$	280,284
Commercial real estate		444,127			402,148
Commercial		49,243			57,933
SBA (1)		73,920			73,131
HELOC		3,685			3,861
Single family real estate		10,623			10,490
Consumer		40			133
		868,190			827,980
Allowance for loan losses		(10,240	)		(10,194	)
Deferred fees, net		(2,133	)		(1,583	)
Discount on SBA loans		(40	)		(49	)
Total loans held for investment, net	$	855,777		$	816,154

(1)  Includes $71.1 million and $69.5 million of SBA Paycheck Protection Program (PPP) loans as of June 30, 2021 and December 31, 2020, respectively.

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

	June 30, 2021
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Nonaccrual		Total		Recorded Investment Over 90 Days and Accruing
	(in thousands)
Manufactured housing	$	286,397	$	58	$	0	$	0	$	58	$	97	$	286,552	$	0
Commercial real estate:
Commercial real estate		399,975		0		0		0		0		0		399,975		0
SBA 504 1st trust deed		21,130		0		0		0		0		1,386		22,516		0
Land		8,946		0		0		0		0		0		8,946		0
Construction		12,690		0		0		0		0		0		12,690		0
Commercial		49,243		0		0		0		0		0		49,243		0
SBA		73,735		0		38		0		38		147		73,920		0
HELOC		3,685		0		0		0		0		0		3,685		0
Single family real estate		10,347		0		0		0		0		276		10,623		0
Consumer		40		0		0		0		0		0		40		0
Total	$	866,188	$	58	$	38	$	0	$	96	$	1,906	$	868,190	$	0

	December 31, 2020
	Current		30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Nonaccrual		Total		Recorded Investment Over 90 Days and Accruing
	(in thousands)
Manufactured housing	$	277,873	$	1,716	$	81	$	0	$	1,797	$	614	$	280,284	$	0
Commercial real estate:
Commercial real estate		360,345		0		0		0		0		0		360,345		0
SBA 504 1st trust deed		16,423		0		0		0		0		1,469		17,892		0
Land		6,528		0		0		0		0		0		6,528		0
Construction		17,383		0		0		0		0		0		17,383		0
Commercial		56,451		92		0		0		92		1,390		57,933		0
SBA		72,856		0		0		0		0		275		73,131		0
HELOC		3,861		0		0		0		0		0		3,861		0
Single family real estate		10,366		0		0		0		0		124		10,490		0
Consumer		133		0		0		0		0		0		133		0
Total	$	822,219	$	1,808	$	81	$	0	$	1,889	$	3,872	$	827,980	$	0

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Allowance for Loan Losses

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020		2021			2020
	(in thousands)					(in thousands)
Beginning balance	$	10,233		$	9,167	$	10,194		$	8,717
Charge-offs		0			0		0			0
Recoveries		48			79		260			137
Net recoveries		48			79		260			137
Provision		(41	)		762		(214	)		1,154
Ending balance	$	10,240		$	10,008	$	10,240		$	10,008

As of June 30, 2021 and December 31, 2020, the Company had reserves for credit losses on undisbursed loans of $78,000 and $92,000, respectively, which were included in other liabilities.

The following tables summarize the changes in the allowance for loan losses by portfolio type:

	For the Three Months Ended June 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate			Consumer			Total
2021	(in thousands)
Beginning balance	$	2,623		$	6,220	$	1,108		$	130		$	25		$	126		$	1		$	10,233
Charge-offs		0			0		0			0			0			0			0			0
Recoveries		12			20		10			4			1			1			0			48
Net recoveries		12			20		10			4			1			1			0			48
Provision (credit)		(5	)		88		(98	)		(20	)		(1	)		(5	)		0			(41	)
Ending balance	$	2,630		$	6,328	$	1,020		$	114		$	25		$	122		$	1		$	10,240
2020
Beginning balance	$	2,364		$	5,484	$	1,164		$	29		$	27		$	96		$	3		$	9,167
Charge-offs		0			0		0			0			0			0			0			0
Recoveries		7			20		47			3			2			0			0			79
Net recoveries		7			20		47			3			2			0			0			79
Provision (credit)		99			255		292			96			(3	)		24			(1	)		762
Ending balance	$	2,470		$	5,759	$	1,503		$	128		$	26		$	120		$	2		$	10,008

	For the Six Months Ended June 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate		Consumer			Total
2021	(in thousands)
Beginning balance	$	2,612		$	5,950	$	1,379		$	118		$	25		$	108	$	2		$	10,194
Charge-offs		0			0		0			0			0			0		0			0
Recoveries		151			40		20			45			3			1		0			260
Net recoveries		151			40		20			45			3			1		0			260
Provision (credit)		(133	)		338		(379	)		(49	)		(3	)		13		(1	)		(214	)
Ending balance	$	2,630		$	6,328	$	1,020		$	114		$	25		$	122	$	1		$	10,240
2020
Beginning balance	$	2,184		$	5,217	$	1,162		$	32		$	27		$	92	$	3		$	8,717
Charge-offs		0			0		0			0			0			0		0			0
Recoveries		13			40		74			6			3			1		0			137
Net recoveries		13			40		74			6			3			1		0			137
Provision (credit)		273			502		267			90			(4	)		27		(1	)		1,154
Ending balance	$	2,470		$	5,759	$	1,503		$	128		$	26		$	120	$	2		$	10,008

17

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 June 30, 2021:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	4,043	$	225	$	93	$	0	$	0	$	437	$	0	$	4,798
Impaired loans with no allowance recorded		1,286		1,386		1,619		397		0		1,992		0		6,680
Total loans individually evaluated for impairment		5,329		1,611		1,712		397		0		2,429		0		11,478
Loans collectively evaluated for impairment		281,223		442,516		47,531		73,523		3,685		8,194		40		856,712
Total loans held for investment	$	286,552	$	444,127	$	49,243	$	73,920	$	3,685	$	10,623	$	40	$	868,190
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	4,043	$	225	$	93	$	0	$	0	$	437	$	0	$	4,798
Impaired loans with no allowance recorded		1,878		1,446		1,619		854		0		1,999		0		7,796
Total loans individually evaluated for impairment		5,921		1,671		1,712		854		0		2,436		0		12,594
Loans collectively evaluated for impairment		281,223		442,516		47,531		73,523		3,685		8,194		40		856,712
Total loans held for investment	$	287,144	$	444,187	$	49,243	$	74,377	$	3,685	$	10,630	$	40	$	869,306
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	246	$	16	$	0	$	0	$	0	$	13	$	0	$	275
Impaired loans with no allowance recorded		0		0		0		0		0		0		0		0
Total loans individually evaluated for impairment		246		16		0		0		0		13		0		275
Loans collectively evaluated for impairment		2,384		6,312		1,020		114		25		109		1		9,965
Total loans held for investment	$	2,630	$	6,328	$	1,020	$	114	$	25	$	122	$	1	$	10,240

18

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Loans Held for Investment as of December 31, 2020:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	4,402	$	230	$	0	$	0	$	0	$	449	$	0	$	5,081
Impaired loans with no allowance recorded		2,294		1,468		1,504		292		0		1,860		0		7,418
Total loans individually evaluated for impairment		6,696		1,698		1,504		292		0		2,309		0		12,499
Loans collectively evaluated for impairment		273,588		400,450		56,429		72,839		3,861		8,181		133		815,481
Total loans held for investment	$	280,284	$	402,148	$	57,933	$	73,131	$	3,861	$	10,490	$	133	$	827,980
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	4,402	$	230	$	0	$	0	$	0	$	449	$	0	$	5,081
Impaired loans with no allowance recorded		3,066		1,474		1,844		946		0		1,860		0		9,190
Total loans individually evaluated for impairment		7,468		1,704		1,844		946		0		2,309		0		14,271
Loans collectively evaluated for impairment		273,588		400,450		56,429		72,839		3,861		8,181		133		815,481
Total loans held for investment	$	281,056	$	402,154	$	58,273	$	73,785	$	3,861	$	10,490	$	133	$	829,752
Related Allowance for Credit Losses
Impaired loans with an allowance recorded	$	279	$	16	$	0	$	0	$	0	$	16	$	0	$	311
Impaired loans with no allowance recorded		0		0		0		0		0		0		0		0
Total loans individually evaluated for impairment		279		16		0		0		0		16		0		311
Loans collectively evaluated for impairment		2,333		5,934		1,379		118		25		92		2		9,883
Total loans held for investment	$	2,612	$	5,950	$	1,379	$	118	$	25	$	108	$	2	$	10,194

Included in impaired loans are $0.6 million and $0.7 million of loans guaranteed by government agencies at June 30, 2021 and December 31, 2020, 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 below as “Impaired loans without specific valuation allowance under ASC 310.”  The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of June 30, 2021 and December 31, 2020.

