Community West Bancshares (CWBC) 10-Q 2022 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, 2022 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 8,746,663 as of August 8, 2022.

Table of Contents

Index			Page
Part I.  Financial Information
	Item 1 – Financial Statements
		Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	3
		Consolidated Income Statements for the three and six months ended June 30, 2022 and 2021 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (unaudited)	5
		Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	6
		Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	7
		Notes to Unaudited Consolidated Financial Statements	8
	The financial statements included in this Form 10-Q should be read in conjunction with Community West Bancshares’ Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
	Item 3 – Quantitative and Qualitative Disclosures About Market Risk		44
	Item 4 – Controls and Procedures		44
Part II. Other Information
	Item 1 – Legal Proceedings		45
	Item 1A – Risk Factors		45
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		45
	Item 3 – Defaults Upon Senior Securities		45
	Item 4 – Mine Safety Disclosures		45
	Item 5 – Other Information		45
	Item 6 – Exhibits		46
Signatures			47

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY WEST BANCSHARES

CONSOLIDATED BALANCE SHEETS

	June 30, 2022			December 31, 2021
	(unaudited)
	(in thousands, except share amounts)
Assets:
Cash and due from banks and federal funds sold	$	2,361		$	1,621
Interest-earning demand deposits in other financial institutions		99,915			206,754
Cash and cash equivalents		102,276			208,375
Investment securities - available-for-sale, at fair value; amortized cost of $58,323 at June 30, 2022 and $19,588 at December 31, 2021		57,681			19,711
Investment securities - held-to-maturity, at amortized cost; fair value of $2,593 at June 30, 2022 and $2,974 at December 31, 2021		2,636			2,815
Investment securities - measured at fair value; amortized cost of $66 at June 30, 2022 and December 31, 2021		196			248
Federal Home Loan Bank stock, at cost		3,160			3,068
Federal Reserve Bank stock, at cost		1,373			1,373
Loans:
Held for sale, at lower of cost or fair value		23,124			23,408
Held for investment, net of allowance for loan losses of $10,866 at June 30, 2022 and $10,404 at December 31, 2021		878,682			858,271
Total loans, net		901,806			881,679
Other assets acquired through foreclosure, net		2,250			2,518
Premises and equipment, net		6,365			6,576
Other assets		29,085			30,689
Total assets	$	1,106,828		$	1,157,052
Liabilities:
Deposits:
Non-interest-bearing demand	$	236,696		$	209,893
Interest-bearing demand		475,869			537,508
Savings		25,626			23,675
Certificates of deposit ($250,000 or more)		8,688			17,612
Other certificates of deposit		147,785			161,443
Total deposits		894,664			950,131
Federal Home Loan Bank advances		90,000			90,000
Other liabilities		15,022			15,546
Total liabilities		999,686			1,055,677
Stockholders’ equity:
Common stock — 0 par value, 60,000,000 shares authorized; 8,743,679 shares issued and outstanding at June 30, 2022 and 8,650,166 at December 31, 2021		45,402			44,431
Retained earnings		62,187			56,852
Accumulated other comprehensive (loss) income		(447	)		92
Total stockholders’ equity		107,142			101,375
Total liabilities and stockholders’ equity	$	1,106,828		$	1,157,052

See the accompanying Notes to Unaudited Financial Statements.

3

COMMUNITY WEST BANCSHARES

CONSOLIDATED INCOME STATEMENTS (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022			2021
Interest income:	(in thousands, except per share amounts)
Loans, including fees	$	11,129	$	11,433		$	22,323		$	22,289
Investment securities and other		577		218			883			417
Total interest income		11,706		11,651			23,206			22,706
Interest expense:
Deposits		500		771			1,070			1,513
Federal Home Loan Bank advances		196		194			390			465
Total interest expense		696		965			1,460			1,978
Net interest income		11,010		10,686			21,746			20,728
Provision (credit) for loan losses		252		(41	)		(32	)		(214	)
Net interest income after provision (credit) for loan losses		10,758		10,727			21,778			20,942
Non-interest income:
Other loan fees		377		310			623			623
Gains from loan sales, net		136		130			196			248
Document processing fees		122		138			223			244
Service charges		93		74			181			141
Other		323		220			1,119			513
Total non-interest income		1,051		872			2,342			1,769
Non-interest expenses:
Salaries and employee benefits		4,910		4,379			9,775			8,944
Occupancy, net		1,021		780			2,018			1,559
Professional services		635		430			1,034			770
Data processing		307		332			617			672
Depreciation		179		198			362			403
FDIC assessment		164		121			335			212
Advertising and marketing		233		164			491			347
Stock based compensation		71		59			144			126
Other		592		206			307			496
Total non-interest expenses		8,112		6,669			15,083			13,529
Income before provision for income taxes		3,697		4,930			9,037			9,182
Provision for income taxes		1,062		1,379			2,442			2,610
Net income	$	2,635	$	3,551		$	6,595		$	6,572
Earnings per share:
Basic	$	0.30	$	0.42		$	0.76		$	0.77
Diluted	$	0.30	$	0.41		$	0.74		$	0.76
Weighted average number of common shares outstanding:
Basic		8,715		8,549			8,689			8,522
Diluted		8,885		8,717			8,867			8,661
Dividends declared per common share	$	0.075	$	0.070		$	0.145		$	0.130

See the accompanying Notes to Unaudited Consolidated Financial Statements.

4

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
	(in thousands)
Net income	$	2,635		$	3,551	$	6,595		$	6,572
Other comprehensive (loss) income, net:
Unrealized (loss) income on securities available-for-sale (AFS), net (tax effect of $121, $67, $226 and $49 for each respective period presented)		(289	)		160		(539	)		115
Net other comprehensive (loss) income		(289	)		160		(539	)		115
Comprehensive income	$	2,346		$	3,711	$	6,056		$	6,687

See the accompanying Notes to Unaudited Consolidated Financial Statements.

5

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

Three Months Ended June 30, 2022	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, March 31, 2022:		8,682	$	44,780	$	(158	)	$	60,206		$	104,828
Net income		—		0		0			2,635			2,635
Exercise of stock options		62		551		0			0			551
Stock based compensation		0		71		0			0			71
Dividends on common stock		0		0		0			(654	)		(654	)
Other comprehensive loss, net		—		0		(289	)		0			(289	)
Balance, June 30, 2022		8,744	$	45,402	$	(447	)	$	62,187		$	107,142

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

Six Months Ended June 30, 2022	Common Stock				Accumulated Other Comprehensive			Retained			Total Stockholders’
	Shares		Amount		Income (Loss)			Earnings			Equity
	(in thousands)
Balance, December 31, 2021:		8,650	$	44,431	$	92		$	56,852		$	101,375
Net income		—		0		0			6,595			6,595
Exercise of stock options		94		827		0			0			827
Stock based compensation		0		144		0			0			144
Dividends on common stock		0		0		0			(1,260	)		(1,260	)
Other comprehensive loss, net		—		0		(539	)		0			(539	)
Balance, June 30, 2022		8,744	$	45,402	$	(447	)	$	62,187		$	107,142

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

See the accompanying Notes to Unaudited Consolidated Financial Statements.

6

COMMUNITY WEST BANCSHARES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended June 30,
	2022			2021
	(in thousands)
Cash flows from operating activities:
Net income	$	6,595		$	6,572
Adjustments to reconcile net income to cash provided by operating activities:
Provision (credit) for loan losses		(32	)		(214	)
Depreciation		362			403
Stock based compensation		144			126
Deferred income taxes		124			(77	)
Net accretion of discounts and premiums for investment securities		11			39
(Gains) Losses on:
Sale of repossessed assets,		(104	)		0
Sale of loans, net		(196	)		(248	)
Loans originated for sale, net of collections on loans held for sale		284			3,977
Changes in:
Investment securities held at fair value		52			(49	)
Servicing assets, net		(1	)		(64	)
Other assets		1,707			350
Other liabilities		(524	)		(1,890	)
Net cash provided by operating activities		8,422			8,925
Cash flows from investing activities:
Principal pay downs and maturities of available-for-sale securities		992			2,273
Purchase of available-for-sale securities		(39,738	)		(4,500	)
Principal pay downs and maturities of held-to-maturity securities		179			1,196
Loan originations and principal collections, net		(20,183	)		(39,297	)
Purchase of FHLB stock		(92	)		0
Redemption of FHLB stock		0			192
Purchase of premises and equipment, net		(151	)		(79	)
Proceeds from sale of other real estate owned and repossessed assets, net		372			0
Net cash used in investing activities		(58,621	)		(40,215	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(55,467	)		98,393
Repayment of FHLB advances		0			(15,000	)
Exercise of stock options		827			745
Cash dividends paid on common stock		(1,260	)		(1,108	)
Net cash (used in) provided by financing activities		(55,900	)		83,030
Net (decrease) increase cash and cash equivalents		(106,099	)		51,740
Cash and cash equivalents at beginning of period		208,375			60,540
Cash and cash equivalents at end of period	$	102,276		$	112,280
Supplemental disclosure:
Cash paid during the period for:
Interest	$	1,481		$	2,128
Income taxes		3,195			3,367
Non-cash investing and financing activity:
Transfers of loans to other assets acquired through foreclosure, net		0			136

See the accompanying Notes to Unaudited Consolidated Financial Statements.

7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

Interim Financial Information

The accompanying unaudited consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021, 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, 2021.

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.

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.

