EDGAR 10-K Filing

Company CIK: 1051343
Filing Year: 2023
Filename: 1051343_10-K_2023_0001140361-23-015469.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
GENERAL
Community West Bancshares, a California corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or “BHCA,” with corporate headquarters in Goleta, California. CWBC's common stock is listed on Nasdaq under the trading symbol "CWBC". CWBC's principal business is to serve as the holding company for its wholly owned subsidiary Community West Bank, N.A. ("CWB"), a national banking association chartered by the Office of the Comptroller of the Currency (“OCC”). Through CWB, the Company provides a variety of financial products and services to customers through seven full-service branch offices in the cities of Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, and Paso Robles, California.
The Company’s operations and financial results in 2020 and 2021 (and to a lesser extent in 2022) were influenced by the COVID-19 global pandemic (the COVID-19 pandemic, or the pandemic). Such impacts have included significant volatility in the global stock and fixed income markets, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Paycheck Protection Program (PPP) administered by the Small Business Administration, and a variety of rulings from the Company’s banking regulators. The impact of COVID-19 has led to financial stress for many businesses and workers throughout the communities we serve.
Human Capital
The Company’s vision is to be recognized as an outstanding financial services company creating remarkable experiences for its clients, shareholders, and communities. Attracting, retaining, and developing qualified employees and providing them with a remarkable employee experience is a key to providing a remarkable client experience and is an important contributor to the Company’s success.
Employee Profile
The following table describes the composition of the Company’s workforce at December 31, 2022.
Number
Full-time
Part-time
Temporary
Women
87 or
64.9%
Minorities
61 or
45.5%
None of the employees are represented by a labor union or subject to a collective bargaining agreement.
Talent acquisition
The Company’s demand for qualified candidates grows as the Company’s business grows. Building a diverse and inclusive workforce is a critical component of the Company’s plan. The Company utilizes a workforce analysis model in its Affirmative Action Plan to analyze the composition of the workforce and identify any areas of underutilization or opportunity for inclusion of women, minorities, veterans, and the disabled. The Company actively recruits in venues identified to have significant populations of candidates who are female or from underrepresented categories. The Company also posts all jobs in the State CalJobs career site, which promotes employment opportunities specifically to veterans and those with disabilities. The Company attracts talented individuals with a combination of competitive pay and benefits. Through systematic talent management, career development, and succession planning the Company is striving to source a larger percentage of candidates internally and develop systems of career planning and growth that are attractive to external candidates.
Professional Development
The Company’s performance management program is an interactive practice that engages employees through quarterly check-ins, mid-year and annual reviews and annual goal setting for achievement of both Company and individual goals. The Company offers a variety of programs to help employees learn new skills, establish and meet personalized development goals, take on new roles and become better leaders.
Employee Engagement
The Company recognizes that employees who are involved in, enthusiastic about, and committed to their work and workplace contribute meaningfully to the success of the Company. On a regular basis, the Company solicits employee feedback through a confidential company-wide survey on culture, management, career opportunities, compensation, and benefits. The results of this survey are reviewed with management and are used to update employee programs, initiatives, and communications. The Company has a number of other engagement initiatives including town hall meetings with the Company’s Chief Executive Officer and other senior leaders. The Company supports and empowers the grassroots Elevate committee, made up of entry to mid-level employees from all departments and branches, and the Leadership Committee, comprised of both emerging and senior level leaders across all divisions.
Succession Planning
The Company is focused on facilitating internal succession by fostering internal mobility, enhancing its talent pool through professional development and certification programs, structuring its training programs to develop skills and competencies for 21st century banking and business acumen, and expending opportunities through structured diversity and inclusion initiatives.
Health and Safety
We consider the health and safety of our employees to be a critical component of the employee experience. Consequently, we offer our employees and their families access to health and wellness programs that provide comprehensive physical and mental health benefits, including medical, dental, and vision coverages, paid and unpaid leave, as well as life insurance and disability coverage. We offer health savings and spending accounts, paid parental leave, and assistance with childcare expenses. Throughout the pandemic we have remained focused on providing a safe work environment, making structural changes to the workplace, and adhering to governmental mandates and guidance while implementing protocols to protect our employees, including the option for certain employees to work from home.
Governance
Our Board of Directors are committed to executing on our long-term vision. Our Board members are accomplished leaders from diverse backgrounds bringing the perspective skills and experience necessary to use independent judgment that will effectively challenge and drive continued success. Our Board members approve the strategy and ethical standards for the entire organization.
At the end of 2022, the CWBC Board consisted of thirteen directors which included the CWBC President and Chief Executive Officer and twelve independent directors. One director self-identified as a minority, three directors self-identified as female, eight directors self-identified as male, and one director chose not to disclose a gender.
PRODUCTS AND SERVICES
CWB is focused on relationship-based banking to small to medium-sized businesses and their owners, professional, high-net worth individuals, and non-profit organizations in the communities served by its branch offices. The products and services provided include deposit products such as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits, cash management products, and lending products, including commercial, commercial real estate, agricultural, and consumer loans.
Competition in our markets remains strong. The Company continues to be competitive due to its focus on high quality customer service and our experienced relationship bankers who have strong relationships within the communities we serve.
Manufactured Housing
The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved mobile home parks throughout California primarily on or near the coast. The parks must meet specific criteria. The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), the Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. The FSA typically issues a 90% guarantee up to $2,037,000 (amount adjusted annually based on inflation) for up to 40 years.
The Company also originates and sells loans to the secondary market through the Federal Agricultural Mortgage Corporation ("Farmer Mac") program. Farmer Mac provides the Company with access to flexible, low-cost financing and effective risk management tools to help farm, ranch, and rural utility customers.
Small Business Administration Lending
CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990. The Company originates SBA loans which can be sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The primary SBA loan program that CWB offers is the Section 504 (“504”) program.
CWB also offers Business & Industry ("B & I") loans. These loans are similar to the SBA product, except they are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market.
As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation responsibility from the SBA.