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

	June 30, 2021		December 31, 2020
	(in thousands)
Impaired loans with a specific valuation allowance under ASC 310	$	4,798	$	5,081
Impaired loans without a specific valuation allowance under ASC 310		6,680		7,418
Total impaired loans	$	11,478	$	12,499
Valuation allowance related to impaired loans	$	275	$	311

19

The following table summarizes impaired loans by class of loans:

	June 30, 2021		December 31, 2020
	(in thousands)
Manufactured housing	$	5,329	$	6,696
Commercial real estate :
Commercial real estate		0		0
SBA 504 1st trust deed		1,611		1,698
Land		0		0
Construction		0		0
Commercial		1,712		1,504
SBA		397		292
HELOC		0		0
Single family real estate		2,429		2,309
Consumer		0		0
Total	$	11,478	$	12,499

The following tables summarize average investment in impaired loans by class of loans and the related interest income recognized:

	Three Months Ended June 30,
	2021				2020
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	5,648	$	69	$	7,660	$	131
Commercial real estate:
Commercial real estate		0		0		84		0
SBA 504 1st trust deed		1,627		6		232		4
Land		0		0		0		0
Construction		0		0		0		0
Commercial		1,744		27		1,693		2
SBA		407		4		340		0
HELOC		0		0		0		0
Single family real estate		2,352		53		2,262		29
Consumer		0		0		0		0
Total	$	11,778	$	159	$	12,271	$	166

	Six Months Ended June 30,
	2021				2020
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	5,985	$	182	$	7,790	$	266
Commercial real estate:
Commercial real estate		0		0		84		0
SBA 504 1st trust deed		1,647		44		233		9
Land		0		0		0		0
Construction		0		0		0		0
Commercial		1,661		54		1,733		4
SBA		367		8		355		0
HELOC		0		0		0		0
Single family real estate		2,333		81		2,289		60
Consumer		0		0		0		0
Total	$	11,993	$	369	$	12,484	$	339

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

20

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

	June 30, 2021			December 31, 2020
	(in thousands)
Nonaccrual loans	$	1,906		$	3,872
Government guaranteed portion of loans included above	$	109		$	207
Troubled debt restructured loans, gross	$	11,001		$	11,141
Loans 30 through 89 days past due with interest accruing	$	96		$	1,889
Loans 90 days or more past due with interest accruing	$	0		$	0
Allowance for loan losses to gross loans held for investment		1.18	%		1.23	%

The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent.  Any unpaid but accrued interest is reversed at that time.  Thereafter, interest income is no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Foregone interest on nonaccrual and TDR loans for the three months ended June 30, 2021 and 2020, was $35,000 and $0.1 million, respectively.  Foregone interest on nonaccrual and TDR loans for the six months ended June 30, 2021 and 2020, was $0.1 million for both periods.

The following table presents the composition of nonaccrual loans by class of loans:

	June 30, 2021		December 31, 2020
	(in thousands)
Manufactured housing	$	97	$	614
Commercial real estate:
Commercial real estate		0		0
SBA 504 1st trust deed		1,386		1,469
Land		0		0
Construction		0		0
Commercial		0		1,390
SBA		147		275
HELOC		0		0
Single family real estate		276		124
Consumer		0		0
Total	$	1,906	$	3,872

Included in nonaccrual loans are $0.1 million of loans guaranteed by government agencies at June 30, 2021 and $0.2 million at December 31, 2020.

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 rates loans with potential problems 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”.   Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve Management’s close attention are deemed to be Special Mention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date.  Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.

21

The following tables present gross loans by risk rating:

	June 30, 2021
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	285,564	$	0	$	988	$	0	$	286,552
Commercial real estate:
Commercial real estate		380,639		5,079		12,947		0		398,665
SBA 504 1st trust deed		20,175		0		2,341		0		22,516
Land		8,946		0		0		0		8,946
Construction		12,690		0		0		0		12,690
Commercial		43,164		710		2,414		0		46,288
SBA		2,345		24		125		0		2,494
HELOC		3,685		0		0		0		3,685
Single family real estate		10,342		0		281		0		10,623
Consumer		40		0		0		0		40
Total, net		767,590		5,813		19,096		0		792,499
Government guarantee		73,736		0		1,955		0		75,691
Total	$	841,326	$	5,813	$	21,051	$	0	$	868,190

	December 31, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	278,826	$	0	$	1,458	$	0	$	280,284
Commercial real estate:
Commercial real estate		340,391		6,265		12,362		0		359,018
SBA 504 1st trust deed		14,877		0		3,015		0		17,892
Land		6,528		0		0		0		6,528
Construction		15,344		0		2,039		0		17,383
Commercial		48,776		823		3,419		0		53,018
SBA		2,554		34		263		0		2,851
HELOC		3,861		0		0		0		3,861
Single family real estate		10,361		0		129		0		10,490
Consumer		133		0		0		0		133
Total, net		721,651		7,122		22,685	$	0		751,458
Government guarantee		72,876		0		3,646		0		76,522
Total	$	794,527	$	7,122	$	26,331	$	0	$	827,980

The increase in Substandard loans during 2020 was primarily from higher risk industries or payment deferrals.

Troubled Debt Restructured Loan (TDR)

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

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

	For the Three Months Ended June 30, 2021
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
Manufactured housing		1	$	167	$	167	$	0	$	0	$	0
Total		1	$	167	$	167	$	0	$	0	$	0

22

There were 0 new TDR loans for the three months ended June 30, 2020.

	For the Six Months Ended June 30, 2021
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
Manufactured housing		1	$	167	$	167	$	0	$	0	$	0
Total		1	$	167	$	167	$	0	$	0	$	0

	For the Six Months Ended June 30, 2020
	Number of Loans		Pre- Modification Recorded Investment		Post Modification Recorded Investment		Balance of Loans with Rate Reduction		Balance of Loans with Term Extension		Effect on Allowance for Loan Losses
	(dollars in thousands)
SBA		1	$	56	$	56	$	56	$	56	$	1
Total		1	$	56	$	56	$	56	$	56	$	1	��

The average rate concessions were 0 basis points for the six months ended June 30, 2021 and 100 basis points for the six months ended June 30, 2020.  The average term extension in months was zero for the six months ended June 30, 2021 and 181 for the six months ended June 30, 2020. The concession for the 1 new TDR for the three months ending in June 30, 2021, was a result of a loan discharged in bankruptcy without a reaffirmation which resulted in a court ordered modification of the loan.

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 0 TDR loans with payment defaults for the three or six months ended June 30, 2021 or 2020.

At June 30, 2021 there were no material loan commitments outstanding on TDR loans.

5. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021			2020
	(in thousands)
Balance, beginning of period	$	2,572	$	2,707	$	2,614		$	2,524
Additions		0		0		136			106
Proceeds from dispositions		0		0		0			0
(Loss) gain on sales, net		0		0		(178	)		77
Third-party portion of writedown/loss		0		0		0			0
Balance, end of period	$	2,572	$	2,707	$	2,572		$	2,707

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.  The balance is primarily attributable to a single commercial agricultural relationship.

6. FAIR VALUE MEASUREMENT

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

23

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

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

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

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

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

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

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2021 and December 31, 2020.  The estimated fair value amounts for June 30, 2021 and December 31, 2020 have been measured as of period-end, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates.  As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

This information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities.

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

The following tables summarize the fair value of assets measured on a recurring basis:

	Fair Value Measurements at the End of the Reporting Period Using:
June 30, 2021	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Assets:	(in thousands)
Investment securities measured at fair value	$	198	$	0	$	0	$	198
Investment securities available-for-sale		0		19,679		0		19,679
Interest only strips		0		0		5		5
Servicing assets		0		0		1,525		1,525
Total	$	198	$	19,679	$	1,530	$	21,407

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	Fair Value Measurements at the End of the Reporting Period Using:
December 31, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Assets:	(in thousands)
Investment securities measured at fair value	$	149	$	0	$	0	$	149
Investment securities available-for-sale		0		12,759		1,498		14,257
Interest only strips		0		0		27		27
Servicing assets		0		0		1,461		1,461
Total	$	149	$	12,759	$	2,986	$	15,894

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 strip assets (“I/O strips”) which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees.  I/O strips are classified as Level 3 in the fair value hierarchy.  The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds.  I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.