Reclassifications

Certain amounts in the consolidated financial statements as of December 31, 2021 and for the three and six months ended June 30, 2021 have been reclassified to conform to the current presentation.  The reclassifications have no effect on net income, comprehensive income or stockholders’ equity as previously reported.

Loans Held For Sale

Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis.  Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision.  Loans held for sale are mostly comprised of commercial agriculture loans guaranteed by the USDA Farm Service Agency (“FSA”) and Small Business Association (“SBA”) loans.  The Company did not incur any lower of cost or fair value provision in the three and six months ended June 30, 2022 and 2021.

8

Loans Held for Investment and Interest and Fees from Loans

Loans are recorded at the principal amount outstanding, net of unearned income, loan participations and amounts charged off.  Unearned income includes deferred loan origination fees reduced by loan origination costs.

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

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

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.

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 for 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.

Allowance 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 the Company’s 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.

9

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 Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

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

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

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

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

Commercial, CRE (which includes SBA 504, Land, and Construction) and SBA 7 (a) Loans

Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible.  A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments.  Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged-down to the fair value of the collateral, if, based on a current assessment of the value, an apparent deficiency exists.  In the event there is no perceived equity, the loan is charged-off in full.  Unsecured loans which are delinquent over 90 days are, without clear support, also charged-off in full.

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

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 or valuation, an apparent deficiency exists.  In the event there is no perceived equity, the loan is generally fully charged-off.

10

Consumer Loans

Consumer 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 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 loan’s 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 financial statements prepared by an accountant 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:

• Concentrations of credit

• Trends in volume, maturity, and composition of loans

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

• Economic conditions

• Policy and procedures or underwriting standards

• Staff experience and ability

• Value of underlying collateral

• Competition, legal, or regulatory environment

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

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.

11

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 other expense on the consolidated income statement.

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.

Earnings Per Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period.  Diluted earnings per share includes the effect of all dilutive potential common shares for the period.  Potentially dilutive common shares include 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 has formed a subcommittee of its allowance for loan losses committee which 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 addition, the Company has analyzed its historical data and is running parallel calculations under different methods in order to refine its final methodology.

12

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 has limited exposure. The Company is currently evaluating the impact of the amended guidance, however the adoption of this standard is not anticipated to have a material impact on the Company’s consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty that assess whether a modification has created a new loan. Additionally, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted ASC 326, the amendments in the ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The impact of ASU 2022-02 should be applied prospectively, or, for the recognition and measurement of TDRs, with a modified retrospective transition method. The new guidance is not expected to have a material impact on the Company’s consolidated financial statements, however the required disclosures will be added to the consolidated financial statements when the standard is adopted.

2. INVESTMENT SECURITIES

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

	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	4,978	$	52	$	0		$	5,030
U.S. government agency collateralized mortgage obligations (“CMO”)		4,219		4		(41	)		4,182
U.S. Treasury securities		39,876		0		(137	)		39,739
Corporate debt securities		9,250		0		(520	)		8,730
Total	$	58,323	$	56	$	(698	)	$	57,681
Securities held-to-maturity
U.S. government agency mortgage-backed securities (“MBS”)	$	2,636	$	14	$	(57	)	$	2,593
Total	$	2,636	$	14	$	(57	)	$	2,593
Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	130	$	0		$	196
Total	$	66	$	130	$	0		$	196

	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency notes	$	5,476	$	32	$	0		$	5,508
U.S. government agency collateralized mortgage obligations (“CMO”)		4,862		31		(10	)		4,883
Corporate debt securities		9,250		102		(32	)		9,320
Total	$	19,588	$	165	$	(42	)	$	19,711
Securities held-to-maturity
U.S. government agency mortgage-backed securities (“MBS”)	$	2,815	$	159	$	0		$	2,974
Total	$	2,815	$	159	$	0		$	2,974
Securities measured at fair value
Equity securities: Farmer Mac class A stock	$	66	$	182	$	0		$	248
Total	$	66	$	182	$	0		$	248

At June 30, 2022 and December 31, 2021, securities with carrying values of $51.6 million and $13.2 million, respectively, were pledged to the Federal Home Loan Bank (“FHLB”) as collateral for current and future advances.

13

The maturity periods and weighted average yields of investment securities available-for-sale and held-to-maturity at the period ends indicated were as follows:

	June 30, 2022
	Less than One Year					One to Five Years				Five to Ten Years					Over Ten Years					Total
	Amount		Yield			Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale	(dollars in thousands)
U.S. government agency notes	$	0		0		$	0		0	$	552		0.85	%	$	4,478		1.64	%	$	5,030		1.55	%
U.S. government agency CMO		0		0			0		0		0		0			4,182		1.89	%		4,182		1.89	%
U.S. Treasury securities		39,739		1.61	%		0		0		0		0			0		0			39,739		1.61	%
Corporate debt securities		0		0			0		0		8,730		3.74	%		0		0			8,730		3.74	%
Total	$	39,739		1.61	%	$	0		0	$	9,282		3.57	%	$	8,660		1.76	%	$	57,681		1.95	%
Securities held-to-maturity
U.S. government agency MBS	$	0		0		$	0		0	$	753		3.60	%	$	1,883		3.20	%	$	2,636		3.32	%
Total	$	0		0		$	0		0	$	753		3.60	%	$	1,883		3.20	%	$	2,636		3.32	%

	December 31, 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	$	661		0.59	%	$	4,847		1.30	%	$	0		0	$	5,508		1.16	%
U.S. government agency CMO		0		0		3,905		0.50	%		978		0.83	%		0		0		4,883		0.60	%
Corporate debt securities		0		0		9,320		3.70	%		0		0			0		0		9,320		3.70	%
Total	$	0		0	$	13,886		2.70	%	$	5,825		1.20	%	$	0		0	$	19,711		2.20	%
Securities held-to-maturity
U.S. government agency MBS	$	0		0	$	2,065		2.90	%	$	750		3.58	%	$	0		0	$	2,815		3.10	%
Total	$	0		0	$	2,065		2.90	%	$	750		3.58	%	$	0		0	$	2,815		3.10	%

The amortized cost and fair value of available-for-sale and held-to-maturity investment securities maturities as of the periods presented are as shown below:

	June 30, 2022				December 31, 2021
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available-for-sale	(in thousands)
Due in one year or less	$	39,876	$	39,739	$	0	$	0
After one year through five years		0		0		13,786		13,886
After five years through ten years		9,795		9,282		5,802		5,825
After ten years		8,652		8,660		0		0
Total	$	58,323	$	57,681	$	19,588	$	19,711
Securities held-to-maturity
Due in one year or less	$	0	$	0	$	0	$	0
After one year through five years		0		0		2,065		2,137
After five years through ten years		753		745		750		837
After ten years		1,883		1,848		0		0
Total	$	2,636	$	2,593	$	2,815	$	2,974

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.

14

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

	June 30, 2022
	Less Than Twelve Months					More Than Twelve Months					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
Securities available-for-sale	(in thousands)
U.S. government agency CMO	$	(26	)	$	2,739	$	(15	)	$	652	$	(41	)	$	3,391
U.S. Treasury securities		(137	)		39,739		0			0		(137	)		39,739
Corporate debt securities		(520	)		8,730		0			0		(520	)		8,730
Total	$	(683	)	$	51,208	$	(15	)	$	652	$	(698	)	$	51,860
Securities held-to-maturity
U.S. government agency MBS	$	(57	)	$	911	$	0		$	0	$	(57	)	$	911
Total	$	(57	)	$	911	$	0		$	0	$	(57	)	$	911

	December 31, 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 CMO	$	0		$	0	$	(10	)	$	977	$	(10	)	$	977
Corporate debt securities		(32	)		2,968		0			0		(32	)		2,968
Total	$	(32	)	$	2,968	$	(10	)	$	977	$	(42	)	$	3,945

As of June 30, 2022 and December 31, 2021, there were 34 and 4 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 securities 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, 2022 and December 31, 2021, 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

As of June 30, 2022 and December 31, 2021, the Company had approximately $6.1 million and $6.3 million of SBA loans included in loans held for sale, respectively.  As of June 30, 2022 and December 31, 2021, the principal balance of SBA loans serviced for others was $2.4 million and $2.7 million, respectively.

The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock.  The primary products are supported by guarantees issued from the United States Department of Agriculture (“USDA”), USDA Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. As of June 30, 2022 and December 31, 2021, the Company had $17.0 million and $17.1 million of USDA loans included in loans held for sale, respectively. As of June 30, 2022 and December 31, 2021, the principal balance of USDA loans serviced for others was $0.7 million.