Under the CARES Act, CWB offered SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1% for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds to the lender or the date that is ten months after the day of the covered period if the borrower does not apply for forgiveness within the ten-month month period.
Loans to One Borrower
Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the Bank’s unimpaired capital and unimpaired surplus, and the secured and unsecured obligations of any one borrower. CWB was approved to increase this lending limit under the OCC’s Special Lending Limits Program to 25%. This program ensures that national bank lending limits, such as CWB’s, would remain competitive with state-chartered banks. In addition, California state banking law generally limits the amount of funds that a state-chartered bank may lend to a single borrower to 15% of the bank's capital for unsecured loans and 25% of the bank's capital for secured loans, and considers real estate secured loans as “secured” for lending limits purposes.
Foreign Operations
The Company has no foreign operations. The Bank may provide loans, letters of credit and other trade-related services to commercial enterprises that conduct business outside the United States.
Customer Concentration
The Company does not have any customer relationships that individually account for 10% or more of consolidated or segment revenues, respectively.
COMPETITION
The financial services industry is highly competitive. Many of the Bank's competitors are much larger in total assets and capitalization, have greater access to capital markets, have higher lending limits, and can offer a broader range of financial services than the Bank can offer and may have lower cost structures.
This increasingly competitive environment is primarily a result of long-term changes in regulation that made mergers and geographic expansion easier; changes in technology and product delivery systems and web-based tools; the accelerating pace of consolidation among financial services providers; and the flight of deposit customers to perceived increased safety and higher interest rates. We compete for customers with other banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial services providers. This strong competition for deposit and loan products directly affects the rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive. The competitive environment is also significantly impacted by federal and state legislation that makes it easier for non-bank financial institutions to compete with the Company.
GOVERNMENT POLICIES
The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory authorities, including those of the states in which it operates and the U.S. government. These laws, regulations and policies include, for example, statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve System (the "FRB") which impact interest rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory agencies. Changes in these laws, regulations and policies may greatly affect our operations. See “Item 1A Risk Factors - Curtailment of government guaranteed loan programs could affect a segment of our business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Supervision and Regulation.”
Additional Available Information
The Company maintains an Internet website at http://www.communitywest.com. The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act as amended. This and other information related to the Company is available free of charge through this website as soon as reasonably practicable after it has been electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site, https://www.sec.gov, in which all forms filed electronically may be accessed. The Company’s internet website and the information contained therein are not intended to be incorporated in this Form 10-K. In addition, the Company's annual report is available in print, free of charge, to any stockholder who requests it in writing to our Investor Relations Department at Community West Bancshares, 445 Pine Avenue, Goleta, California 93117, Attention Richard Pimentel, or by email to rpimentel@communitywestbank.com.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties are discussed below and elsewhere in this Form 10-K. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition. Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business. See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section of this Form 10-K.
Terrorist attacks and threats of war may impact all aspects of our operations, revenues, costs, and stock price in unpredictable ways.
The recent special military actions of the Russian Republic and its invasion of Ukraine and the resulting geopolitical uncertainty have had and may continue to have an impact on the European Union and the United Kingdom and, other countries, including the U.S. The threat that these military operations may expand beyond Ukraine may have a negative impact as well. Significant increases in the price of oil and natural gas have occurred and are likely to continue putting additional inflationary pressures on central banks, including the FRB. It is expected that interest rate hikes that have occurred during 2022 are likely to continue in 2023 based on announcements by the FRB, but the amount, timing, and frequency of such increases are not fully known at this time. The Russian Republic has also threatened increased cyberattacks as part of its recent actions which could affect the Bank and its customers. Additionally, the United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions on Russian banks and wealthy individuals as well as halting certification of the Nord Stream 2 gas pipeline. They have denied Russian banks access the Society for Worldwide Interbank Financial Telecommunications or SWIFT which is expected to slow down international trade and make such transactions costlier to accomplish which could also negatively affect the Bank and its customers. In response to the Russian military actions, many businesses headquartered in the Eurozone and the United States have stopped doing business with Russia which may negatively affect the profitability of those companies. The international turmoil has already had and may continue to have a negative impact on the stock market generally and, in turn, on our stock price. The full impact of the actions by the Russian Republic regarding Ukraine over the past year and which are likely to continue in 2023 are not fully known at this time, but they could have a material adverse impact on our business, financial condition, results of operations, and stock price.
Risks Relating to the Bank and to the Business of Banking in General
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.
While real estate values and unemployment rates remain stable, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
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loan delinquencies, problem assets, and foreclosures may increase;
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the sale of foreclosed assets may slow;
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demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;
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collateral securing our outstanding loans could decline in value, exposing us to increased risk in our loans or reducing customers' borrowing power;
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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
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the amount of our low-cost or non-interest-bearing deposits may decrease and the composition of our deposits may be adversely affected.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Interest rate changes, which are beyond our control, could harm our profitability.
Our profitability depends to a large extent upon net interest income, which is the difference between interest income and dividends we earn on interest-earning assets, such as loans and investments, and interest expense we pay on interest-bearing liabilities, such as deposits and borrowings. Any change in general market interest rates, whether as a result of changes in the monetary policy of the Federal Reserve or otherwise, may have a significant effect on net interest income and prepayments on our loans. After maintaining its federal funds rate target in a range of 0% to 0.25% since March 2020, as part of its efforts to combat inflation, the Federal Reserve raised the federal funds target to a range of 4.25% to 4.50% between March 2022 and December 2022. Additional rate increases are anticipated in 2023 before the Federal Reserve stops raising the federal funds rate.
As interest rates rise, our existing customers who have adjustable-rate loans may see their loan payments increase and, as a result, may experience difficulty repaying those loans. Increasing delinquencies, nonaccrual loans, and defaults lead to higher loan loss provisions, and potentially greater eventual losses that would lower our current profitability and capital ratios.
CWBC and CWB have liquidity risk.