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

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

25

The following summarizes the fair value measurements of assets measured on a non-recurring basis:

			Fair Value Measurements at the End of the Reporting Period Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in thousands)
June 30, 2021:
Impaired loans	$	3,736	$	0	$	3,736	$	0
Loans held for sale		30,929		0		30,929		0
Foreclosed real estate and repossessed assets		2,572		0		2,572		0
Total	$	37,237	$	0	$	37,237	$	0

			Fair Value Measurements at the End of the Reporting Period Using:
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Active Markets for Similar Assets (Level 2)		Unobservable Inputs (Level 3)
	(in thousands)
December 31, 2020:
Impaired loans	$	3,910	$	0	$	3,910	$	0
Loans held for sale		34,383		0		34,383		0
Foreclosed real estate and repossessed assets		2,614		0		2,614		0
Total	$	40,907	$	0	$	40,907	$	0

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.

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.

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The estimated fair value of the Company’s financial instruments are as follows:

	June 30, 2021
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	112,280	$	112,280	$	0	$	0	$	112,280
FRB and FHLB stock		4,441		0		4,441		0		4,441
Investment securities		23,247		198		23,242		0		23,440
Loans, net		883,029		0		901,157		7,467		908,624
Financial liabilities:
Deposits		864,578		0		863,577		0		863,577
Other borrowings		90,000		0		90,843		0		90,843

	December 31, 2020
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	60,540	$	60,540	$	0	$	0	$	60,540
FRB and FHLB stock		4,633		0		4,633		0		4,633
Investment securities		22,043		149		22,162		0		22,311
Loans, net		847,383		0		845,302		8,278		853,580
Financial liabilities:
Deposits		766,185		0		765,565		0		765,565
Other borrowings		105,000		0		106,051		0		106,051

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

Cash and cash equivalents

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

Investment securities

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

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

Federal Reserve Stock and Federal Home Loan Bank Stock

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

Loans Held for Sale

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 June 30, 2021 and December 31, 2020, the Company had loans held for sale with an aggregate carrying value of $27.3 million and $31.2 million, respectively.

Loans

Fair value of loans is estimated by calculating loan level fair values for all loans utilizing a discounted cash flow methodology incorporating “exit pricing” analytics in conformance with ASU 2016-01.  All active loans were valued in the portfolio as of date of exercise, excluding any loans held for sale, and utilized assumptions such as probability of default, loss given default, recovery delay and prepayment assumptions.  Fair value was calculated in accordance with ASC 820.  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.

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Deposits

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

Federal Home Loan Bank advances and other borrowings

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

Off-balance sheet instruments

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

There were $0.1 million standby letters of credit outstanding at June 30, 2021 and 0 at December 31, 2020.  Unfunded loan commitments at June 30, 2021 and December 31, 2020 were $61.5 million and $59.5 million, respectively.

7. OTHER BORROWINGS

Federal Home Loan Bank Advances – The Company through the Bank has a blanket lien credit line with the FHLB.  FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities.  Total FHLB advances were $90.0 million and $105.0 million at June 30, 2021 and December 31, 2020, respectively, borrowed at fixed rates.  The Company also had $26.0 million of letters of credit with FHLB at June 30, 2021 to secure public funds.  At June 30, 2021, CWB had pledged to the FHLB $15.4 million of securities and $300.9 million of loans.  At June 30, 2021, CWB had $104.2 million available for additional borrowing.  At December 31, 2020, CWB had pledged to the FHLB $18.9 million of securities and $304.7 million of loans.  At December 31, 2020, CWB had $81.4 million available for additional borrowing. Total FHLB interest expense for the six months ended June 30, 2021 and June 30, 2020 was $0.5 million and $0.4 million, respectively.

Federal Reserve Bank – The Company has established a credit line with the FRB.  Advances are collateralized in the aggregate by eligible loans for up to 28 days.  There were no outstanding FRB advances as of June 30, 2021 and December 31, 2020.  Available borrowing capacity was $110.7 million and $102.7 million as of June 30, 2021 and December 31, 2020, respectively. The Company also established a borrowing line with FRB under the Paycheck Protection Program Liquidity Fund (PPPLF).  Advances are secured by SBA PPP loans for up to the term of the loan.  There were 0 PPPLF advances at June 30, 2021 and December 31, 2020.

Federal Funds Purchased Lines – The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There was 0 amount outstanding as of June 30, 2021 and December 31, 2020.

Line of Credit - In July of 2019, the Company entered into a change of terms on its revolving line of credit agreement for up to $10.0 million. The line is collateralized by 100% of common stock in Community West Bank.  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 had 0 required balance at June 30, 2021.  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%.  As of June 30, 2021, there was 0 outstanding balance on the revolving line of credit.

8. STOCKHOLDERS’ EQUITY

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2021		2020			2021		2020
	Unrealized holding gains (losses) on AFS					Unrealized holding gains (losses) on AFS
	(in thousands)
Beginning balance	$	(10)	$	(112	)	$	35	$	(78	)
Other comprehensive income before reclassifications		160		59			115		25
Amounts reclassified from accumulated other comprehensive income		0		0			0		0
Net current-period other comprehensive income		160		59			115		25
Ending Balance	$	150	$	(53	)	$	150	$	(53	)

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Common Stock

On February 28, 2019, the Board of Directors increased the common stock repurchase program to $4.5 million and extended the repurchase program until August 31, 2021.  Under this program the Company has repurchased 350,189 common stock shares for $3.0 million at an average price of $8.71 per share.  There were 0 repurchased common stock shares under this program during the six months ended June 30, 2021.

During the three and six months ended June 30, 2021, the Company paid common stock dividends of $0.6 million and $1.1 million, respectively. During the three and six months ended June 30, 2020, the Company paid common stock dividends of $0.4 and $0.8 million, respectively.

9. CAPITAL REQUIREMENT

The Federal Reserve has capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company.

In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio (CBLR) framework. The final rule was effective January 1, 2020. Under this framework, the Bank would choose the option of using the community bank leverage ratio.  In order to qualify, a community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020.

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of June 30, 2021 and December 31, 2020.

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)			Community Banking Leverage Ratio (1)
June 30, 2021
CWB’s actual regulatory ratios		12.46	%		11.21	%		11.21	%		8.94	%		8.94	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%		8.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A			9.00	%
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A			N/A

(1) Temporary CBLR requires minimum of 8.50% to be considered well-capitalized until January 1, 2022.

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)
December 31, 2020
CWB’s actual regulatory ratios		12.27	%		11.02	%		11.02	%		9.29	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A

There are no conditions or events since June 30, 2021 that Management believes have changed the Company’s or the Bank’s risk-based capital category. The Company is closely monitoring capital levels in light of the COVID-19 pandemic, and the potential impact of its effect upon earnings.

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10. REVENUE RECOGNITION

The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income.  However, the recognition of these income streams did not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers.  Non-interest revenue streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied, and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Exchange Fees and Other Service Charges

Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges.  Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks, and other services. The Company’s performance obligation for exchange and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

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

Non-interest income	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
In-scope of Topic 606:	(in thousands)
Service charges on deposit accounts	$	58	$	51	$	111	$	170
Exchange fees and other service charges		118		31		221		71
Non-interest income (in-scope of Topic 606)		176		82		332		241
Non-interest income (out-of-scope of Topic 606)		696		558		1,437		1,349
Total	$	872	$	640	$	1,769	$	1,590

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2021 and December 31, 2020, the Company did not have any signficant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

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11. LEASES

The Company has adopted the accounting standard Leases -Topic 842.  We have operating leases for office space that are accounted for in accordance with Topic 842.  Our office leases are typically for terms of between 2 and 10 years.  Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments.  When renewal options exist, we generally do not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset.  As part of the adoption, we elected the package of practical expedients permitted under the transition guidance, but not the hindsight practical expedient.  As of June 30, 2021, the balance of the right-of-use assets was $5.5 million, and the lease liabilities were $5.6 million.  The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying Consolidated Balance Sheets.