4. LOANS HELD FOR INVESTMENT

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

	June 30, 2022			December 31, 2021
	(in thousands)
Manufactured housing	$	305,749		$	297,363
Commercial real estate		516,514			480,801
Commercial		50,645			55,287
SBA		4,785			23,659
HELOC		3,380			3,579
Single family real estate		9,090			8,749
Consumer		35			109
		890,198			869,547
Allowance for loan losses		(10,866	)		(10,404	)
Deferred fees, net		(703	)		(838	)
Discount on SBA loans		(32	)		(34	)
Other loans in process		85			0
Total loans held for investment, net	$	878,682		$	858,271

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

	June 30, 2022
	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	$	304,288	$	1,145	$	71	$	107	$	1,323	$	138	$	305,749	$	0
Commercial real estate:
Commercial real estate		449,360		1,185		0		0		1,185		0		450,545		0
SBA 504 1st trust deed		13,273		0		0		0		0		0		13,273		0
Land		10,720		0		0		0		0		0		10,720		0
Construction		41,976		0		0		0		0		0		41,976		0
Commercial		50,645		0		0		0		0		0		50,645		0
SBA		4,559		226		0		0		226		0		4,785		0
HELOC		3,380		0		0		0		0		0		3,380		0
Single family real estate		8,849		0		0		0		0		241		9,090		0
Consumer		35		0		0		0		0		0		35		0
Total	$	887,085	$	2,556	$	71	$	107	$	2,734	$	379	$	890,198	$	0

	December 31, 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	$	296,715	$	342	$	0	$	0	$	342	$	306	$	297,363	$	0
Commercial real estate:
Commercial real estate		431,062		0		0		0		0		0		431,062		0
SBA 504 1st trust deed		16,961		0		0		0		0		0		16,961		0
Land		7,185		0		0		0		0		0		7,185		0
Construction		25,593		0		0		0		0		0		25,593		0
Commercial		55,287		0		0		0		0		0		55,287		0
SBA		23,296		223		139		0		362		1		23,659		0
HELOC		3,579		0		0		0		0		0		3,579		0
Single family real estate		8,491		0		0		0		0		258		8,749		0
Consumer		109		0		0		0		0		0		109		0
Total	$	868,278	$	565	$	139	$	0	$	704	$	565	$	869,547	$	0

The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent.  Any unpaid but accrued interest is reversed from interest income at that time.  Thereafter, interest income is no longer recognized on the loan.  Interest income may be recognized on impaired loans to the extent they are not past due by 90 days.  Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all 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, 2022 and 2021, was $10 thousand and $35 thousand, respectively.  Foregone interest on nonaccrual and TDR loans for the six months ended June 30, 2022 and 2021, was $23 thousand and $91 thousand, respectively.

16

Allowance for Loan Losses

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
2022	(in thousands)
Beginning balance	$	3,758		$	6,046	$	580		$	22		$	35		$	105		$	1	$	10,547
Charge-offs		0			0		0			0			0			0			0		0
Recoveries		28			21		3			11			4			0			0		67
Net recoveries		28			21		3			11			4			0			0		67
Provision (credit)		190			53		11			(10	)		(2	)		10			0		252
Ending balance	$	3,976		$	6,120	$	594		$	23		$	37		$	115		$	1	$	10,866
2021
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

	For the Six Months Ended June 30,
	Manufactured Housing			Commercial Real Estate			Commercial			SBA			HELOC			Single Family Real Estate		Consumer			Total
2022	(in thousands)
Beginning balance	$	2,606		$	6,729		$	923		$	22		$	18		$	105	$	1		$	10,404
Charge-offs		0			0			0			0			0			0		0			0
Recoveries		35			40			170			242			6			0		1			494
Net recoveries		35			40			170			242			6			0		1			494
Provision (credit)		1,335			(649	)		(499	)		(241	)		13			10		(1	)		(32	)
Ending balance	$	3,976		$	6,120		$	594		$	23		$	37		$	115	$	1		$	10,866
2021
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

As of June 30, 2022 and December 31, 2021, the Company had reserves for credit losses on undisbursed loans of $94 thousand and $94 thousand, respectively, which were included in other liabilities on the consolidated balance sheet.

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, 2022:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	3,226	$	215	$	76	$	45	$	0	$	412	$	0	$	3,974
Impaired loans with no allowance recorded		1,097		0		1,388		55		0		241		0		2,781
Total loans individually evaluated for impairment		4,323		215		1,464		100		0		653		0		6,755
Loans collectively evaluated for impairment		301,426		516,299		49,181		4,685		3,380		8,437		35		883,443
Total loans held for investment	$	305,749	$	516,514	$	50,645	$	4,785	$	3,380	$	9,090	$	35	$	890,198
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	3,226	$	215	$	76	$	45	$	0	$	412	$	0	$	3,974
Impaired loans with no allowance recorded		1,097		0		1,388		55		0		241		0		2,781
Total loans individually evaluated for impairment		4,323		215		1,464		100		0		653		0		6,755
Loans collectively evaluated for impairment		301,426		516,299		49,181		4,685		3,380		8,437		35		883,443
Total loans held for investment	$	305,749	$	516,514	$	50,645	$	4,785	$	3,380	$	9,090	$	35	$	890,198
Related Allowance for Credit Losses
Loans individually evaluated for impairment		183		17		1		1		0		10		0		212
Loans collectively evaluated for impairment		3,793		6,103		593		22		37		105		1		10,654
Total loans held for investment	$	3,976	$	6,120	$	594	$	23	$	37	$	115	$	1	$	10,866

17

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Loans Held for Investment as of December 31, 2021:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	3,563	$	220	$	85	$	194	$	0	$	425	$	0	$	4,487
Impaired loans with no allowance recorded		1,358		1,402		1,505		226		0		258		0		4,749
Total loans individually evaluated for impairment		4,921		1,622		1,590		420		0		683		0		9,236
Loans collectively evaluated for impairment		292,442		479,179		53,697		23,239		3,579		8,066		109		860,311
Total loans held for investment	$	297,363	$	480,801	$	55,287	$	23,659	$	3,579	$	8,749	$	109	$	869,547
Unpaid Principal Balance
Impaired loans with an allowance recorded	$	3,563	$	220	$	85	$	194	$	0	$	683	$	0	$	4,745
Impaired loans with no allowance recorded		1,358		1,402		1,505		226		0		0		0		4,491
Total loans individually evaluated for impairment		4,921		1,622		1,590		420		0		683		0		9,236
Loans collectively evaluated for impairment		292,442		479,179		53,697		23,239		3,579		8,066		109		860,311
Total loans held for investment	$	297,363	$	480,801	$	55,287	$	23,659	$	3,579	$	8,749	$	109	$	869,547
Related Allowance for Credit Losses
Loans individually evaluated for impairment		210		17		0		1		0		12		0		240
Loans collectively evaluated for impairment		2,396		6,712		923		21		18		93		1		10,164
Total loans held for investment	$	2,606	$	6,729	$	923	$	22	$	18	$	105	$	1	$	10,404

Included in impaired loans were $0.3 million of loans guaranteed by government agencies at December 31, 2021. There were 0 impaired loans guaranteed by government agencies at June 30, 2022.

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, 2022 and December 31, 2021.

18

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

	Three Months Ended June 30,
	2022				2021
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	4,441	$	88	$	5,648	$	69
Commercial real estate:
Commercial real estate		0		0		0		0
SBA 504 1st trust deed		215		4		1,627		6
Land		0		0		0		0
Construction		0		0		0		0
Commercial		1,487		21		1,744		27
SBA		100		6		407		4
HELOC		0		0		0		0
Single family real estate		659		15		2,352		53
Consumer		0		0		0		0
Total	$	6,902	$	134	$	11,778	$	159

	Six Months Ended June 30,
	2022				2021
	Average Investment in Impaired Loans		Interest Income		Average Investment in Impaired Loans		Interest Income
	(in thousands)
Manufactured housing	$	4,655	$	173	$	5,985	$	182
Commercial real estate:
Commercial real estate		0		0		0		0
SBA 504 1st trust deed		680		8		1,647		44
Land		0		0		0		0
Construction		0		0		0		0
Commercial		1,522		42		1,661		54
SBA		204		12		367		8
HELOC		0		0		0		0
Single family real estate		622		23		2,333		81
Consumer		0		0		0		0
Total	$	7,683	$	258	$	11,993	$	369

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

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company 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”.  Risk ratings are updated as part of our normal loan monitoring process, at a minimum, annually.

The following tables present gross loans by risk rating:

	June 30, 2022
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	304,524	$	0	$	1,225	$	0	$	305,749
Commercial real estate:
Commercial real estate		441,114		2,160		5,996		0		449,270
SBA 504 1st trust deed		12,793		0		480		0		13,273
Land		10,720		0		0		0		10,720
Construction		41,976		0		0		0		41,976
Commercial		45,976		500		2,831		0		49,307
SBA		1,865		0		0		0		1,865
HELOC		3,380		0		0		0		3,380
Single family real estate		8,845		0		0		245		9,090
Consumer		35		0		0		0		35
Total, net		871,228		2,660		10,532		245		884,665
Government guaranteed loans		4,960		0		573		0		5,533
Total	$	876,188	$	2,660	$	11,105	$	245	$	890,198

19

	December 31, 2021
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Manufactured housing	$	295,810	$	0	$	1,553	$	0	$	297,363
Commercial real estate:
Commercial real estate		415,471		3,043		11,255		0		429,769
SBA 504 1st trust deed		14,646		0		2,315		0		16,961
Land		7,185		0		0		0		7,185
Construction		25,593		0		0		0		25,593
Commercial		50,372		26		2,265		0		52,663
SBA		1,891		0		114		0		2,005
HELOC		3,579		0		0		0		3,579
Single family real estate		8,487		0		262		0		8,749
Consumer		109		0		0		0		109
Total, net		823,143		3,069		17,764	$	0		843,976
Government guaranteed loans		23,610		0		1,961		0		25,571
Total	$	846,753	$	3,069	$	19,725	$	0	$	869,547

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 total carrying amount of loans that were classified as TDRs at June 30, 2022 and December 31, 2021 were $6.6 million and $8.6 million, respectively. There were 0 new TDR loans for the three or six months ended June 30, 2022 or 2021.

A TDR loan is deemed to have a payment default when the borrower fails to make 2 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, 2022 or 2021.

At June 30, 2022 there were no material loan commitments outstanding on TDR loans.

5. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE

Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure.  Properties or other assets (primarily manufactured housing) are 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 of other assets acquired through foreclosure at June 30, 2022 and December 31, 2021 is primarily attributable to a single commercial agricultural relationship.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
	(in thousands)
Balance, beginning of period	$	2,389		$	2,572	$	2,518		$	2,614
Additions		0			0		0			136
Proceeds from dispositions		(232	)		0		(372	)		0
(Loss) gain on sales, net		93			0		104			(178	)
Third-party portion of write down/loss		0			0		0			0
Balance, end of period	$	2,250		$	2,572	$	2,250		$	2,572

20

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 fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy is broken down into three levels based on the reliability of inputs, as follows:

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

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

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

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

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2022 and December 31, 2021.  The estimated fair value amounts for June 30, 2022 and December 31, 2021 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, 2022	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
Assets:	(in thousands)
Investment securities measured at fair value	$	196	$	0	$	0	$	196
Investment securities available-for-sale
U.S. government agency notes		0		5,030		0		5,030
U.S. government agency collateralized mortgage obligations		0		4,182		0		4,182
U.S. Treasury securities		0		39,739		0		39,739
Corporate debt securities		0		8,730		0		8,730
Interest only strips		0		0		12		12
Servicing assets		0		0		1,601		1,601
Total	$	196	$	57,681	$	1,613	$	59,490

21

	Fair Value Measurements at the End of the Reporting Period Using:
December 31, 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	$	248	$	0	$	0	$	248
Investment securities available-for-sale
U.S. government agency note		0		5,508		0		5,508
U.S. government agency collateralized mortgage obligations		0		4,883		0		4,883
Corporate debt securities		0		9,320		0		9,320
Interest only strips		0		0		15		15
Servicing assets		0		0		1,600		1,600
Total	$	248	$	19,711	$	1,615	$	21,574

The change in Level 3 assets measured at fair value on a recurring basis included in income was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Servicing Assets:	(in thousands)
Balance, beginning of period	$	1,565			1,485		$	1,600		$	1,461
Additions		136			241			196			359
Amortization		(100	)		(126	)		(195	)		(205	)
Valuation adjustments		0			0			0			(15	)
Balance, end of period	$	1,601			1,600		$	1,601		$	1,600

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 amortization method for the treatment of servicing assets and had measured for impairment on a periodic basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds.  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.

22

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, 2022:
Impaired loans	$	2,070	$	0	$	2,070	$	0
Foreclosed real estate and repossessed assets		2,250		0		2,250		0
Total	$	4,320	$	0	$	4,320	$	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, 2021:
Impaired loans	$	3,785	$	0	$	3,785	$	0
Loans held for sale		23,408		0		23,408		0
Foreclosed real estate and repossessed assets		2,518		0		2,518		0
Total	$	29,711	$	0	$	29,711	$	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.  Loans held for sale are carried at the lower of cost or fair value. 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.

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

	June 30, 2022
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	102,276	$	102,276	$	0	$	0	$	102,276
FRB and FHLB stock		4,533		0		4,533		0		4,533
Investment securities		60,513		196		60,274		0		60,470
Loans, net		901,806		0		891,643		2,070		893,713
Accrued interest receivable		5,470		0		5,470		0		5,470
Financial liabilities:
Deposits		894,664		0		893,384		0		893,384
FHLB advances		90,000		0		84,558		0		84,558
Accrued interest payable		37		0		37		0		37

23

	December 31, 2021
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3		Total
Financial assets:	(in thousands)
Cash and cash equivalents	$	208,375	$	208,375	$	0	$	0	$	208,375
FRB and FHLB stock		4,441		0		4,441		0		4,441
Investment securities		22,773		248		22,685		0		22,933
Loans, net		881,679		0		870,868		5,452		876,320
Accrued interest receivable		5,841		0		5,841		0		5,841
Financial liabilities:
Deposits		950,131		0		948,648		0		948,648
FHLB advances		90,000		0		88,409		0		88,409
Accrued interest payable		58		0		58		0		58

7. 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 $90.0 million at June 30, 2022 and December 31, 2021, respectively, borrowed at fixed rates.  The Company also had $46.0 million of letters of credit with FHLB at June 30, 2022 to secure public funds.  At June 30, 2022, CWB had pledged to the FHLB $51.6 million of securities and $260.7 million of loans.  At June 30, 2022, CWB had $40.3 million available for additional borrowing.  At December 31, 2021, CWB had pledged to the FHLB $13.2 million of securities and $286.6 million of loans. Total FHLB interest expense was $193 thousand and $384 thousand for the three and six months ended June 30, 2022, respectively, and was $269 thousand and $461 thousand for the three and six months ended June 30, 2021, 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.  At June 30, 2022 and December 31, 2021, there were $263.1 million and $259.5 million, respectively, of loans pledged to the FRB.  There were 0 outstanding FRB advances as of June 30, 2022 and December 31, 2021. Available borrowing capacity was $99.9 million and $119.0 million as of June 30, 2022 and December 31, 2021, respectively.

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, 2022 and December 31, 2021.

Line of Credit - In September of 2021, the Company entered into an unsecured line of credit agreement for up to $5.0 million at Prime + 0.25%.  The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to 1, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%.  As of June 30, 2022  and December 31, 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,
	2022			2021			2022			2021
	Unrealized holding gains (losses) on AFS						Unrealized holding gains (losses) on AFS
	(in thousands)
Beginning balance	$	(158	)	$	(10	)	$	92		$	35
Other comprehensive (loss) income before reclassifications		(289	)		160			(539	)		115
Amounts reclassified from accumulated other comprehensive income		0			0			0			0
Net current-period other comprehensive (loss) income		(289	)		160			(539	)		115
Ending Balance	$	(447	)	$	150		$	(447	)	$	150

24

Common Stock

On February 28, 2019, the Board of Directors increased the common stock repurchase program to $4.5 million and extended the repurchase program until August 31, 2023.  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 shares of common stock under this program during the three and six months ended June 30, 2022.

During the three and six months ended June 30, 2022, the Company declared and paid common stock dividends of $0.7 million and $1.3 million, respectively. During the three and six months ended June 30, 2021, the Company declared and paid common stock dividends of $0.6 and $1.1 million, respectively.

9. CAPITAL REQUIREMENT

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

In 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. Under this framework, the Bank would choose the option of using the community bank leverage ratio (CBLR).  A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. As of the fourth quarter 2021, the Company rescinded its CBLR election.

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of June 30, 2022 and December 31, 2021.

	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)
June 30, 2022
CWB’s actual regulatory ratios		12.23	%		11.07	%		11.07	%		9.30	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		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)
December 31, 2021
CWB’s actual regulatory ratios		12.19	%		11.02	%		11.02	%		8.56	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A

There are no conditions or events since June 30, 2022 that management believes have changed the Company’s or the Bank’s risk-based capital category.

10. REVENUE RECOGNITION

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

25

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,
	2022		2021		2022		2021
In-scope of Topic 606:	(in thousands)
Service charges on deposit accounts	$	68	$	58	$	138	$	111
Exchange fees and other service charges		132		118		250		221
Non-interest income (in-scope of ASC 606)		200		176		388		332
Non-interest income (out-of-scope of ASC 606)		851		696		1,954		1,437
Total	$	1,051	$	872	$	2,342	$	1,769

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, 2022 and December 31, 2021, the Company did not have any signficant contract balances.

Contract Acquisition Costs

In connection with the adoption of ASC 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 ASC 606, the Company did not capitalize any contract acquisition cost.

11. LEASES

The Company has operating leases for office space. The Company’s office leases are typically for terms of between 2 and 10 years.  Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments.  When renewal options exist, the Company generally does not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of the lease liability nor the right-of-use asset until after exercise of the renewal option.  As of June 30, 2022 and December 31, 2021, the balance of the right-of-use assets was $5.6 million and $5.1 million, respectively, and the balance of lease liabilities were $5.7 million and $5.1 million, respectively.  The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying consolidated balance sheets.

26

	Six Months Ended June 30,
	2022			2021
Lease cost:	(in thousands)
Operating lease cost	$	503		$	1,018
Sublease income		0			0
Total lease cost	$	503		$	1,018
Other information:
Operating cash flows from operating leases	$	499		$	990
Weighted average remaining lease term - operating leases	7.41 years			8.45 years
Weighted average discount rate - operating leases		3.25	%		3.24	%

Future minimum operating lease payments:

	June 30,
	2022		2021
	(in thousands)
2021	$	—	$	496
2022		504		887
2023		1,013		813
2024		1,026		821
2025		976		768
2026		876		664
Thereafter		2,011		1,922
Total future minimum lease payments	$	6,406	$	6,371
Less remaining imputed interest		729		820
Total lease liabilities	$	5,677	$	5,551

27

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, 2021, and the other financial information appearing elsewhere in this report.