Like all financial institutions, liquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As can be seen from recent events regarding the operations and failures of other banks in the U.S., an inability to raise funds through deposits, borrowings, the sale of loans, the sale of investment securities at or above the value of such securities on the Company's books, and other sources could have a material adverse effect on liquidity. Access to funding sources in amounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a market downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors that are not specific to CWB, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole which have been experienced in recent months in both domestic and foreign markets. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits (“CD”) markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to CWBC, thereby negatively impacting its separate liquidity.
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance these programs will be available as needed.
As of December 31, 2022, the Company has borrowings from the FHLB of San Francisco of $90.0 million and no borrowings from the FRB. The Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. Any change or termination could have an adverse effect on the Company’s liquidity and profitability. In addition, the Federal Reserve recently announced the creation of a new Bank Term Funding Program offering qualifying banks loans for up to one year in length collateralized by qualifying assets including U.S. securities valued at par to be a source of liquidity in an effort to eliminate an institution's need to quickly sell such securities to meet liquidity needs.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs, and profitability. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Allowance for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our consolidated financial condition and/or consolidated results of operations. The Company maintains an allowance for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date. Provisions are taken from earnings and applied to the allowance for loan losses as the risk of loss in the loan and commitment portfolios increases. Conversely, credits to earnings from the allowance for loan losses are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and commitment portfolios. As of December 31, 2022, the Company’s allowance for loan losses was $10.8 million, or 1.15% of gross loans held for investment. In addition, as of December 31, 2022, we had $0.2 million in loans on nonaccrual status. In determining the level of the allowance for loan losses, Management makes various assumptions and judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information known to Management at the time of the analysis. If Management’s assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses which could have a material adverse effect on the Company’s consolidated financial condition and/or consolidated results of operations. While the allowance for loan losses was determined to be adequate at December 31, 2022, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, or life insurance and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to repay loans in accordance with their original terms and, if not, the cumulative effect may have an adverse effect on our financial condition and/or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2022, approximately $591.2 million, or 62%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate. The real estate securing our loan portfolio is concentrated in California. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. A decline in the real estate market, particularly within California, could materially and adversely affect the business of the Company because a significant portion of its loans are secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and the Company would be more likely to suffer losses on loans. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires, and other natural disasters particular to California.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation, and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that the Company can pay, restrict the ability of institutions to guarantee the Company's debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”). Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and consolidated financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations, and reputation may be negatively impacted.
CWBC is subject to regulation and supervision by the FRB and CWB is subject to supervision and regulation by the OCC with applicable laws and regulations governing the types, amounts, and terms of investments and loans we make, disclosures of products and services we offer to our customers, the levels of capital we must maintain, and the rates of interest we may pay. Those regulations continuously change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. While legislation enacted in 2018 was designed to reduce some of the obligations imposed by the Dodd-Frank Act, recent events, including the failure of two U.S. based financial institutions has resulted in the current administration reaffirming that it will take affirmative action to assure compliance by financial institutions with applicable law, including many of the provisions of the Dodd-Frank Act. In addition, it is likely that the FDIC will consider whether to raise the base deposit insurance assessment to support any losses sustained by those recent bank failures. Such actions could increase CWB's costs. No assurances can be given that future changes in applicable laws and regulations like the enactment of the Anti-Money Laundering Act of 2020 would not impose regulatory restrictions resulting in a negative impact on CWBC. For further discussion, see “SUPERVISION AND REGULATION” herein.
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to affect the implementation of the Basel III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the FRB. For a further discussion of the capital rules, see “SUPERVISION AND REGULATION” herein.
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial, and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s consolidated results of operations and consolidated financial condition may be adversely affected.
The Company is exposed to the risk of environmental liabilities with respect to properties to which we obtain title.
Approximately 62% of the Company’s loan portfolio at December 31, 2022 was secured by real estate. In the course of our business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and prospects.
Changes in interest rates could adversely affect the Company’s profitability, business and prospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates and can impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an adverse effect on the Company’s business, asset quality and prospects. The Company’s operating income and net income depend to a great extent on its net interest margin. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and the interest rates paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions, and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. If the rate of interest paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities increases more than the rate of interest received on loans, securities, and other earning assets increases, the Company’s net interest income, and therefore earnings, would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other interest-bearing liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. No assurances can be given that the Company will be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business, consolidated financial condition, consolidated results of operations, and cash flows.
We may be impacted by the transition from LIBOR as a reference rate.
The London Interbank Offered Rate (LIBOR) had been used extensively in the United States and globally as a reference rate for various commercial and financial contracts, including adjustable-rate mortgages, corporate debt, interest rate swaps and other derivatives. In November 2020, the FRB issued a statement supporting the release of a proposal and supervisory statements designed to provide a clear end date for U.S. Dollar LIBOR (USD LIBOR), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the date LIBOR ceases to be issued.
In December 2022, the FRB issued a final rule replacing USD LIBOR, effective June 30, 2023, with a new index calculated by short-term repurchase agreements, backed by United States Treasury securities, otherwise known as the Secured Overnight Financing Rate (SOFR). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it is a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions.
The Company had $4.2 million of investment securities and $0.4 million of loans (comprised of two (2) loans) tied to LIBOR at December 31, 2022 and is working through the transition away from LIBOR. The Bank has identified the 1-year Constant Treasury Maturity (CMT) index to replace the 1-year LIBOR index for the two remaining loans tied to LIBOR. The Bank transitioned from LIBOR and has been using the CMT index for its fixed rate real estate pricing over the past five years. All of the investment securities tied to LIBOR contain replacement language identifying SOFR as a replacement index for current LIBOR-based investments. The transition from LIBOR could create additional costs or risk for us. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, our failure to adequately manage this transition process with our customers could impact our reputation.
The Company’s future success will depend on our ability to compete effectively in a highly competitive market.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including "fintech lenders, commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks, and other financial institutions compete with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we conduct our business from many local commercial banks as well as numerous national commercial banks and regionally based commercial banks. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected.