	Six Months Ended June 30,
	2021			2020
Lease cost:	(in thousands)
Operating lease cost		1,018			1,109
Sublease income		0			0
Total lease cost		1,018			1,109
Other information
Cash paid for amounts included in the measurement of lease liabilities		0			0
Operating cash flows from operating leases		990			1,093
Weighted average remaining lease term - operating leases	8.45 years			9.42 Years
Weighted average discount rate - operating leases		3.24	%		3.25	%

Future minimum operating lease payments:

	June 30,
	2021		2020
	(in thousands)
2020	$	—	$	467
2021		496		884
2022		887		779
2023		813		705
2024		821		713
2025		768		705
Thereafter		2,586		2,586
Total future minimum lease payments	$	6,371	$	6,839
Less remaining imputed interest		820		974
Total lease liabilities	$	5,551	$	5,865

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

This discussion is designed to provide insight into Management’s assessment of significant trends related to the Company’s consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity.  It should be read in conjunction with the Company’s unaudited interim consolidated financial statements and notes thereto included herein and the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

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

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

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

• COVID-19 related impact on the Company and its clients, employees, and vendors, which may depend on several factors including the scope and continued duration of the pandemic, its influence on the financial markets, long-term and post-pandemic changes in the banking preferences and behaviors of clients, supply chain risks to the bank and its clients and actions taken by governmental authorities and other third parties in response to the pandemic;

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

• legislative or regulatory changes which may adversely affect the Company’s business;

• the water shortage in certain areas of California and its impact on the economy;

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

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

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

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

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

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

• litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, which may delay the occurrence or non-occurrence of events longer than anticipated;

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

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

• the ability to attract and retain key members of management;

• the ability to realize cost efficiencies;

• a failure or breach of our operational or security systems or infrastructure;

• 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; and

• loss of key personnel;

• impairments in sources of liquidity;

• possible impact by the transition from Libor as a reference rate; and,

• risks related to natural disasters, terrorist attacks, threats of war or actual war and health epidemics may impact our operations, revenues, costs, and stock price.

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For additional information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in item 1A of Part II of this Quarterly Report.

Financial Overview and Highlights

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

During the first quarter of 2020, the global economy began experiencing a downturn related to the impacts of the COVID-19 global pandemic (the COVID-19 pandemic, or the pandemic).  Such impacts have included volatility in the global stock and fixed income markets, a 150-basis-point reduction in the target federal funds rate, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Paycheck Protection Program (PPP) administered by the Small Business Administration, and a variety of rulings from the Company’s banking regulators. The California governor issued a stay-at-home order on March 19, 2020, which limited gatherings and travel and required workers who are not necessary to sustain or protect life to work from or stay at home.  The orders, as a result of COVID-19, led to financial stress for many businesses and workers throughout the communities we serve. On June 15, 2021, the Governor terminated the stay-at-home order.  The impact from the State’s re-opening and the effects from the new COVID -19 delta variant are unknown at this time.

The CARES Act, a massive and unprecedented federal government support program, was enacted on March 27, 2020.  It is a $2 trillion stimulus package intended to provide financial relief across the country.  The CARES Act includes the Paycheck Protection Program (PPP), which enables small businesses to obtain a forgivable Small Business Association (SBA) loan to meet payroll, rent, utility, and mortgage interest obligations.

The original PPP terminated on August 8, 2020, but was reopened in January 2021, with $284 billion in additional funding. As part of the resumption of the program, significant clarifications and modifications were made related to the scope of businesses eligible, expansion of the scope of expenses eligible for forgiveness, and simplification of forgiveness mechanisms for loans of $150,000 or less. Eligible businesses were able to apply for and receive PPP loans through May 31, 2021, and certain small businesses that previously received a loan under the original program were eligible to obtain an additional loan. These loans have a five-year term and earn interest at a rate of 1%. During the six months ended, June 30, 2021, the Company funded $50.0 million in loans under the second round of the PPP and received $21.8 million in loan payoffs on the first round of PPP loans. As of June 30, 2021, the outstanding balance of loans originated under the first and second round of the PPP totaled $71.1 million.

The CARES Act permitted financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and provided interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. This included the following (i) the loan modification was made between March 1, 2020, and December 31, 2020, and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extends these provisions through January 1, 2022. The Company applied this guidance to qualifying loan modifications. The types of loan modifications granted to borrowers included extensions of loan maturity dates, covenant waivers, interest only payments for a specified period of time, and loan payment deferrals. As of June 30, 2021, the Company has outstanding modifications on loans that met these conditions with a net balance of $0.6 million, of which, modifications involving loan payment deferrals total $0.6 million.

We are proud to have facilitated $123.7 million of SBA PPP loans to businesses throughout the communities we serve. Bank regulators issued an interim rule that neutralizes the regulatory capital effects by allowing a zero percent risk weight, for capital purposes to loans originated under the PPP and exclusion from average assets used for the leverage ratio as long as the loans are pledged to the Federal Reserve Bank’s Paycheck Protection Program Liquidity Fund (PPPLF) program.  The capital rule was issued April 9, 2020, and was effective immediately.

These Government sponsored programs could mask or delay the detection or reporting of deterioration in credit quality indicators. The industries most heavily impacted include retail, healthcare, hospitality, schools, and energy. The Company’s management team has evaluated the loans related to the affected industries, and at June 30, 2021, the Bank’s loans to these industries were $166.0 million, which is 18.6% of our $893.3 million loan portfolio.

The extent to which COVID-19 impacts our business will depend on future developments, which remain uncertain and difficult to predict.  Future developments include new information which may emerge concerning the COVID-19, the new COVID-19 delta variant, and the actions to contain the coronavirus or treat its impact.  We expect the significance of the pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other factors, its duration, the success of efforts to contain it and the impact of actions taken in response.  Uncertainty created by the pandemic is likely to continue to impact our operations, clients, vendors, and various areas of risk; however, we are unable at this time, to estimate the full impact of the pandemic on our ongoing financial and operational results. The Company expects to see continued volatility in the economic markets and government responses to the pandemic.  These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company for the remainder of the year.

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In light of volatility in the capital markets and economic disruptions, the Company continues to carefully monitor its capital and liquidity position.  The Company continues to anticipate that it will have sufficient capital levels to meet all applicable regulatory capital requirements.

Financial Result Highlights for the Second Quarter of 2021

The significant factors impacting the Company’s second quarter earnings performance were:

• Net income was $3.6 million, or $0.41 per diluted share in 2Q21, compared to $1.2 million, or $0.14 per diluted share in 2Q20.

• Net interest income increased to $10.7 million for 2Q21, compared to $8.8 million in 2Q20.

• A provision credit for loan losses of $41,000 was booked for 2Q21, compared to a provision for loan losses of $762,000 for 2Q20.  The resulting allowance was 1.18% of total loans held for investment at June 30, 2021, and 1.29% of total loans held for investment, excluding the $71.1 million of Paycheck Protection Program (“PPP”) loans at June 30, 2021, which are 100% guaranteed by the Small Business Administration (“SBA”).*

• Net interest margin improved to 4.24% for 2Q21, compared to 3.72% for 2Q20.

• Total demand deposits increased $147.8 million to $651.9 million at June 30, 2021, compared to $504.1 million at June 30, 2020.

• Total loans increased $37.2 million to $893.3 million at June 30, 2021, compared to $856.0 million at June 30, 2020.

• Book value per common share increased to $11.11 at June 30, 2021, compared to $9.93 at June 30, 2020.

• The Bank’s community bank leverage ratio (CBLR) was 8.94% at June 30, 2021, compared to 8.94% at June 30, 2020.

• Net non-accrual loans were to $1.8 million at June 30, 2021, and $2.6 million at June 30, 2020.

• Other assets acquired through foreclosure, net, was $2.6 million at June 30, 2021, and $2.7 million at June 30, 2020.

*Non-GAAP

The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance for the three and six months ended June 30, 2021 throughout the analysis sections of this report.

Critical Accounting Policies

A number of critical accounting policies are used in the preparation of the Company’s consolidated financial statements.  These policies relate to areas of the financial statements that involve estimates and judgments made by management.  These include provision and allowance for loan losses and investment securities.  These critical accounting policies are discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 with a description of how the estimates are determined and an indication of the consequences of an over or underestimate.