Forward Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (this “Form 10-Q”) contains certain forward-looking statements about the Company and the Bank that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about future financial and operational results, expectations, or intentions are forward-looking statements.  Such statements reflect management's current views of future events and operations.  These forward-looking statements are based on information currently available to the Company as of the date of this Form 10-Q.  It is important to note that these forward-looking statements are not guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of which are difficult to predict and are generally beyond our control including, but not limited to, risks from the ongoing COVID-19 pandemic; wars and international conflicts including the current military actions involving the Russian Federation and Ukraine; the strength of the United States economy in general and of the local economies in which we conduct operations; the effect of, and changes in, trade, monetary and fiscal policies and laws, including changes in interest rate policies of the Board of Governors of the Federal Reserve System; inflation, including the rising costs of oil and gas; supply chain interruptions; weather, natural disasters, climate change; increased unemployment; deterioration in credit quality of our loan portfolio and/or the value of the collateral securing the repayment of those loans; reduction in the value of our investment securities; the costs and effects of litigation and of adverse outcomes of such litigation; the cost and ability to attract and retain key employees; a breach of our operational or security systems, policies or procedures including cyber-attacks on us or third party vendors or service providers; regulatory or legal developments; United States tax policies, including our effective income tax rate; and our ability to implement and execute our business plan and strategy and expand our operations as provided therein. Actual results may differ materially from those set forth or implied in the forward-looking statements as a result of a variety of factors including the risk factors contained in documents filed by the Company with the Securities and Exchange Commission and are available in the “Investor Relations” section of our website, https://www.communitywest.com/sec-filings/documents.  The Company is under no obligation (and expressly disclaims any obligation) to update or alter such forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

28

 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 pandemic and measures to prevent its spread may continue to have an effect on our business;

• 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;

• loss of key personnel;

• 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.

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, 2021 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  and one wholly owned subsidiary, 445 Pine LLC which was formed to hold certain repossessed property.  These entities are collectively referred to herein as the “Company”.

COVID-19 Update

Although the COVID-19 pandemic continues to persist, we believe that the pandemic has not adversely affected our primary objective of providing our clients with financial services they need to conduct their operations and that we have been able to successfully navigate the challenges of the COVID-19 pandemic to date.  The future trajectory of COVID-19 cases and timing of when the virus will be fully controlled or abated remain uncertain.  We cannot predict the potential future impact that COVID-19 may have on our operations and financial performance.

29

Financial Result Highlights for the Second Quarter of 2022

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

• Net income was $2.6 million, or $0.30 per diluted share in the second quarter of 2022, compared to $3.6 million, or $0.41 per diluted share in the second quarter of 2021.

• Net interest income increased to $11.0 million for the second quarter of 2022 compared to $10.7 million in the second quarter of 2021.

• A provision for loan losses of $252 thousand was recorded for the second quarter of 2022, compared to a provision (credit) for loan losses of $41 thousand for the second quarter of 2021.

• Net interest margin was 4.01% for the second quarter of 2022, compared to 4.24% for the second quarter of 2021.

• Return on average assets was 0.93% for the second quarter of 2022 compared to 1.37% for the second quarter of 2021.

• Return on average equity was 9.92% for the second quarter of 2022 compared to 15.18% for the second quarter 2021.

• Total assets decreased by $50.2 million at June 30, 2022 to $1.11 billion compared to $1.16 billion at December 31, 2021.

• Total demand deposits decreased $32.9 million to $738.2 million at June 30, 2022, compared to $771.1 million at December 31, 2021. However, during the same period non-interest bearing demand deposits increased by $26.8 million to $236.7 million.

• Total loans, net increased $20.1 million to $901.8 million at June 30, 2022, compared to $881.7 million at December 31, 2021.

• Book value per common share increased to $12.25 at June 30, 2022, compared to $11.72 at December 31, 2021.

• Net non-accrual loans were $379 thousand at June 30, 2022, compared to $565 thousand at December 31, 2021.

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, 2022 throughout the analysis sections of this report on Form 10-Q.

Critical Accounting Estimates

The Company's significant accounting policies conform with generally accepted accounting Principles ("GAAP") and are described in "Note 1 of the Notes to Financial Statements section in the Company’s Annual Report on Form 10-K" for the fiscal year ended December 31, 2021.  In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized.  Certain of the critical accounting estimates are more dependent on such judgement and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances.  The more significant areas in which management of the Company applies critical assumptions and estimates include the following:

The Company maintains an ALL at a level deemed appropriate by management to provide for known or probable incurred losses in the portfolio at the consolidated statements of financial condition date.  The determination of ALL requires estimates and assumptions in the preparation of the Company’s financial statements that can be particularly susceptible to significant change. The Company has implemented and adheres to an internal loan review system and loss allowance methodology designed to provide for the detection of problem loans and maintenance of an adequate allowance to cover loan losses. Management’s determination of the adequacy of ALL is based on an evaluation of the composition of the portfolio, actual loss experience, industry charge-off experience on loans, current economic conditions, and other relevant factors in the areas in which the Company’s lending activities are based. These factors may affect the borrowers’ ability to pay and the value of the underlying collateral. The allowance is calculated by applying loss factors to loans held for investment according to loan type and loan credit classification. The loss factors are evaluated on a quarterly basis and established based primarily upon the Bank’s historical loss experience. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALL. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. In the opinion of management, and in accordance with the credit loss allowance methodology, the present allowance is considered adequate to absorb estimable and probable incurred credit losses. Additions and reductions to the allowance are reflected in current operations. Charge-offs to the allowance are made when specific loans (or portions thereof) are considered uncollectible or are transferred to other assets acquired through foreclosure and the fair value of the property is less than the loan’s recorded investment. Recoveries are credited to the allowance.

Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company’s control.  Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for loan losses in future periods.  A discussion of facts and circumstances considered by management in determining the allowance for loan losses is included in "Note 1 - Summary of Significant Accounting Policies" and "Note 4 - Loans Held for Investment" in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

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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,
	2022			2021			2022			2021
	(in thousands, except per share amounts)
Net income	$	2,635		$	3,551		$	6,595		$	6,572
Basic earnings per share	$	0.30		$	0.42		$	0.76		$	0.77
Diluted earnings per share	$	0.30		$	0.41		$	0.74		$	0.76
Net interest margin		4.01	%		4.24	%		3.93	%		4.22	%
Return on average assets		0.93	%		1.37	%		1.16	%		1.29	%
Return on average stockholders' equity		9.92	%		15.18	%		12.67	%		14.35	%

The following table sets forth a summary financial overview for the comparable three and six months ended June 30, 2022 and 2021:

	Three Months Ended June 30,						Increase (Decrease)			Six Months Ended June 30,						Increase (Decrease)
	2022		2021							2022			2021
	(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income	$	11,706	$	11,651		$	55		$	23,206		$	22,706		$	500
Interest expense		696		965			(269	)		1,460			1,978			(518	)
Net interest income		11,010		10,686			324			21,746			20,728			1,018
Provision (credit) for loan losses		252		(41	)		293			(32	)		(214	)		182
Net interest income after provision for  loan losses		10,758		10,727			31			21,778			20,942			836
Non-interest income		1,051		872			179			2,342			1,769			573
Non-interest expenses		8,112		6,669			1,443			15,083			13,529			1,554
Income before income taxes		3,697		4,930			(1,233	)		9,037			9,182			(145	)
Provision for income taxes		1,062		1,379			(317	)		2,442			2,610			(168	)
Net income	$	2,635	$	3,551		$	(916	)	$	6,595		$	6,572		$	23
Income per share - basic	$	0.30	$	0.42		$	(0.12	)	$	0.76		$	0.77		$	(0.01	)
Income per share - diluted	$	0.30	$	0.41		$	(0.11	)	$	0.74		$	0.76		$	(0.02	)

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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,
	2022								2021
	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	$	149,710		$	302		0.81	%	$	91,106		$	33		0.15	%
Investment securities		45,243			275		2.44	%		26,914			185		2.76	%
Loans (1)		907,088			11,129		4.92	%		891,948			11,433		5.14	%
Total earnings assets		1,102,041			11,706		4.26	%		1,009,968			11,651		4.63	%
Nonearning Assets
Cash and due from banks		2,193								2,204
Allowance for loan losses		(10,765	)							(10,261	)
Other assets		37,435								40,075
Total Assets	$	1,130,904							$	1,041,986
Interest-Bearing Liabilities
Interest-bearing demand deposits		495,821			273		0.22	%		436,167			466		0.43	%
Savings deposits		25,402			16		0.25	%		20,047			19		0.38	%
Time deposits		164,687			211		0.51	%		184,584			286		0.62	%
Total interest-bearing deposits		685,910			500		0.29	%		640,798			771		0.48	%
FHLB advances		90,000			196		0.87	%		92,582			194		0.84	%
Total interest-bearing liabilities		775,910			696		0.36	%		733,380			965		0.53	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		232,849								199,306
Other liabilities		15,646								15,449
Stockholders' equity		106,499								93,851
Total Liabilities and Stockholders' Equity	$	1,130,904							$	1,041,986
Net interest income and margin (3)				$	11,010		4.01	%				$	10,686		4.24	%
Net interest spread (4)							3.90	%							4.10	%
Total cost of funds (including the effect of noninterest-bearing demand deposits) (5)							0.28	%							0.41	%

(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.

(5) Total cost of funds (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

32

	Six Months Ended June 30,
	2022								2021
	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	$	177,607		$	411		0.47	%	$	81,251		$	72		0.18	%
Investment securities		36,121			472		2.64	%		26,406			345		2.63	%
Loans (1)		900,849			22,323		5.00	%		883,902			22,289		5.09	%
Total earnings assets		1,114,577			23,206		4.20	%		991,559			22,706		4.62	%
Nonearning Assets
Cash and due from banks		2,177								2,140
Allowance for loan losses		(10,691	)							(10,245	)
Other assets		38,282								39,948
Total Assets	$	1,144,345							$	1,023,402
Interest-Bearing Liabilities
Interest-bearing demand deposits		507,572			592		0.24	%		423,461			947		0.45	%
Savings deposits		24,670			33		0.27	%		19,689			40		0.41	%
Time deposits		170,038			445		0.53	%		179,093			526		0.59	%
Total interest-bearing deposits		702,280			1,070		0.31	%		622,243			1,513		0.49	%
FHLB advances		90,000			390		0.87	%		98,757			465		0.95	%
Total interest-bearing liabilities		792,280			1,460		0.37	%		721,000			1,978		0.55	%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits		230,428								194,191
Other liabilities		16,638								15,824
Stockholders' equity		104,999								92,387
Total Liabilities and Stockholders' Equity	$	1,144,345							$	1,023,402
Net interest income and margin (3)				$	21,746		3.93	%				$	20,728		4.22	%
Net interest spread (4)							3.83	%							4.07	%
Total cost of funds (including the effect of noninterest-bearing demand deposits) (5)							0.29	%							0.44	%

(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.