In order to remain competitive in our industry and provide our customers with the latest products and services, we must be able to keep up with the changes in technology. Many of the financial institutions and the financial technology companies with which we compete have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse effect on our customer relations and, in turn, our financial condition and results of operations.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate consolidated financial statements on a timely basis could be impaired, which could result in a loss of investor confidence in our consolidated financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our consolidated financial information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our consolidated financial statements. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our system of internal control can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate consolidated financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action that could require us to restate our consolidated financial statements. Any such restatement could result in a loss of public confidence in the reliability of our consolidated financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our consolidated financial condition and consolidated results of operations.
Our accounting policies and methods are fundamental to how we record and report our consolidated financial condition and consolidated results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period consolidated financial statements. Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board ("FASB"), the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes can be difficult to predict and can materially impact how we record and report our consolidated financial condition and consolidated results of operations. In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period consolidated financial statements.
One change is ASU 2016-13, which was released by the Financial Accounting Standards Board in 2016 and was effective for the Company on January 1, 2023. Prior to adoption of ASU 2016-13, the impairment model used by financial institutions to assess the adequacy of the allowance for loan losses was based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the current expected credit loss ("CECL") model, in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model has necessitated significantly greater data requirements and changes to methodologies to accurately account for expected losses over the life of a loan. The Company is currently evaluating the impact of the adoption of the new standard on our consolidated financial statements and anticipates the allowance will increase and the increase will decrease shareholders’ equity as well as the Company’s and Bank’s regulatory capital ratios.
Natural disasters, severe weather and wild fires may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways
In the last few years, California has experienced extensive wildfires that have burned millions of acres, destroyed thousands of homes and commercial properties, and resulted in the loss of life not only in California generally but also directly in our market area. Those natural disasters were followed by significant rains in the winters of 2022 and 2023 resulting in flooding and further loss of property. While the recent rains in California may have helped to reduce the drought experienced in recent years, to the extent that flooding is experienced it could adversely affect our customers. The potential resurgence of drought conditions could also negatively affect our customers. As of December 31, 2022, CWB had $28.3 million of agricultural loans (some of which are classified as held for sale). The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty and a substantial portion of our customers businesses and residences are located in areas susceptible to such events as earthquakes, floods, droughts and wildfires. The occurrence of such events could adversely impact our customers' and their businesses and ability to repay their loans, all of which could have a material adverse effect on CWBC.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet and telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us, and/or our customers that use our internet banking, electronic banking, or some other form of our telecommunications systems. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place, which losses could adversely affect the Company and its consolidated financial condition or consolidated results of operations.
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of these information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur, or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our consolidated financial condition and consolidated results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity, and availability of the Company’s and our customers’ information across all geographic and product lines and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software, and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks, and other events that could have an adverse security impact and result in significant losses by us and/or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsourced or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses, or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data, or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, or penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees, especially seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level. In particular, our relative success to date has been partly the result of our skills of our senior management and management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their communities. These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share. From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer. If the Company is unable to hire or retain qualified employees it may not be able to successfully execute its business strategy. If the Company or its employee is found to have violated any non-solicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.
We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations. We may need to raise additional capital in the future to achieve and maintain those adequate capital levels. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.
The COVID-19 pandemic and measures intended to prevent its spread will likely continue to have an effect on our business results of operations and financial condition.
Although the United States ("U.S.") and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including disruptions of global supply chains. The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications has contributed to rising inflation. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the severity and duration of any resurgence of COVID-19 variants.
Risks Relating to our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends and continue with share repurchases is subject to restrictions.
As a holding company with no significant assets other than the Bank, CWBC is dependent on dividends from the Bank to fund operating expenses and estimated tax payments. The ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions is subject to the restrictions of the National Bank Act. In addition, it is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 7 - Management's Discussion and Analysis of Operations - Regulatory Matters- Dividends” in this Form 10-K.
In the event the Bank is unable to pay dividends to CWBC, it is likely that CWBC, in turn, would have to discontinue cash dividends and share repurchases and may have difficulty meeting its other financial obligations. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock.
For the year ended December 31, 2022, the Bank paid $1.4 million in dividends to CWBC. No assurances can be given that future performance will justify the payment of dividends in any particular year. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code.
Issuance of additional common stock or other equity securities in the future could dilute the ownership interest of existing shareholders.
In order to maintain capital at desired or regulatory-required levels, or to fund future growth, the board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for, or representing rights to acquire shares of the common stock. The sale of these shares may significantly dilute the ownership interests of shareholders. New investors in the future may also have rights, preferences and privileges senior to current shareholders which may adversely impact current shareholders. In addition, the Company issues options to purchase common stock and restricted stock awards under its equity compensation plans to plan participants, including directors, officers and other employees of the Company and/or the Bank, which may dilute the ownership interests of shareholders.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

---

ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
The Company is headquartered at 445 Pine Avenue in Goleta, California. This facility houses the Company's corporate offices and the manufactured housing lending division. The Company operates seven domestic branch locations, two of which are owned. All other properties are leased by the Company, including the corporate headquarters.
The Company continually evaluates the suitability and adequacy of its offices. Management believes that the existing facilities are adequate for its present and anticipated future use.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
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 will not have a material impact on the Company’s financial position or results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC. The following table sets forth the high and low sales prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:
2022 Quarters
2021 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
Range of stock prices:
High
$
14.98
$
14.95
$
14.31
$
15.90
$
13.92
$
14.62
$
13.50
$
13.44
Low
13.91
13.52
13.36
13.40
12.75
12.11
10.76
8.75
Cash Dividends Declared:
$
0.075
$
0.075
$
0.075
$
0.070
$
0.070
$
0.070
$
0.070
$
0.060
Holders
As of February 28, 2023, the closing price of our common stock on NASDAQ was $ 15.11 per share. As of that date the Company had 227 holders of record of its common stock. The Company has a greater number of beneficial owners of our common stock who own their shares through brokerage firms and institutional accounts.