RESULTS OF OPERATIONS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(in thousands, except per share amounts)
Net income	$	3,551		$	1,160		$	6,572		$	2,758
Basic earnings per share	$	0.42		$	0.14		$	0.77		$	0.33
Diluted earnings per share	$	0.41		$	0.14		$	0.76		$	0.32
Total assets	$	1,063,028		$	1,060,847		$	1,063,028		$	1,060,847
Total loans	$	883,029		$	846,021		$	883,029		$	846,021
Total deposits	$	864,578		$	750,158		$	864,578		$	750,158
Total stockholders’ equity	$	95,457		$	84,093		$	95,457		$	84,093
Book value per common share	$	11.11		$	9.93		$	11.11		$	9.93
Net interest margin		4.24	%		3.72	%		4.22	%		3.84	%
Return on average assets		1.37	%		0.48	%		1.29	%		0.59	%
Return on average stockholders’ equity		15.18	%		5.57	%		14.35	%		6.66	%

The following table sets forth a summary financial overview for the comparable three and six months ended June 30, 2021 and 2020:

34

	Three Months Ended June 30,					Increase			Six Months Ended June 30,					Increase
	2021			2020		(Decrease)			2021			2020		(Decrease)
	(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income	$	11,651		$	10,777	$	874		$	22,706		$	21,752	$	954
Interest expense		965			1,996		(1,031	)		1,978			4,508		(2,530	)
Net interest income		10,686			8,781		1,905			20,728			17,244		3,484
Credit (provision) for loan losses		(41	)		762		(803	)		(214	)		1,154		(1,368	)
Net interest income after provision for loan losses		10,727			8,019		2,708			20,942			16,090		4,852
Non-interest income		872			640		232			1,769			1,590		179
Non-interest expenses		6,669			7,003		(334	)		13,529			13,732		(203	)
Income before income taxes		4,930			1,656		3,274			9,182			3,948		5,234
Provision for income taxes		1,379			496		883			2,610			1,190		1,420
Net income	$	3,551		$	1,160	$	2,391		$	6,572		$	2,758	$	3,814
Income per share - basic	$	0.42		$	0.14	$	0.28		$	0.77		$	0.33	$	0.45
Income per share - diluted	$	0.41		$	0.14	$	0.27		$	0.76		$	0.32	$	0.44

35

Interest Rates and Differentials

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

	Three Months Ended June 30,
	2021								2020
	Average Balance			Interest		Average Yield/Cost (2)			Average Balance			Interest		Average Yield/Cost (2)
Interest-Earning Assets	(in thousands)
Federal funds sold and interest-earning deposits	$	91,106		$	33		0.15	%	$	81,116		$	59		0.29	%
Investment securities		26,914			185		2.76	%		28,408			133		1.88	%
Loans (1)		891,948			11,433		5.14	%		839,625			10,585		5.07	%
Total earnings assets		1,009,968			11,651		4.63	%		949,149			10,777		4.57	%
Nonearning Assets
Cash and due from banks		2,204								2,283
Allowance for loan losses		(10,261	)							(9,239	)
Other assets		40,075								36,057
Total assets	$	1,041,986							$	978,250
Interest-Bearing Liabilities
Interest-bearing demand deposits		436,167			466		0.43	%		291,328			496		0.68	%
Savings deposits		20,047			19		0.38	%		17,028			27		0.64	%
Time deposits		184,584			286		0.62	%		261,287			977		1.50	%
Total interest-bearing deposits		640,798			771		0.48	%		569,643			1,500		1.06	%
Other borrowings		92,582			194		0.84	%		133,342			496		1.50	%
Total interest-bearing liabilities		733,380			965		0.53	%		702,985			1,996		1.14	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		199,306								176,001
Other liabilities		15,449								15,507
Stockholders’ equity		93,851								83,757
Total Liabilities and Stockholders’ Equity	$	1,041,986							$	978,250
Net interest income and margin (3)				$	10,686		4.24	%				$	8,781		3.72	%
Net interest spread (4)							4.10	%							3.43	%

(1) Includes nonaccrual loans.

(2) Annualized.

(3) Net interest margin is computed by dividing net interest income by total average earning assets.

(4) Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

36

	Six Months Ended June 30,
	2021								2020
	Average Balance			Interest		Average Yield/Cost (2)			Average Balance			Interest		Average Yield/Cost (2)
Interest-Earning Assets	(in thousands)
Federal funds sold and interest-earning deposits	$	81,251		$	72		0.18	%	$	61,348		$	185		0.61	%
Investment securities		26,406			345		2.63	%		28,732			318		2.23	%
Loans (1)		883,902			22,289		5.09	%		813,581			21,249		5.25	%
Total earnings assets		991,559			22,706		4.62	%		903,661			21,752		4.84	%
Nonearning Assets
Cash and due from banks		2,140								2,613
Allowance for loan losses		(10,245	)							(9,059	)
Other assets		39,948								35,119
Total assets	$	1,023,402							$	932,334
Interest-Bearing Liabilities
Interest-bearing demand deposits		423,461			947		0.45	%		287,269			1,215		0.85	%
Savings deposits		19,689			40		0.41	%		16,367			57		0.70	%
Time deposits		179,093			526		0.59	%		281,343			2,350		1.68	%
Total interest-bearing deposits		622,243			1,513		0.49	%		584,979			3,622		1.25	%
Other borrowings		98,757			465		0.95	%		100,956			886		1.76	%
Total interest-bearing liabilities		721,000			1,978		0.55	%		685,935			4,508		1.32	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		194,191								146,946
Other liabilities		15,824								16,167
Stockholders’ equity		92,387								83,286
Total Liabilities and Stockholders’ Equity	$	1,023,402							$	932,334
Net interest income and margin (3)				$	20,728		4.22	%				$	17,244		3.84	%
Net interest spread (4)							4.07	%							3.52	%

(1) Includes nonaccrual loans.

(2) Annualized.

(3) Net interest margin is computed by dividing net interest income by total average earning assets.

(4) Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

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

	Three Months Ended June 30, 2021 versus 2020									Six Months Ended June 30, 2021 versus 2020
	Increase (Decrease) Due to Changes in (1)									Increase (Decrease) Due to Changes in (1)
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)									(in thousands)
Interest income:
Federal funds sold and interest-earning deposits	$	4		$	(30	)	$	(26	)	$	18		$	(131	)	$	(113	)
Investment securities		(10	)		62			52			(30	)		57			27
Loans, net		671			177			848			1,775			(735	)		1,040
Total interest income		665			209			874			1,763			(809	)		954
Interest expense:
Interest-bearing demand deposits		155			(185	)		(30	)		304			(572	)		(268	)
Savings deposits		3			(11	)		(8	)		7			(24	)		(17	)
Time deposits		(119	)		(572	)		(691	)		(299	)		(1,525	)		(1,824	)
Other borrowings		(85	)		(217	)		(302	)		(10	)		(411	)		(421	)
Total interest expense		(46	)		(985	)		(1,031	)		2			(2,532	)		(2,530	)
Net increase	$	711		$	1,194		$	1,905		$	1,761		$	1,723		$	3,484

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

37

Comparison of interest income, interest expense and net interest margin

The Company’s primary source of revenue is interest income.  Interest income for the three and six months ended June 30, 2021 was $11.7 million and $22.7 million, compared to $10.8 million and $21.8 million for three and six months ended June 30, 2020.  Total interest income in the second quarter of 2021 was impacted by net deferred fees earned from the forgiven SBA PPP loans. The annualized yield on interest-earning assets for the second quarter 2021 was 4.63% compared to 4.57% for the second quarter of 2020.

Interest expense for the three and six months ended June 30, 2021 compared to 2020 decreased by $1.0 million and $2.5 million, respectively.  This decrease in interest expense for the comparable periods was primarily due to decreased rates paid on interest-bearing deposits.  During the quarter, the Company strategically lowered interest rates paid on deposit accounts as well as locking in longer-term wholesale funding to protect against the potential for future rising interest rates.  The annualized average cost of interest-bearing liabilities decreased by 61 basis points to 0.53% for the three months ended June 30, 2021 compared to the same period in 2020.  The cost of interest-bearing deposits decreased by 58 basis points to 0.48% for the second quarter 2021 compared to 1.06% for the second quarter 2020.  The cost of other borrowings for the comparable periods decreased by 66 basis points to 0.84% for the three months ended June 30, 2021 compared to the same period in 2020, primarily due to the repricing of some FHLB advances. Total cost of funds was 0.41% for the second quarter 2021 compared to 0.91% for the second quarter of 2020.  Year to date total cost of funds at June 30, 2021 was 0.44% compared to 1.09% for the first six months of 2020.

The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was an increase in the interest margin for the three months ended June 30, 2021 to 4.24% compared to 3.72% in the three months ended June 30, 2020.  The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was an increase in the interest margin for the six months ended June 30, 2021 to 4.22% compared to 3.84% in the six months ended June 30, 2020.

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 ($41,000) and $0.8 million for the second quarters of 2021 and 2020, respectively.  The provision decrease for the second quarter 2021 compared to the second quarter of 2020 was primarily due to positive loan rating migrations and loan loss recoveries. The Company’s allowance was 1.18% of loans held for investment at June 30, 2021 compared to 1.23% at June 30, 2020. The Company’s allowance was 1.29% of loans held for investment at June 30, 2021 when excluding the $71.1 million of SBA PPP loans, which are 100% government guaranteed.