(5) Total cost of funds (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

The table below sets forth the relative impact on net interest income of changes in the volume of 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, 2022 versus 2021									Six Months Ended June 30, 2022 versus 2021
		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	$	87		$	182		$	269		$	159		$	180		$	339
Investment securities		123			(33	)		90			125			2			127
Loans, net		188			(492	)		(304	)		428			(394	)		34
Total interest income		398			(343	)		55			712			(212	)		500
Interest expense:
Interest-bearing demand deposits		37			(230	)		(193	)		112			(467	)		(355	)
Savings deposits		4			(7	)		(3	)		8			(15	)		(7	)
Time deposits		(27	)		(48	)		(75	)		(26	)		(55	)		(81	)
FHLB advances		(6	)		8			2			(39	)		(36	)		(75	)
Total interest expense		8			(277	)		(269	)		55			(573	)		(518	)
Net increase	$	390		$	(66	)	$	324		$	657		$	361		$	1,018

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

33

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, 2022 was $11.7 million and $23.2 million, respectively, compared to $11.7 million and $22.7 million for three and six months ended June 30, 2021, respectively.  Total interest income in the three and six months ended June 30, 2022 was positively impacted by an increase in the outstanding balance of total loans as well as the purchase of $40 million of additional U.S. Treasury securities classified as available for sale during the second quarter. These effects were partially offset by a decrease in the rates earned on outstanding loans, in part due to lower accretion of deferred fees related to PPP loans. The Company recognized $0.1 million and $0.5 million of income in interest and net fees related to PPP loans during the three and six months ended June 30, 2022, compared to $1.1 million and $2.1 million for the three and six months ended June 30, 2021. As of June 30, 2022, there was $17 thousand of net unrecognized fees related to PPP loans that will be recognized as income through amortization or once the loans are either paid off or forgiven by the SBA. The annualized yield on interest-earning assets for the second quarter 2022 was 4.26% compared to 4.63% for the second quarter of 2021. The annualized yield on interest-earning assets for the six months ended June 30, 2022 was 4.20% compared to 4.62% for the six months ended June 30, 2021.

Interest expense for the second quarter and year-to-date periods ending June 30, 2022 was $0.7 million and $1.5 million, respectively. These amounts represented decreases of $0.3 million and $0.5 million, respectively, when compared to the comparable periods in 2021.  This decrease in interest expense for the comparable periods was primarily due to a decrease rates paid on deposit accounts. For the three and six month periods ending June 30, 2022, the cost of interest bearing deposits was 0.29% and 0.31%, respectively, compared to 0.48% and 0.49% during the comparable periods in prior years. The decreases in rates reflect the Company's disciplined approach to deposit pricing. During the quarter and year to date periods, the amount of municipal deposits (which are higher costing deposits) decreased approximately $47.0 million which was a significant contributing factor to the reduction in the cost of deposits during those periods.

The cost of borrowings was 0.87% and 0.84% for the three months ended June 30, 2022 and 2021, respectively. The increased cost of borrowings was the result of repricing of advances from the FHLB during the period at higher rates. For the six months ended June 30, 2022 and 2021, the cost of borrowings was 0.87% and 0.95%, respectively. The decrease in the cost of funds between the periods was due to the maturity of advances with a higher interest rate, which were replaced by lower-costing advances. Including the impact of non-interest bearing deposits, the total cost of funds was 0.28% for the second quarter 2022 compared to 0.41% for the second quarter of 2021.  Year-to-date total cost of funds for the six months ended June 30, 2022 was 0.29% compared to 0.44% for the first six months of 2021.

The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was a decrease in the interest margin for the three months ended June 30, 2022 to 4.01% compared to 4.24% for the three months ended June 30, 2021.  The net impact of the changes in yields on interest-earning assets and the rates paid on interest-bearing liabilities was a decrease in the interest margin for the six months ended June 30, 2022 to 3.93% compared to 4.22% for the six months ended June 30, 2021.

Provision for loan losses

The provision (or credit) 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 for loan losses was $252 thousand for the second quarter of 2022 and a negative provision (credit) for loan losses of $41 thousand for the second quarter of 2021.  The increase in the provision for loan losses expense for the second quarter 2022 compared to the second quarter of 2021 was primarily due to loan grading migration benefits for previously categorized economic risks associated with the COVID-19 pandemic. The Company’s allowance was 1.22% of loans held for investment at June 30, 2022 compared to 1.20% at December 31, 2021.

The provision (credit) for loan losses for the six months ended June 30, 2022 was $32 thousand compared to $214 thousand for the six months ended June 30, 2021. The change during the periods was the result of improved migration in the loan portfolio partially offset by provision expense due to growth in the portfolio.

The following schedule summarizes the provision, charge-offs, and recoveries by loan category for the three and six months ended June 30, 2022 and 2021:

34

	For the Three Months Ended June 30,
	Manufactured Housing			Commercial Real Estate		Commercial			SBA			HELOC			Single Family Real Estate			Consumer		Total
2022	(in thousands)
Beginning balance	$	3,758		$	6,046	$	580		$	22		$	35		$	105		$	1	$	10,547
Charge-offs		—			—		—			—			—			—			—		—
Recoveries		28			21		3			11			4			—			—		67
Net recoveries		28			21		3			11			4			—			—		67
Provision (credit)		190			53		11			(10	)		(2	)		10			—		252
Ending balance	$	3,976		$	6,120	$	594		$	23		$	37		$	115		$	1	$	10,866
2021
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 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

	For the Six Months Ended June 30,
	Manufactured Housing			Commercial Real Estate			Commercial			SBA			HELOC			Single Family Real Estate		Consumer			Total
2022	(in thousands)
Beginning balance	$	2,606		$	6,729		$	923		$	22		$	18		$	105	$	1		$	10,404
Charge-offs		—			—			—			—			—			—		—			—
Recoveries		35			40			170			242			6			—		1			494
Net recoveries		35			40			170			242			6			—		1			494
Provision (credit)		1,335			(649	)		(499	)		(241	)		13			10		(1	)		(32	)
Ending balance	$	3,976		$	6,120		$	594		$	23		$	37		$	115	$	1		$	10,866
2021
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 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

The percentage of net nonaccrual loans to the total loan portfolio has decreased to 0.04% as of June 30, 2022 from 0.06% at December 31, 2021.

The allowance for loan losses compared to net nonaccrual loans has increased to 2,867% as of June 30, 2022 from 1,841% as of December 31, 2021.  Total past due loans increased to $2.6 million as of June 30, 2022 from $0.7 million as of December 31, 2021. The majority of the increase in past due loans during the period between December 31, 2021 and June 30, 2022, is in the 30-59 days past due bucket. During this same period, the balance of loans that were graded as special mention, substandard, or doubtful decreased by $8.8 million and nonaccrual loans decreased by $0.2 million.

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 (Decrease)			Six Months Ended June 30,				Increase (Decrease)
	2022		2021					2022		2021
	(in thousands)
Other loan fees	$	377	$	310	$	67		$	623	$	623	$	—
Gains from loan sales, net		136		130		6			196		248		(52	)
Document processing fees		122		138		(16	)		223		244		(21	)
Service charges		93		74		19			181		141		40
Other		323		220		103			1,119		513		606
Total non-interest income	$	1,051	$	872	$	179		$	2,342	$	1,769	$	573

35

Total non-interest income increased by $0.2 million for the three months ended June 30, 2022 compared to the same period in 2021. Other loan fees increased for the three months ended June 30, 2022 due to an increase in loan origination fee income. In addition, the increase in other income between the periods was a result of a $104 thousand gain on sale of other assets acquired through foreclosure during the three months ended June 30, 2022. Total non-interest income for the six months ended June 30, 2022 was $2.3 million, an increase of $0.6 million compared to $1.8 million for the six months ended June 30, 2021. The increase was primarily due to the recognition of $0.5 million of proceeds from a bank owned life insurance policy and the aforementioned $104 thousand gain on sale of other assets acquired through foreclosure that was recognized in other income during the Six Months Ended June 30, 2022.