Common Stock Dividends
It is the Company’s intention to review its dividend policy on a quarterly basis. As a holding company with limited significant assets other than the capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB. CWB’s ability to pay dividends to the Company is limited by the National Bank Act. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Supervision and Regulation - CWBC - Limitations on Dividend Payments.”
Repurchases of Securities
Common
In 2021, the Board of Directors extended the repurchase program for common stock repurchases up to $4.5 million until August 31, 2023. Under this program, as of December 31, 2022, the Company has repurchased 350,189 common stock shares for $3.1 million at an average price of $8.75 per share. During the year ended December 31, 2022, the Company did not repurchase any shares and has $1.4 million available to purchase additional shares under the program.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2022:
Plan Category
Number of securities to be
issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price
of outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance under
equity
compensation plans
(excluding securities
reflected in column (a))
(a)
(b)
(c)
Plans approved by shareholders
605,950
$
9.95
353,301
Plans not approved by shareholders
-
-
-
Total
605,950
$
9.95
353,301
For material features of the plans, see Item 8. Financial Statements and Supplementary Data - Note 10 - Stockholders' Equity

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with “Item 8 - Financial Statements and Supplementary Data.” This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Forward-Looking Statements,” on page 4 of this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements.
The Company’s financial condition and results of operations are presented for 2022 compared to 2021. Some tables include additional periods to comply with disclosure requirements or to illustrate the trend of financial results for the periods presented in the financial statements. For a discussion of Company’s results of operations for 2021 compared to 2020, financial condition for 2020, and other 2020 information not included herein, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 29, 2022.
Corporate Profile
Community West Bancshares ("CWBC") is a bank holding company headquartered in Goleta, California with consolidated assets of $1.09 billion at December 31, 2022. The Consolidated financial information presented herein reflects CWBC and its subsidiary which is referred to collectively as "the Company." CWBC's wholly owned subsidiary is Community West Bank ("CWB") which includes its wholly owned subsidiary 445 Pine Investments LLC ("445 Pine") which is a limited liability company.
Critical Accounting Estimates
The Company's significant accounting policies conform with generally accepted accounting principles ("GAAP") and are described in Note 1 - Summary of Significant Accounting Policies of the Notes to Financial Statements section of this 2022 Annual Report on Form 10-K. 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 estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions.
The accounting for the allowance for loan losses is among the Company's most critical accounting policies and represents management's judgments regarding incurred losses inherent in the loan portfolio as of the consolidated balance sheet date. 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.
Financial Overview and Highlights
Community West Bancshares is a financial services company headquartered in Goleta, California that provides full-service banking and lending through its wholly owned subsidiary Community West Bank (“CWB”), which has seven California branch banking offices located in Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, and Paso Robles.
Financial Result Highlights of 2022
The significant financial results of and factors impacting the Company as of and for the year ended December 31, 2022 were:
•
Net income of $13.4 million, or $1.51 per diluted share for the year ended December 31, 2022, compared to $13.1 million, or $1.50 per diluted share for the year ended December 31, 2021.
•
Net interest income was $45.8 million for the year ended December 31, 2022, compared to $42.4 million for the year ended December 31, 2021.
•
Net interest margin was 4.21% for 2022, compared to 4.03% for 2021.
•
Total deposits were $875.1 million at December 31, 2022 compared to $950.1 million at December 31, 2021. Noninterest bearing deposits were $216.5 million at December 31, 2022 compared to $209.9 million at December 31, 2021.
•
Total demand deposits represented 73.7% of total deposits at December 31, 2022, compared to 78.7% at December 31, 2021.
•
Total loans (including loans held for sale) were $955.3 million at December 31, 2022, compared to $892.1 million at December 31, 2021.
•
Book value per common share increased to $12.80 at December 31, 2022, compared to $11.72 at December 31, 2021.
•
Provision (credit) for loan losses was $(195) thousand for the year ended December 31, 2022 compared to a provision (credit) for loan losses of $(181) thousand for the year ended December 31, 2021. Net recoveries during 2022 were $556 thousand compared to $391 thousand in 2021.
•
The Bank’s Tier one leverage ratio was 10.34% at December 31, 2022 compared to 8.56% at December 31, 2021.
•
Non-accrual loans were $211 thousand at December 31, 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 as of and for the year ended December 31, 2022 throughout the analysis sections of this Form 10-K.