The provision for loan losses for the six months ended June 30, 2021 was $(0.2) million compared to $1.2 million for the six months ended June 30, 2020.

The following schedule summarizes the provision, charge-offs (recoveries) by loan category for the three and six months ended June 30, 2021 and 2020:

	For the Three Months Ended June 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate			Consumer			Total
2021	(in thousands)
Beginning balance	$	2,623		$	6,220	$	1,108		$	130		$	25		$	126		$	1		$	10,233
Charge-offs		—			—		—			—			—			—			—			—
Recoveries		12			20		10			4			1			1			—			48
Net (charge-offs) recoveries		12			20		10			4			1			1			—			48
Provision (credit)		(5	)		88		(98	)		(20	)		(1	)		(5	)		—			(41	)
Ending balance	$	2,630		$	6,328	$	1,020		$	114		$	25		$	122		$	1		$	10,240
2020
Beginning balance	$	2,364		$	5,484	$	1,164		$	29		$	27		$	96		$	3		$	9,167
Charge-offs		—			—		—			—			—			—			—			—
Recoveries		7			20		47			3			2			—			—			79
Net (charge-offs) recoveries		7			20		47			3			2			—			—			79
Provision (credit)		99			255		292			96			(3	)		24			(1	)		762
Ending balance	$	2,470		$	5,759	$	1,503		$	128		$	26		$	120		$	2		$	10,008

38

	For the Six Months Ended June 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate		Consumer			Total
2021	(in thousands)
Beginning balance	$	2,612		$	5,950	$	1,379		$	118		$	25		$	108	$	2		$	10,194
Charge-offs		—			—		—			—			—			—		—			—
Recoveries		151			40		20			45			3			1		—			260
Net (charge-offs) recoveries		151			40		20			45			3			1		—			260
Provision (credit)		(133	)		338		(379	)		(49	)		(3	)		13		(1	)		(214	)
Ending balance	$	2,630		$	6,328	$	1,020		$	114		$	25		$	122	$	1		$	10,240
2020
Beginning balance	$	2,184		$	5,217	$	1,162		$	32		$	27		$	92	$	3		$	8,717
Charge-offs		—			—		—			—			—			—		—			—
Recoveries		13			40		74			6			3			1		—			137
Net (charge-offs) recoveries		13			40		74			6			3			1		—			137
Provision (credit)		273			502		267			90			(4	)		27		(1	)		1,154
Ending balance	$	2,470		$	5,759	$	1,503		$	128		$	26		$	120	$	2		$	10,008

The percentage of net nonaccrual loans to the total loan portfolio has decreased to 0.20% as of June 30, 2021 from 0.43% at December 31, 2020.

The allowance for loan losses compared to net nonaccrual loans has increased to 570% as of June 30, 2021 from 263% as of December 31, 2020.  Total past due loans decreased to $0.1 million as of June 30, 2021 from $1.9 million as of December 31, 2020.

Non-Interest Income

The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers.

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

	Three Months Ended June 30,				Increase		Six Months Ended June 30,				Increase
	2021		2020		(Decrease)		2021		2020		(Decrease)
	(in thousands)
Other loan fees	$	310	$	239	$	71	$	623	$	525	$	98
Gains from loan sales, net		130		97		33		248		287		(39	)
Document processing fees		138		108		30		244		232		12
Service charges		74		62		12		141		196		(55	)
Other		220		134		86		513		350		163
Total non-interest income	$	872	$	640	$	232	$	1,769	$	1,590	$	179

Total non-interest income increased by $0.2 million for the three months ended June 30, 2021 compared to the same period in 2020. Other income for the three and six months ended June 30, 2021 increased due to reallocation of interchange fees from deposit transaction activity related to core data processing expenses. Other loan fees increased $71,000 and $98,000 for the three and six months ended June 30, 2021, compared to the same period in 2020, due to increased manufactured home loan originations. Gains from loan sales increased for the three months ended June 30, 2021, compared the same period in 2020 due to an increase in sold Farmer Mac loans.

39

Non-Interest Expenses

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

	Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
	2021		2020		(Decrease)			2021		2020		(Decrease)
	(in thousands)
Salaries and employee benefits	$	4,379	$	4,574	$	(195	)	$	8,944	$	8,972	$	(28	)
Occupancy, net		780		776		4			1,559		1,534		25
Professional services		430		559		(129	)		770		942		(172	)
Data processing		332		260		72			672		543		129
Depreciation		198		206		(8	)		403		414		(11	)
FDIC assessment		121		133		(12	)		212		277		(65	)
Advertising and marketing		164		265		(101	)		347		418		(71	)
Stock based compensation		58		95		(37	)		126		180		(54	)
Other		207		135		72			496		452		44
Total non-interest expense	$	6,669	$	7,003	$	(334	)	$	13,529	$	13,732	$	(203	)

Total non-interest expenses decreased slightly by $0.3 million and $0.2 million in the three and six month periods ended June 30, 2021 compared to 2020, respectively.  The decrease in non-interest expenses for the year is primarily due to decreased salaries and employee benefits, professional services, and advertising and marketing as a result of the Bank’s internal department restructuring and reduced spending during the pandemic.  Professional services decreased $0.1 million and $0.2 million in the three and six months ended June 30, 2021 compared to 2020 due to decreased legal expenses, and director expenses for travel and training. The increase in other expenses were mainly due to an asset impairment expense related to a single OREO property. These decreases were offset by the increase in data processing expenses, primarily due to reallocation of some deposit interchange fee income.

Income Taxes

Income tax provision for the three and six months ended June 30, 2021 was $1.4 million and $2.6 million compared to $0.5 million and $1.2 million in the same period during 2020, respectively.  The combined state and federal effective income tax rates for the six months ended June 30, 2021 and 2020 were 28.4% and 30.1%, respectively.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. 

Net deferred tax assets of $4.1 million and $4.0 million at June 30, 2021 and December 31, 2020, respectively .

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 June 30, 2021 or December 31, 2020.

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 June 30, 2021 and December 31, 2020.

On March 27, 2020, the CARES Act was enacted in the United States. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company evaluated the provisions of the CARES Act and do not anticipate the associated impacts, if any, will have a material effect on its financial position.

40

BALANCE SHEET ANALYSIS

Total assets increased $87.6 million to $1.1 billion at June 30, 2021 from $975.4 million at December 31, 2020.  Net loans increased by $35.6 million to $883.0 million at June 30, 2021 from $847.4 million at December 31, 2020.  The majority of the loan increase was due to SBA PPP loan fundings of $71.1 million.  Additionally, there were increases in loan originations of $42.0 million and $6.3 million in our commercial real estate and manufactured housing portfolios, respectively. These increases were partially offset by a decrease of $24.9 million of commercial loans, $4.0 million in loans available-for-sale, and $1.2 million in investment securities held-to-maturity. The decrease in investment securities held-to-maturity was primarily related to paydowns within the portfolio. Cash and cash equivalents increased $51.7 million primarily from excess liquid funds deposited with the Federal Reserve Bank.

Total liabilities increased $81.1 million to $967.6 million at June 30, 2021 from $886.4 million at December 31, 2020 mostly due to increased deposits of $98.4 million. Non-interest-bearing demand deposits increased by $20.5 million and interest-bearing demand deposits increased by $51.5 million, and certificates of deposit increased $25.4 million. Some of the increase in certificates of deposit was attributable to strategic lengthening of brokered certificates to protect against rising rates. Other borrowings decreased $15.0 million due to the company’s repayment of higher priced debt.

Total stockholders’ equity increased $6.5 million to $95.5 million at June 30, 2021 from $89.0 million at December 31, 2020.  The $6.6 million increase in retained earnings from net income was partially offset by a $1.1 million decrease from dividends paid on common stock. The book value per common share was $11.11 at June 30, 2021 compared to $10.50 at December 31, 2020.