 Non-Interest Expenses

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

	Three Months Ended June 30,				Increase (Decrease)			Six Months Ended June 30,				Increase (Decrease)
	2022		2021					2022		2021
	(in thousands)
Salaries and employee benefits	$	4,910	$	4,379	$	531		$	9,775	$	8,944	$	831
Occupancy, net		1,021		780		241			2,018		1,559		459
Professional services		635		430		205			1,034		770		264
Data processing		307		332		(25	)		617		672		(55	)
Depreciation		179		198		(19	)		362		403		(41	)
FDIC assessment		164		121		43			335		212		123
Advertising and marketing		233		164		69			491		347		144
Stock based compensation		71		59		12			144		126		18
Other		592		206		386			307		496		(189	)
Total non-interest expenses	$	8,112	$	6,669	$	1,443		$	15,083	$	13,529	$	1,554

Total non-interest expenses increased by $1.4 million and $1.6 million in the three and six month periods ended June 30, 2022, respectively, compared to the same periods in 2021.  The increase in non-interest expenses for the periods presented is primarily due to increases in salaries and employee benefits, occupancy expenses, and professional services. Salaries and employee benefits increased in the three and six months ended June 30, 2022 due to increased pressure on wages and benefits as a result of increased inflation and low unemployment. Occupancy costs also increased during the three and six month periods ended June 30, 2022 due to increased costs associated with contracted services expenses related to the Company's strategic outsourcing of many of its information technology department functions. Professional services expenses increased during the three and six months ended June 30, 2022 due to increased costs associated with audit and tax services. Other expenses increased by $0.4 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due primarily to an increase of $146 thousand in costs associated with other assets acquired through foreclosure and a reduction in the deferral of loan origination costs of $182 thousand associated with lower new loan origination volume in the current period.

During the year to date period ended June 30, 2022, we recorded other expenses of $0.3 million compared to other expenses of $0.5 million for the year to date period ended June 30, 2021. The year to date period in 2022 was impacted by recaptured loan collection and legal expenses of $1.0 million received from the settlement of a long-standing lawsuit with a former borrower in the first quarter of 2022. This expense recapture was partially offset by a decrease in the deferral of loan origination costs of $432 thousand associated with lower new loan origination volume in the current period.

Income Taxes

Income tax provision for the three and six months ended June 30, 2022 was $1.1 million and $2.4 million, respectively, compared to $1.4 million and $2.6 million in the same periods during 2021.  The combined state and federal effective income tax rates for the three months ended June 30, 2022 and 2021 were 28.7% and 28.0%, respectively, and for the  six months ended June 30, 2022 and 2021 were 27.0% and 28.4%, respectively. The lower effective tax rate for the year to date period in 2022 was the result of the fact that the income recorded from the proceeds from a bank owned life insurance policy in the first quarter of 2022 was non-taxable to the Company.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards.  Net deferred tax assets of $4.5 million and $4.4 million at June 30, 2022 and December 31, 2021, respectively, are reported in other assets on the consolidated balance sheet.

36

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, 2022 or December 31, 2021.

ASC 740 also prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions.  ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions.  There were no uncertain tax positions at June 30, 2022 and December 31, 2021.

BALANCE SHEET ANALYSIS

Total assets decreased $50.2 million to $1,106.8 million at June 30, 2022 from $1,157.1 million at December 31, 2021.  Net loans increased by $20.1 million to $901.8 million at June 30, 2022 from $881.7 million at December 31, 2021.  The majority of the loan increase was due to an increase in commercial real estate loans of $35.7 million and manufactured housing loans of $8.4 million, partially offset by decreases of $18.9 million in SBA loans primarily due to PPP loan payoffs and $4.6 million in commercial loans including commercial agriculture loans. The decrease in assets was also due to decreased cash and cash equivalents of $106.1 million primarily as a result of the use of these funds to purchase investment securities to take advantage of the higher yield on those assets and to pay down higher cost interest bearing deposits.

Total liabilities decreased $56.0 million to $999.7 million at June 30, 2022 from $1,055.7 million at December 31, 2021, mostly due to a decrease in deposits of $55.5 million. Interest-bearing demand deposits decreased by $61.6 million during the six months ended June 30, 2022, while total certificate of deposit accounts decreased by $22.6 million. These decreases were partially offset by an increase in non-interest bearing demand deposits of $26.8 million.

Total stockholders’ equity increased $5.8 million to $107.1 million at June 30, 2022 from $101.4 million at December 31, 2021.  The $6.6 million increase in retained earnings from net income was partially offset by a $1.3 million decrease from dividends paid on common stock for the six months ended June 30, 2022. Book value per common share was $12.25 at June 30, 2022 compared to $11.72 at December 31, 2021.

Selected Balance Sheet Accounts

	June 30, 2022		December31, 2021		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Cash and cash equivalents	$	102,276	$	208,375	$	(106,099	)		(50.9	)%
Investment securities available-for-sale		57,681		19,711		37,970			192.6	%
Investment securities held-to-maturity		2,636		2,815		(179	)		(6.4	)%
Loans - held for sale		23,124		23,408		(284	)		(1.2	)%
Loans - held for investment, net		878,682		858,271		20,411			2.4	%
Total assets		1,106,828		1,157,052		(50,224	)		(4.3	)%
Total deposits		894,664		950,131		(55,467	)		(5.8	)%
FHLB advances		90,000		90,000		-
Total stockholder's equity		107,142		101,375		5,767			5.7	%

37

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, 2022			December31, 2021
	(in thousands)
Manufactured housing	$	305,749		$	297,363
Commercial real estate		516,514			480,801
Commercial		50,645			55,287
SBA		4,785			23,659
HELOC		3,380			3,579
Single family real estate		9,090			8,749
Consumer		35			109
		890,198			869,547
Allowance for loan losses		(10,866	)		(10,404	)
Deferred costs, net		(703	)		(838	)
Discount on SBA loans		(32	)		(34	)
Other loans in process		85			—
Total loans held for investment, net	$	878,682		$	858,271

The Company had $23.1 million of loans held for sale at June 30, 2022 compared to $23.4 million at December 31, 2021.  Loans held for sale at June 30, 2022 consisted of $6.1 million SBA loans and $17.0 million commercial agriculture FSA guaranteed loans.  Loans held for sale at December 31, 2021, were $6.3 million SBA loans and $17.1 million commercial agriculture FSA guaranteed loans.

Concentrations of Lending Activities

The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices 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, and consumer loans to customers through branch offices located in the Company’s primary markets.  The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas.  As of June 30, 2022 and December 31, 2021, manufactured housing loans comprised 33.5% and 33.3%, respectively, of total loans.  As of June 30, 2022 and December 31, 2021, commercial real estate loans accounted for approximately 56.6% and 53.8% of total loans, respectively.  Approximately 26.5% and 28.9% of these commercial real estate loans were owner-occupied at June 30, 2022 and December 31, 2021, respectively.  Substantially all of these loans are secured by first liens with average loan to value ratios  at origination of 53.2% and 53.8% at June 30, 2022 and December 31, 2021, respectively.  The Company was within established concentration policy limits at June 30, 2022 and December 31, 2021.

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, 2022			December31, 2021
	(in thousands)
Nonaccrual loans (net of government guaranteed portion)	$	379		$	565
Troubled debt restructured loans, gross		6,633			8,565
Nonaccrual loans (net of government guaranteed portion) to gross loans		0.04	%		0.06	%
Net charge-offs (recoveries) (annualized) to average loans		(0.05	)%		(0.04	)%
Allowance for loan losses to nonaccrual loans (net of government guaranteed portion)		2,867	%		1,841	%
Allowance for loan losses to gross loans		1.22	%		1.20	%

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

	June 30, 2022		December 31, 2021
	(in thousands)
Loans 30 through 89 days past due with interest accruing	$	2,627	$	704
Loans 90 days or more past due with interest accruing	$	—	$	—

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.

38

A loan is considered a TDR when concessions have been made to the borrower and the borrower is in financial difficulty.  These concessions include but are not limited to term extensions, rate reductions and principal reductions.  Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions.  TDR loans are also considered impaired.

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

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of June 30, 2022:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	3,226	$	215	$	76	$	45	$	—	$	412	$	—	$	3,974
Impaired loans with no allowance recorded		1,097		—		1,388		55		—		241		—		2,781
Total loans individually         evaluated for impairment		4,323		215		1,464		100		—		653		—		6,755
Related allowance for impaired loans		183		17		1		1		—		10		—		212
Total impaired loans, net	$	4,140	$	198	$	1,463	$	99	$	—	$	643	$	—	$	6,543

	Manufactured Housing		Commercial Real Estate		Commercial		SBA		HELOC		Single Family Real Estate		Consumer		Total Loans
Impaired Loans as of December 31, 2021:	(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded	$	3,563	$	220	$	85	$	194	$	—	$	425	$	—	$	4,487
Impaired loans with no allowance recorded		1,358		1,402		1,505		226		—		258		—		4,749
Total loans individually evaluated for impairment		4,921		1,622		1,590		420		—		683		—		9,236
Related allowance for impaired loans		210		17		—		1		—		12		—		240
Total impaired loans, net	$	4,711	$	1,605	$	1,590	$	419	$	—	$	671	$	—	$	8,996

Total impaired loans decreased $2.5 million in the second quarter of 2022 compared to December 31, 2021.  This decrease was primarily in impaired commercial real estate and manufactured housing categories, which decreased by $1.4 million and $0.6 million, respectively.

The following table summarizes nonaccrual loans by loan segment:

	At June 30, 2022								At December 31, 2021
	Nonaccrual Balance		%			Percent of Total Loans			Nonaccrual Balance		%			Percent of Total Loans
	(dollars in thousands)
Manufactured housing	$	138		36.41	%		0.02	%	$	306		54.16	%		0.03	%
Commercial real estate		—		0.00	%		0.00	%		—		0.00	%		0.00	%
Commercial		—		0.00	%		0.00	%		—		0.00	%		0.00	%
SBA		—		0.00	%		0.00	%		1		0.18	%		0.00	%
HELOC		—		0.00	%		0.00	%		—		0.00	%		0.00	%
Single family real estate		241		63.59	%		0.03	%		258		45.66	%		0.03	%
Consumer		—		—			—			—		—			—
Total nonaccrual loans	$	379		100.00	%		0.04	%	$	565		100.00	%		0.06	%

39

Nonaccrual loans decreased $0.2 million, or 33%, from $0.6 million at December 31, 2021 to $0.4 million at June 30, 2022.