A summary of our results of operations and financial condition and select metrics is included in the following table:
Year Ended December 31,
(in thousands, except per share amounts)
Net income available to common stockholders
$
13,449
$
13,101
$
8,245
Basic earnings per share
1.54
1.53
0.97
Diluted earnings per share
1.51
1.50
0.97
Total assets
1,091,502
1,157,052
975,435
Gross loans (including loans held for sale)
955,342
892,083
859,209
Allowance for loan losses
10,765
10,404
10,194
Total deposits
875,084
950,131
766,185
Net interest margin
4.21
%
4.03
%
3.89
%
Return on average assets
1.20
%
1.21
%
0.85
%
Return on average stockholders' equity
12.48
%
13.68
%
9.70
%
Dividend payout ratio
19.13
%
17.66
%
20.04
%
Equity to assets ratio
10.32
%
8.76
%
9.12
%
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and its results of operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes these asset quality metrics:
Year Ended December 31,
(in thousands)
Non-accrual loans (net of guaranteed portion)
$
$
$
3,665
Non-accrual loans to total loans (including loans held for sale)
0.02
%
0.06
%
0.43
%
Allowance for loan losses to total loans held for investment
1.15
%
1.20
%
1.23
%
Allowance for loan losses to nonaccrual loans
5,101.90
%
1,841.42
%
263.27
%
Net (recoveries) charge-offs to average loans
(0.06
)%
(0.04
)%
(0.03
)%
Impaired loans, net
$
5,873
$
8,996
$
12,188
Impaired loans to gross loans held for investment
0.63
%
1.03
%
1.47
%
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits, respectively. The ability to originate new loans and attract new deposits is fundamental to the Company’s asset growth. Total assets decreased to $1.09 billion at December 31, 2022 from $1.16 billion at December 31, 2021. However, during this same period, gross loans increased by $63.3 million, or 7.1%, to $955.3 million as of December 31, 2022 compared to $892.1 million as of December 31, 2021. Total deposits decreased by 7.9% to $875.1 million as of December 31, 2022 from $950.1 million as of December 31, 2021, however non-interest bearing deposits increased by 3.1% to $216.5 million at December 31, 2022 compared to $209.9 million at December 31, 2021.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
Year Ended
December 31,
Increase
(Decrease)
Year Ended
December 31,
Increase
(Decrease)
(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income
$
49,138
$
46,078
$
3,060
$
46,078
$
43,854
$
2,224
Interest expense
3,328
3,704
(376
)
3,704
7,265
(3,561
)
Net interest income
45,810
42,374
3,436
42,374
36,589
5,785
Provision (credit) for loan losses
(195
)
(181
)
(14
)
(181
)
1,223
(1,404
)
Net interest income after provision for loan losses
46,005
42,555
3,450
42,555
35,366
7,189
Non-interest income
3,978
3,753
3,753
3,912
(159
)
Non-interest expenses
31,272
27,995
3,277
27,995
27,523
Income before provision for income taxes
18,711
18,313
18,313
11,755
6,558
Provision for income taxes
5,262
5,212
5,212
3,510
1,702
Net income
$
13,449
$
13,101
$
$
13,101
$
8,245
$
4,856
Earnings per share - basic
$
1.54
$
1.53
$
0.01
$
1.53
$
0.97
$
0.56
Earnings per share - diluted
$
1.51
$
1.50
$
0.01
$
1.50
$
0.97
$
0.53
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the years ended:
December 31, 2022
December 31, 2021
December 31, 2020
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Interest-Earning Assets
Interest-earning deposits
$
119,524
$
1,226
1.03
%
$
139,217
$
0.17
%
$
80,864
$
0.35
%
Investment securities
47,949
1,255
2.62
%
27,011
2.68
%
28,266
2.20
%
Loans (1)
921,638
46,657
5.06
%
884,601
45,123
5.10
%
831,863
42,948
5.16
%
Total earnings assets
1,089,111
49,138
4.51
%
1,050,829
46,078
4.38
%
940,993
43,854
4.66
%
Nonearning Assets
Cash and due from banks
2,169
2,149
3,286
Allowance for loan losses
(10,906
)
(10,245
)
(9,557
)
Other assets
37,751
39,826
37,297
Total assets
$
1,118,125
$
1,082,559
$
972,019
Interest-Bearing Liabilities
Interest-bearing demand deposits
$
480,472
$
1,508
0.31
%
$
467,720
$
1,702
0.36
%
$
314,659
$
2,111
0.67
%
Savings deposits
24,317
0.25
%
20,749
0.37
%
17,419
0.60
%
Time deposits
160,788
0.59
%
182,108
1,057
0.58
%
229,110
3,267
1.43
%
Total interest-bearing deposits
665,577
2,511
0.38
%
670,577
2,835
0.42
%
561,188
5,483
0.98
%
FHLB advances and other borrowings
90,795
0.90
%
94,343
0.92
%
139,795
1,782
1.27
%
Total interest-bearing liabilities
756,372
3,328
0.44
%
764,920
3,704
0.48
%
700,983
7,265
1.04
%
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits
237,849
205,820
169,696
Other liabilities
16,151
16,049
16,313
Stockholders' equity
107,753
95,770
85,027
Total Liabilities and Stockholders' Equity
$
1,118,125
$
1,082,559
$
972,019
Net interest income and margin (2)
$
45,810
4.21
%
$
42,374
4.03
%
$
36,589
3.89
%
Net interest spread (3)
4.07
%
3.90
%
3.62
%
(1)
Includes nonaccrual loans and loans held for sale, and is net of deferred fees, related direct costs, premiums, and discounts, but excludes the allowance for loan losses. Interest income includes net accretion/(amortization) of deferred fees, costs, premiums, and discounts of $0.91 million, $3.35 million, and $1.09 million for the years ended December 31, 2022, 2021, and 2020, respectively.
(2)
Net interest margin is computed by dividing net interest income by total average earning assets.
(3)
Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
Year Ended December 31, 2022 versus 2021
Year Ended December 31, 2021 versus 2020
Increase (Decrease)
Due to Changes in (1)
Increase (Decrease)
Due to Changes in (1)
Volume
Rate
Total
Volume
Rate
Total
(in thousands)
(in thousands)
Interest income:
Interest-earning deposits
$
(33
)
$
1,029
$
$
$
(151
)
$
(55
)
Investment securities
(29
)
(34
)
Loans
1,901
(367
)
1,534
2,677
(502
)
2,175
Total interest income
2,427
3,060
2,739
(515
)
2,224
Interest expense:
Interest-bearing demand deposits
(240
)
(194
)
(965
)
(409
)
Savings
(29
)
(16
)
(41
)
(29
)
Time deposits
(129
)
(114
)
(272
)
(1,938
)
(2,210
)
Total interest-bearing deposits
(70
)
(254
)
(324
)
(2,944
)
(2,648
)
FHLB advances and other borrowings
(34
)
(18
)
(52
)
(421
)
(492
)
(913
)
Total interest expense
(104
)
(272
)
(376
)
(125
)
(3,436
)
(3,561
)
Net increase
$
2,531
$
$
3,436
$
2,864
$
2,921
$
5,785
(1)
Changes due to both volume and rate have been allocated proportionately between changes in volume and rate.