Selected Balance Sheet Accounts

	June 30, 2021		December 31, 2020		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Cash and cash equivalents	$	112,280	$	60,540	$	51,740			85.5	%
Investment securities available-for-sale		19,679		17,308		2,371			13.7	%
Investment securities held-to-maturity		3,370		4,586		(1,216	)		(26.5	)%
Loans - held for sale		27,252		31,229		(3,977	)		(12.7	)%
Loans - held for investment, net		855,777		816,154		39,623			4.9	%
Total assets		1,063,028		975,435		87,593			9.0	%
Total deposits		864,578		766,185		98,393			12.8	%
Other borrowings		90,000		105,000		(15,000	)		(14.3	)%
Total stockholder’s equity		95,457		89,007		6,450			7.2	%

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

	June 30, 2021			December 31, 2020
	(in thousands)
Manufactured housing	$	286,552		$	280,284
Commercial real estate		444,127			402,148
Commercial		49,243			80,851
SBA		73,920			81,442
HELOC		3,685			3,861
Single family real estate		10,623			10,490
Consumer		40			133
		868,190			859,209
Allowance for loan losses		(10,240	)		(10,194	)
Deferred costs, net		(2,133	)		(1,583	)
Discount on SBA loans		(40	)		(49	)
Total loans held for investment, net	$	855,777		$	847,383

The Company had $27.3 million of loans held for sale at June 30, 2021 compared to $31.2 million at December 31, 2020.  Loans held for sale at June 30, 2021 consisted of $8.0 million SBA loans and $19.3 million commercial agriculture loans.  Loans held for sale at December 31, 2020, were $8.3 million SBA loans and $22.9 million commercial agriculture loans.

41

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 originates manufactured housing, commercial, SBA, construction, real estate, agriculture, and consumer loans to clients through branch offices located in the Company’s primary markets.  The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas.  As of June 30, 2021 and December 31, 2020, manufactured housing loans comprised 32.1% and 31.6%, respectively, of total loans.  As of June 30, 2021 and December 31, 2020, commercial real estate, inclusive of SBA 504, land, and construction, loans accounted for approximately 49.7% and 45.3% of total loans, respectively.  Approximately 29.1% and 28.9% of these commercial real estate loans were owner-occupied at June 30, 2021 and December 31, 2020, respectively.  Substantially all of these loans are secured by first liens with average loan to value ratios of 54.1% and 53.8% at June 30, 2021 and December 31, 2020, respectively.  The Company has exceeded two concentration lending limits due to the rapid growth of SBA PPP loans as of June 30, 2021, but anticipates being back within established limits as these clients work through the forgiveness process.

Asset Quality

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

	June 30, 2021			December 31, 2020
	(in thousands)
Nonaccrual loans (net of government guaranteed portion)	$	1,797		$	3,665
Troubled debt restructured loans, gross		11,001			11,141
Nonaccrual loans (net of government guaranteed portion) to gross loans		0.20	%		0.43	%
Net charge-offs (recoveries) (annualized) to average loans		0.00	%		(0.03	)%
Allowance for loan losses to nonaccrual loans (net of government guaranteed portion)		600	%		263	%
Allowance for loan losses to gross loans		1.18	%		1.23	%

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

	June 30, 2021			December 31, 2020
	(in thousands)
Total nonaccrual loans	$	1,906		$	3,872
Government guaranteed portion of loans included above		(109	)		(207	)
Total nonaccrual loans, without guarantees	$	1,797		$	3,665
Troubled debt restructured loans, gross	$	11,001		$	11,141
Loans 30 through 89 days past due with interest accruing	$	96		$	1,889
Loans 90 days or more past due with interest accruing	$	—		$	—
Allowance for loan losses to gross loans held for investment		1.18	%		1.23	%

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.

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Guidance on Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by banking regulators and titled “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.  Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of January 1, 2022 ( the extension of the expiration date was passed as part of the Bipartisan-Bicameral Omnibus COVID Relief Deal on December 21, 2020) or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates.  Accordingly, we offered short-term modifications made in response to COVID-19 to borrowers who were current and otherwise not past due.  These were short-term, 180 days or less, modifications in the form of payment deferrals. With the passage of The Economic Aid Act, the Company modified and extended its payment deferral program.  The new program is for 90 days. As of June 30, 2021, one loan remained on deferral for a total of $0.6 million.

The following schedule summarizes impaired loans and specific reserves by loan class as of the periods indicated:

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of June 30, 2021:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	4,043	$	225	$	93	$	—	$	—	$	437	$	—	$	4,798
Impaired loans with no allowance recorded		1,286		1,386		1,619		397		—		1,992		—		6,680
Total loans individually evaluated for impairment		5,329		1,611		1,712		397		—		2,429		—		11,478
Related Allowance for Credit Losses
Impaired loans with an allowance recorded		246		16		—		—		—		13		—		275
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment		246		16		—		—		—		13		—		275
Total impaired loans, net	$	5,083	$	1,595	$	1,712	$	397	$	—	$	2,416	$	—	$	11,203

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of December 31, 2020:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	4,402	$	230	$	—	$	—	$	—	$	449	$	—	$	5,081
Impaired loans with no allowance recorded		2,294		1,468		1,504		292		—		1,860		—		7,418
Total loans individually evaluated for impairment		6,696		1,698		1,504		292		—		2,309		—		12,499
Related Allowance for Credit Losses
Impaired loans with an allowance recorded		279		16		—		—		—		16		—		311
Impaired loans with no allowance recorded		—		—		—		—		—		—		—		—
Total loans individually evaluated for impairment		279		16		—		—		—		16		—		311
Total impaired loans, net	$	6,417	$	1,682	$	1,504	$	292	$	—	$	2,293	$	—	$	12,188

Total impaired loans decreased $1.0 million in the second quarter of 2021 compared to December 31, 2020.  This decrease was primarily in impaired manufactured housing loans of $1.4 million, offset by increases of $0.2 million in commercial loans and $0.1 million each for SBA and single family real estate loans.

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The following table summarizes the composite of nonaccrual loans:

	At June 30, 2021								At December 31, 2020
	Nonaccrual Balance		%			Percent of Total Loans			Nonaccrual Balance		%			Percent of Total Loans
	(dollars in thousands)
Manufactured housing	$	97		5.09	%		0.01	%	$	614		15.86	%		0.08	%
Commercial real estate		1,386		72.72	%		0.16	%		1,469		37.94	%		0.01	%
Commercial		—		0.00	%		0.00	%		1,390		35.90	%		0.21	%
SBA		147		7.71	%		0.02	%		275		7.10	%		0.05	%
HELOC		—		0.00	%		0.00	%		—		0.00	%		0.00	%
Single family real estate		276		14.48	%		0.03	%		124		3.20	%		0.00	%
Consumer		—		0.00	%		0.00	%		—		0.00	%		0.00	%
Total nonaccrual loans	$	1,906		100.00	%		0.22	%	$	3,872		100.00	%		0.35	%

Nonaccrual balances include $0.1 million and $0.2 million of loans that are government guaranteed at June 30, 2021 and December 31, 2020, respectively.  Nonaccrual loans net of government guarantees decreased $1.9 million, or 51%, from $3.7 million at December 31, 2020 to $1.8 million at June 30, 2021.

CWB or the SBA repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days.  After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance.  Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.

Allowance For Loan Losses

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Allowance for loan losses:							(in thousands)
Balance at beginning of period	$	10,233		$	9,167		$	10,194		$	8,717
Provisions charged to operating expenses:
Manufactured housing		(5	)		99			(133	)		273
Commercial real estate		88			255			338			502
Commercial		(98	)		292			(379	)		267
SBA		(20	)		96			(49	)		90
HELOC		(1	)		(3	)		(3	)		(4	)
Single family real estate		(5	)		24			13			27
Consumer		—			(1	)		(1	)		(1	)
Total Provision (credit)		(41	)		762			(214	)		1,154
Recoveries of loans previously charged-off:
Manufactured housing		12			7			151			13
Commercial real estate		20			20			40			40
Commercial		10			47			20			74
SBA		4			3			45			6
HELOC		1			2			3			3
Single family real estate		1			—			1			1
Consumer		—			—			—			—
Total recoveries		48			79			260			137
Loans charged-off:
Manufactured housing		—			—			—			—
Commercial real estate		—			—			—			—
Commercial		—			—			—			—
SBA		—			—			—			—
HELOC		—			—			—			—
Single family real estate		—			—			—			—
Consumer		—			—			—			—
Total charged-off		—			—			—			—
Net charge-offs (recoveries)		(48	)		(79	)		(260	)		(137	)
Balance at end of period	$	10,240		$	10,008		$	10,240		$	10,008

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Potential Problem Loans

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

	June 30, 2021
	Number of Loans		Loan Balance (1)		Percent			Percent of Total Loans
	(dollars in thousands)
Manufactured housing		6	$	434		1.92	%		0.05	%
Commercial real estate		21		18,981		83.95	%		2.15	%
Commercial		7		3,048		13.48	%		0.35	%
SBA		3		143		0.63	%		0.02	%
HELOC		—		—		0.00	%		0.00	%
Single family real estate		1		5		0.02	%		0.00	%
Total		38	$	22,611		100.00	%		2.57	%

(1) Of the $22.6 million of potential problem loans, $1.7 million are guaranteed by government agencies.