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,
	2022			2021			2022			2021
Allowance for loan losses:							(in thousands)
Balance at beginning of period	$	10,547		$	10,233		$	10,404		$	10,194
Provision (credit) charged to operating expenses:
Manufactured housing		190			(5	)		1,335			(133	)
Commercial real estate		53			88			(649	)		338
Commercial		11			(98	)		(499	)		(379	)
SBA		(10	)		(20	)		(241	)		(49	)
HELOC		(2	)		(1	)		13			(3	)
Single family real estate		10			(5	)		10			13
Consumer		—			—			(1	)		(1	)
Total Provision (credit)		252			(41	)		(32	)		(214	)
Recoveries of loans previously charged-off:
Manufactured housing		28			12			35			151
Commercial real estate		21			20			40			40
Commercial		3			10			170			20
SBA		11			4			242			45
HELOC		4			1			6			3
Single family real estate		—			1			—			1
Consumer		—			—			1			—
Total recoveries		67			48			494			260
Loans charged-off:
Manufactured housing		—			—			—			—
Commercial real estate		—			—			—			—
Commercial		—			—			—			—
SBA		—			—			—			—
HELOC		—			—			—			—
Single family real estate		—			—			—			—
Consumer		—			—			—			—
Total charged-off		—			—			—			—
Net charge-offs (recoveries)		(67	)		(48	)		(494	)		(260	)
Balance at end of period	$	10,866		$	10,240		$	10,866		$	10,240

Investment Securities

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

The carrying value of investment securities was as follows:

	June 30, 2022		December 31, 2021
	(in thousands)
U.S. government agency notes	$	5,030	$	5,508
U.S. government agency mortgage-backed securities ("MBS")		2,636		2,815
U.S. government agency collateralized mortgage obligations ("CMO")		4,182		4,883
U.S. Treasury securities		39,739		-
Corporate debt securities		8,730		9,320
Equity securities: Farmer Mac class A stock		196		248
Total	$	60,513	$	22,774

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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,
	2022			2021		2022			2021
	(in thousands)
Balance, beginning of period	$	2,389		$	2,572	$	2,518		$	2,614
Additions		—			—		—			136
Proceeds from dispositions		(232	)		—		(372	)		—
(Loss) gain on sales, net		93			—		104			(178	)
Third-party portion of write down/loss		—			—		—			—
Balance, end of period	$	2,250		$	2,572	$	2,250		$	2,572

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 Company did not have any valuation allowances against foreclosed assets as of June 30, 2022 or December 31, 2021.

Deposits

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

	June 30, 2022		December31, 2021		Increase (Decrease)			Percent Increase (Decrease)
	(dollars in thousands)
Non-interest-bearing demand deposits	$	236,696	$	209,893	$	26,803			12.8	%
Interest-bearing demand deposits		475,869		537,508		(61,639	)		(11.5	)%
Savings		25,626		23,675		1,951			8.2	%
Certificates of deposit ($250,000 or more)		8,688		17,612		(8,924	)		(50.7	)%
Other certificates of deposit		147,785		161,443		(13,658	)		(8.5	)%
Total deposits	$	894,664	$	950,131	$	(55,467	)		(5.8	)%

Total deposits decreased to $894.7 million at June 30, 2022 from $950.1 million at December 31, 2021.  This decrease was primarily from a decrease in interest-bearing demand deposits and certificates of deposit. These decreases were largely the result of depositors that moved their accounts to institutions that were advertising higher rates on these types of accounts. These decreases were partially offset by an increase in non-interest bearing demand deposits.  Deposits are the primary source of funding the Company’s asset growth.  In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep ("ICS").  CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits.  At June 30, 2022 and December 31, 2021, the Company had $95.2 million and $109.3 million, respectively, of CDARS and ICS deposits.

Liquidity and Capital Resources

Liquidity

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

The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators.  CWB's available liquidity is represented by cash and amounts due from banks, federal funds sold and non-pledged marketable securities.  CWB manages its liquidity risk through operating, investing and financing activities. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. In order to ensure funds are available when necessary, on at least a quarterly basis CWB projects the amount of funds that will be required.

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The Company has established policies as well as analytical tools to manage liquidity.  Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost-effective manner.  CWB’s liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective.  Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk.  The Bank has asset/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues.

The Company through CWB has a blanket lien credit line with the Federal Home Loan Bank (“FHLB”).  FHLB advances are collateralized in the aggregate by CWB’s eligible loans and securities.  Total FHLB fixed rate advances were  $90.0 million at June 30, 2022 and December 31, 2021.  The Company also had $46.0 million of letters of credit with FHLB at June 30, 2022 to secure public funds.  At June 30, 2022, CWB had pledged to the FHLB $51.6 million of securities and $260.7 million of loans.  At June 30, 2022, CWB had $40.3 million available for additional borrowing.  At December 31, 2021, CWB had pledged to the FHLB securities of $13.2 million at carrying value and $286.6 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, 2022 and December 31, 2021.  At June 30, 2022 and December 31, 2021, there were $263.1 million and $259.5 million of loans pledged to the FRB. CWB had $99.9 million and $119.0 million in borrowing capacity as of June 30, 2022 and December 31, 2021, respectively.

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, 2022 and December 31, 2021.

The Company continues to face strong competition for core deposits.  The liquidity ratio of the Company was 16.5% and 21.7% at June 30, 2022 and December 31, 2021, 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.

As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources for its liquidity.  CWBC’s routine funding requirements primarily consisted of certain operating expenses, common stock dividends and interest payments on the other borrowings.  CWBC obtains funding to meet its obligations from dividends collected from CWB and fees charged for services provided to CWB and has the capability to issue equity and debt securities.  Federal banking laws and regulatory requirements regulate the amount of dividends that may be paid by a banking subsidiary without prior approval.  During the three and six months ended June 30, 2022, CWBC declared and paid dividends of $0.7 million and $1.3 million, respectively.  On July 29, 2022, the Company's Board of Directors declared a $0.075 per share dividend payable August 31, 2022, to stockholders of record on August 12, 2022.  The Company anticipates that it will continue to pay quarterly cash dividends in the future, although there can be no assurance that payment of such dividends will continue or that they will not be reduced.

CWBC has a $5.0 million revolving line of credit.  The Company must maintain a compensating deposit account with the lender of $1 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3.0%.  At June 30, 2022, and December 31, 2021, the line of credit balance was zero.

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

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

	At June 30, 2022
	Less than 1 year		More than 1 year		Total
	(dollars in thousands)
Time deposits	$	34,838	$	121,635	$	156,473
FHLB advances		-		90,000		90,000
Operating lease obligations		1,046		5,360		6,406
Total	$	35,884	$	216,995	$	252,879

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

	At June 30, 2022
	Less than 1 year		More than 1 year		Total
	(dollars in thousands)
Loan commitments to extend credit	$	42,354		58,254	$	100,608
Standby letters of credit		-		-		-
Total	$	42,354		58,254	$	100,608

Capital Resources

Maintaining capital strength continues to be a long-term objective for the Company.  Capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard depositor funds.  Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities.  The Company has the capacity to issue 60,000,000 shares of common stock of which 8,743,679 have been issued at June 30, 2022.  Conversely, the Company may decide to repurchase shares of its outstanding common stock, depending on the market price and other relevant factors.  CWB is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could trigger certain mandatory or discretionary actions that, if undertaken, could have a material effect on the Company's business and financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CWB must meet specific capital guidelines that involve quantitative measures of  its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors.

In 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR).  A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. As of the fourth quarter 2021, the Company rescinded its CBLR election.

The following tables illustrate the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of June 30, 2022 and December 31, 2021.

	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)
June 30, 2022
CWB's actual regulatory ratios		12.23	%		11.07	%		11.07	%		9.30	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		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)
December 31, 2021
CWB's actual regulatory ratios		12.19	%		11.02	%		11.02	%		8.56	%
Minimum capital requirements		8.00	%		6.00	%		4.50	%		4.00	%
Well-capitalized requirements		10.00	%		8.00	%		6.50	%		N/A

There are no conditions or events since June 30, 2022 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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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, 2021 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation – Supervision and Regulation."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Certain qualitative and quantitative disclosures about market risk are set forth in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.  There has been no material change in these disclosures as previously disclosed in the Company’s Form 10-K.  For further discussion of interest rate risk, see Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity - Interest Rate Risk.”

The Company expects to see continued volatility in the economic markets and government responses to inflation, the threat of a pending recession in the U.S. economy, and the Russian Federation invasion of Ukraine.  These changing conditions and governmental responses could have impacts on the balance sheet and income statement of the Company.

ITEM 4. CONTROLS AND PROCEDURES

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

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

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated whether there was any change in internal control over financial reporting that occurred during the quarter ended June 30, 2022 and determined that there was no change in internal control over financial reporting that occurred during the quarter ended June 30, 2022 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, 2021.  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, 2022 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.

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.

46

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 11, 2022	BY:/s/ Richard Pimentel
	Richard Pimentel
	Executive Vice President and Chief Financial Officer
	On Behalf of Registrant and as a Duly Authorized Officer
	and as Principal Financial and Accounting Officer

47