Comparison of interest income, interest expense and net interest margin
The Company’s primary source of revenue is interest income. Interest income for the year ended December 31, 2022 was $49.1 million, an increase from $46.1 million for the year ended December 31, 2021. The average yield on interest-earning assets during 2022 was 4.51%, compared to 4.38% during the prior year. The increase in interest income during 2022 compared to 2021 was the result of an increase of $1.0 million in interest income on loans. The increase in interest income on loans was mainly the result of an increase in the average balance of loans outstanding, which increased by $37.0 million during 2022. The increase in interest income was also positively impacted by increases of $1.5 million and $0.5 million in interest income on interest-earning deposits and in investment securities, respectively. The increase in interest income on interest-earning deposits was mainly due to an increase in the rate paid on those balances to 1.03% for 2022 compared to 0.17% in 2021, while the increase in interest income on investment securities was the result of an increase of $20.9 million in the average balance of investment securities balances. The increases in interest income on interest-earning deposits and federal fund sold and on investment securities were largely the result of an increase in the Federal Reserve's target fed funds rate from 0.00%-0.25% at December 31, 2021 to 4.25%-4.50% at December 31, 2022. These increases were partially offset by a decrease of $2.7 million in the accretion of deferred fee income related to PPP loans during 2022, which also negatively impacted the average yield on loans.
Interest expense for the year ended December 31, 2022 decreased compared to the same period in 2021 by $0.4 million to $3.3 million in 2022 compared to $3.7 million in 2021. The decrease during the year was principally the result of the decrease in rates paid on interest-bearing demand deposits of 5 basis points and a $21.3 million decrease in the average balance of time deposits. The average cost of total interest-bearing deposits also decreased to 38 basis points in 2022 compared to 42 basis points in 2021.
The net impact of these changes was to increase net interest margin during 2022 to 4.21% compared to 4.03% for 2021. Net interest income was $45.8 million for the year ended December 31, 2022, which represented a $3.4 million increase from net interest income of $42.4 million for the year ended December 31, 2021.
Provision for loan losses
The provision for loan losses in each period is reflected as a charge (or credit) against earnings in that period. The provision for loan losses (credit) is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio. The provision (credit) for loan losses was ($195,000) in 2022 compared to ($181,000) in 2021. The provision (credit) for loan losses for 2022 resulted primarily from net recoveries of $0.6 million, partially offset by the need for additional allowance as a result of growth of $65.6 million in the gross loan portfolio during the year. The provision (credit) for 2021 was primarily the result of $0.4 million in net recoveries and a change in loan portfolio mix. As a result of improvements in credit quality, decreased historical loss rates, and net recoveries for the year, the ratio of the allowance for loan losses to loans held for investment decreased to 1.15% at December 31, 2022 from 1.20% at December 31, 2021.
The percentage of non-accrual loans (net of government guarantees) to the total loan portfolio has decreased to 0.02% as of December 31, 2022 from 0.06% at December 31, 2021 primarily due to a decrease in nonaccrual manufactured housing loans.
The allowance for loan losses compared to net non-accrual loans has increased to 5,101.90% as of December 31, 2022 from 1,841.42% as of December 31, 2021. Total past due loans were $2.9 million as of December 31, 2022 and $0.7 million as of December 31, 2021, the majority of which represented loans past due less than 60 days at both period ends.
Non-interest Income
The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers. The following tables present a summary of non-interest income for the periods presented:
Year Ended December 31,
Increase
(Decrease)
Year Ended December 31,
Increase
(Decrease)
(in thousands)
Other loan fees
$
1,161
$
1,349
$
(188
)
$
1,349
$
1,546
$
(197
)
Gains from loan sales, net
(218
)
(445
)
Document processing fees
(90
)
(1
)
Service charges
(52
)
Other
1,700
1,115
1,115
Total non-interest income
$
3,978
$
3,753
$
$
3,753
$
3,912
$
(159
)
Total non-interest income increased $0.2 million for 2022 compared to 2021. The increase was primarily due to the recognition of $0.5 million of proceeds from a bank owned life insurance policy and a $1.0 million recapture of expenses from a lawsuit settlement related to a foreclosed asset during the first quarter of 2022, which were included in other income. This increase was partially offset by a decrease in the gain on loan sales due to lower loan sale volume, a decrease in other loan fees as a result of lower fee income from loans sold to Farmer Mac, and a decrease in the valuation of equity securities carried at fair value on a recurring basis of $121 thousand included in other income.
Non-Interest Expenses
The following tables present a summary of non-interest expenses for the periods presented:
Year Ended December 31,
Increase
(Decrease)
Year Ended December 31,
Increase
(Decrease)
(in thousands)
Salaries and employee benefits
$
19,637
$
18,624
$
1,013
$
18,624
$
18,287
$
Occupancy expense, net
4,180
3,254
3,254
3,036
Professional services
2,923
1,645
1,278
1,645
1,801
(156
)
Advertising and marketing
Data processing
1,265
1,215
1,215
1,055
Depreciation
(69
)
(41
)
FDIC assessment
(80
)
Other
1,058
1,258
(200
)
1,258
1,285
(27
)
Total non-interest expenses
$
31,272
$
27,995
$
3,277
$
27,995
$
27,523
$
Total non-interest expenses for the year ended December 31, 2022 compared to 2021 increased by $3.3 million primarily due to additional salaries and employee benefits, professional services expenses, and occupancy expenses. Salaries and employee benefits increased $1.0 million primarily due to increased costs of employee retention due to wage competition in our target markets. Professional services expenses increased by $1.3 million primarily due to costs incurred related to testing the effectiveness of the Company’s internal control structure and procedures for financial reporting as required for institutions over $1 billion in total assets, and to support strategic and technology initiatives. Occupancy expenses increased due to the outsourcing of additional software and IT services during 2022.
Income Taxes
The income tax provision for 2022 was $5.3 million compared to $5.2 million in 2021. The effective income tax rate was 28.1% and 28.5% for 2022 and 2021, respectively.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis, including operating losses and tax credit carryforwards. Net deferred tax assets of $5.1 million at December 31, 2022 are reported in the consolidated balance sheets as a component of other assets.