	December 31, 2020
	Number of Loans		Loan Balance (1)		Percent			Percent of Total Loans
	(dollars in thousands)
Manufactured housing		6	$	370		1.28	%		0.04	%
Commercial real estate		25		21,984		76.20	%		2.56	%
Commercial		13		5,645		19.57	%		0.66	%
SBA		4		845		2.93	%		0.10	%
HELOC		—		—		0.00	%		0.00	%
Single family real estate		1		5		0.02	%		0.00	%
Total		49	$	28,849		100.00	%		3.36	%

(1) Of the $28.8 million of potential problem loans, $3.5 million are guaranteed by government agencies.

Investment Securities

Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements.  Held-to-maturity securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts.  Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions.  Investment securities identified as available-for-sale are carried at fair value.  Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity.  Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.

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

The carrying value of investment securities was as follows:

	June 30, 2021		December 31, 2020
	(in thousands)
U.S. government agency notes	$	5,994	$	6,472
U.S. government agency mortgage-backed securities (“MBS”)		3,370		4,586
U.S. government agency collateralized mortgage obligations (“CMO”)		6,041		7,785
Other securities		7,644		3,051
Equity securities: Farmer Mac class A stock		198		149
Total	$	23,247	$	22,043

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Other Assets Acquired Through Foreclosure

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021			2020
	(in thousands)
Balance, beginning of period	$	2,572	$	2,524	$	2,614		$	2,524
Additions		—		106		136			106
Proceeds from dispositions		—		—		—			—
(Loss) gain on sales, net		—		77		(178	)		77
Third-party portion of writedown/loss		—		—		—			—
Balance, end of period	$	2,572	$	2,707	$	2,572		$	2,707

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. The majority of this balance relates to one property of $2.5 million. The Company had $0.2 million valuation allowance on foreclosed assets as of June 30, 2021 and $0.1 million at June 30, 2020.

Deposits

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

	June 30, 2021		December 31, 2020		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Non-interest-bearing demand deposits	$	202,293	$	181,837	$	20,456			11.2	%
Interest-bearing demand deposits		449,649		398,101		51,548			12.9	%
Savings		19,700		18,736		964			5.1	%
Certificates of deposit ($250,000 or more)		19,791		30,536		(10,745	)		(35.2	)%
Other certificates of deposit		173,145		136,975		36,170			26.4	%
Total deposits	$	864,578	$	766,185	$	98,393			12.8	%

Total deposits increased by $98.4 million to $864.6 million at June 30, 2021 from $766.2 million at December 31, 2020.  This increase was primarily from an increase in non-interest-bearing and interest-bearing demand deposits, offset by maturing time deposits.  Deposits are the primary source of funding the Company’s asset growth.  In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”).  CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits.  At June 30, 2021 and December 31, 2020, the Company had $101.7 million and $91.9 million, respectively, of CDARS and ICS deposits.  As of June 30, 2021 the Company had zero insured overnight funding compared to $10.0 million at December 31, 2020.

46

Liquidity and Capital Resources

Liquidity Management

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

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

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

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

CWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”).  Advances are collateralized in the aggregate by CWB’s eligible loans and securities.  CWB had $90.0 million and $105.0 million of FHLB advances at June 30, 2021 and December 31, 2020, respectively, borrowed at fixed rates.  The Company also had $26.0 million of letters of credit with FHLB at June 30, 2021 to secure public funds.  At June 30, 2021, CWB had pledged to the FHLB, $15.4 million of securities and $300.9 million of loans.  At June 30, 2021, CWB had $104.2 million available for additional borrowing.  At December 31, 2020, CWB had pledged to the FHLB, securities of $18.9 million at carrying value and $304.7 million of loans.

CWB has established a credit line with the Federal Reserve Bank (“FRB”).  There were no outstanding FRB advances as of June 30, 2021 and December 31, 2020.  CWB had $110.7 million and $102.7 million in borrowing capacity as of June 30, 2021 and December 31, 2020, respectively. The Company also established a borrowing line with FRB under the Paycheck Protection Program Liquidity Fund (PPPLF).  Advances are secured by SBA PPP loans for up to the term of the loan.  There were no PPPLF advances at June 30, 2021.

The Company has federal funds purchased lines at correspondent banks with a total borrowing capacity of $20.0 million.  There was no amount outstanding as of June 30, 2021 and December 31, 2020.

The Company continues to face strong competition for core deposits.  The liquidity ratio of the Company was 15.0% and 11.2% at June 30, 2021 and December 31, 2020, respectively.  The Company’s liquidity ratio fluctuates in conjunction with loan funding demands.  The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, federal funds sold, and loans held for sale, divided by total assets.

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

Capital Resources

Maintaining capital strength continues to be a long-term objective for the Company.  Ample capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard depositor funds.  Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities.  The Company has the capacity to issue 60,000,000 shares of common stock of which 8,589,166 have been issued at June 30, 2021.  Conversely, the Company may decide to repurchase shares of its outstanding common stock, depending on the market price and other relevant factors.

The federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio (CBLR) framework. The final rule was effective January 1, 2020. Under this framework, the bank would choose the option of using the CBLR.  In order to qualify, a community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020.

47

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of June 30, 2021 and December 31, 2020.  The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)			Community Banking Leverage Ratio
June 30, 2021
CWB’s actual regulatory ratios		12.46	%		11.21	%		11.21	%		8.94	%		8.94	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%		8.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A			9.00	%
Minimum capital requirements including fully-phased in capital conservation buffer		10.50	%		8.50	%		7.00	%		N/A			N/A

	Total Capital (To Risk- Weighted Assets)			Tier 1 Capital (To Risk- Weighted Assets)			Common Equity Tier 1 (To Risk- Weighted Assets)			Leverage Ratio/Tier 1 Capital (To Average Assets)			Community Banking Leverage Ratio
December 31, 2020
CWB’s actual regulatory ratios		12.27	%		11.02	%		11.02	%		9.29	%		9.29	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%		8.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A			9.00	%
Minimum capital requirements including fully-phased in capital conservation buffer (2019)		10.50	%		8.50	%		7.00	%		N/A			N/A

There are no conditions or events since June 30, 2021 that management believes have changed the Company’s or the Bank’s risk-based capital category. The Company is closely monitoring capital levels in light of the COVID-19 pandemic, and the potential impact of its effect upon earnings.

Supervision and Regulation

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

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

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

For a detailed discussion of the regulatory scheme governing the Company and CWB, please see the discussion in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation.”

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Certain qualitative and quantitative disclosures about market risk are set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K.  For further discussion of interest rate risk, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Interest Rate Risk.”

The ultimate impact to our primary market risk exposure with the continued impact of the COVID-19 pandemic remains uncertain.  A review of our market risk methods are ongoing, and modeling is incorporating additional assumptions to account for this continued uncertainty related to this pandemic.  Repricing cash flows, and prepayment projections for loans and mortgage-backed securities did not behave as they would be expected to in a more stable interest rate environment.  SBA PPP loans and the FRB’s PPPLF borrowings are new instruments and have payment characteristics.  In late March 2020, we implemented loan payment programs for customers to alleviate the financial setback caused by the temporary closure of business and lost wages.  Under these programs, borrowers who were in good standing as of the date of the request, can elect to defer full or partial payments for up to a 180-day period.  At June 30, 2021, all but one loan has resumed payments. Customer deposit flows may experience unusual fluctuations due to government support programs, customer and business stress, and general money supply.  We continue to closely monitor customer and economic indicators to develop more precise market risk assumptions as the economic impact of this crisis begins to reveal itself. The Company expects to see continued volatility in the economic markets.  These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company for the remainder of the year.

ITEM 4. CONTROLS AND PROCEDURES

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

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

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended June 30, 2021 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Investing in our common stock involves various risks which are particular to our Company, our industry, and our market area.  Several risk factors that may have a material adverse impact on our business, operating results and financial condition are discussed in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  There has been no material change in the Company’s risk factors as previously disclosed in the Company’s Form 10-K.

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

The Company made no repurchases of its common stock during the quarter ended June 30, 2021 and there was approximately $1.4 million that may yet be purchased under the Company’s repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following Exhibits are filed herewith.

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

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

SIGNATURES

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

COMMUNITY WEST BANCSHARES

(Registrant)

Date: August 6, 2021	BY: /s/ Susan C. Thompson
	Susan C. Thompson
	Executive Vice President and Chief Financial Officer
	On Behalf of Registrant and as a Duly Authorized Officer
	and as Principal Financial and Accounting Officer

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EXHIBIT INDEX

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

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

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