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
There was no valuation allowance on deferred tax assets at December 31, 2022 and 2021. The Company continues to be profitable, and management believes that the Company will generate sufficient taxable income in future periods to utilize deferred tax assets before they expire.
ASC 740 also prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December 31, 2022 and 2021.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 13 - Income Taxes in the consolidated financial statements.
BALANCE SHEET
Total assets decreased $65.6 million to $1.09 billion at December 31, 2022 compared to $1.16 billion at December 31, 2021. The majority of the decrease was related to a decrease in cash and cash equivalents, which decreased by $143.7 million during the year. The decrease in cash and cash equivalents was offset by an increase in loans held for investment of $65.6 million, primarily due to increases in commercial real estate loans (which include land, construction and SBA 504 loans) and manufactured housing loans. Total commercial real estate loans increased by 13.4% to $545.3 million at December 31, 2022 compared to $480.8 million at December 31, 2021, and comprised 57.0% of the total loan held for investment portfolio at December 31, 2022. Manufactured housing loans increased by 6.2% to $315.8 million at December 31, 2022 compared to $297.4 million at December 31, 2021, and represented 33.0% of the total loan portfolio. SBA loans held for investment decreased by $20.2 million during 2022 primarily due to a reduction in outstanding PPP loans.
Total liabilities decreased $76.8 million, or 7.3% to $978.9 million at December 31, 2022 from $1.06 billion at December 31, 2021. The majority of this decrease was due to a reduction in deposit balances, specifically interest-bearing demand deposits. Total deposits decreased by $75.0 million to $875.1 million at December 31, 2022 from $950.1 million at December 31, 2021. Interest-bearing demand deposits were $428.2 million at December 31, 2022, a decrease of $109.3 million from $537.5 million at December 31, 2021. The decrease was a result of both planned and unplanned withdrawals due to competition that put pressure on pricing and client retention. This decrease was offset by increases of $27.9 million and $6.6 million in total certificates of deposits and non-interest bearing demand deposits, respectively during 2022.
Total stockholders’ equity increased to $112.7 million at December 31, 2022 from $101.4 million at December 31, 2021. This increase was primarily from 2022 net income of $13.4 million reduced by common stock dividends declared and paid in 2022 of $2.6 million. The increase was also partially offset by a decrease in accumulated other comprehensive income (loss) of $0.9 million due to the decline in the fair value of investment securities available-for-sale.
The following tables present the Company’s average balances for the dates indicated:
For the Years Ended December 31,
Amount
Percent
Amount
Percent
Amount
Percent
ASSETS:
(dollars in thousands)
Cash and due from banks
$
2,169
0.2
%
$
2,149
0.2
%
$
3,286
0.3
%
Interest-earning deposits in other institutions
119,524
10.7
%
139,217
12.9
%
80,864
8.3
%
Investment securities available-for-sale
40,552
3.6
%
18,878
1.7
%
18,053
1.9
%
Investment securities held-to-maturity
2,668
0.2
%
3,443
0.3
%
5,415
0.6
%
Investment securities measured at fair value
0.0
%
0.0
%
0.0
%
Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock
4,505
0.4
%
4,491
0.4
%
4,663
0.5
%
Loans held for sale and loans held for investment, net
910,732
81.5
%
874,356
80.9
%
822,306
84.6
%
Servicing assets
1,575
0.1
%
1,525
0.1
%
1,047
0.1
%
Other assets acquired through foreclosure, net
2,304
0.2
%
2,580
0.2.0
%
2,681
0.3.0
%
Premises and equipment, net
6,412
0.6
%
6,870
0.6
%
7,383
0.8
%
Other assets
27,460
2.5
%
28,851
2.7
%
26,186
2.6
%
TOTAL ASSETS
$
1,118,125
100.0
%
$
1,082,559
100.0
%
$
972,019
100.0
%
LIABILITIES:
Deposits:
Non-interest-bearing demand
$
237,849
21.3
%
$
205,820
19.0
%
$
169,696
17.5
%
Interest-bearing demand
480,472
43.0
%
467,720
43.3
%
314,659
32.4
%
Savings
24,317
2.2
%
20,749
1.9
%
17,419
1.8
%
Time certificates over $250,000
4,769
0.4
%
13,965
1.3
%
82,583
8.5
%
Other time certificates
156,019
14.0
%
168,143
15.5
%
146,527
15.0
%
Total deposits
903,426
80.9
%
876,397
81.0
%
730,884
75.2
%
FHLB advances and other borrowings
90,795
8.1
%
94,343
8.7
%
139,795
14.4
%
Other liabilities
16,151
1.4
%
16,049
1.5
%
16,313
1.6
%
Total liabilities
1,010,372
90.4
%
986,789
91.2
%
886,992
91.2
%
STOCKHOLDERS' EQUITY
Common stock
45,186
4.0
%
43,627
4.0
%
42,747
4.4
%
Retained earnings
62,940
5.6
%
52,059
4.8
%
42,340
4.4
%
Accumulated other comprehensive (loss) income
(373
)
0.0
%
0.0
%
(60
)
0.0
%
Total stockholders' equity
107,753
9.6
%
95,770
8.8
%
85,027
8.8
%
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,118,125
100.0
%
$
1,082,559
100.0
%
$
972,019
100.0
%
Loans Held for Sale
As of December 31, 2022 and 2021, the Company the Company had approximately $5.2 million and $6.3 million, respectively, of SBA loans included in loans held for sale. The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program. As of December 31, 2022 and 2021, the Company had $15.9 million and $17.1 million of USDA loans included in loans held for sale, respectively.
Loan Portfolio
Market Summary
Total gross loans increased by $63.2 million during 2022 to $956.2 million. The majority of this increase was driven by growth in the commercial real estate and manufactured housing loan portfolios. Total manufactured housing loans increased by $18.5 million and total commercial real estate loans increased by $64.5 million in 2022. SBA loans decreased by $20.2 million as a result of the forgiveness or repayment of PPP loans during 2022.
The table below summarizes the distribution of the Company’s loans (including loans held for sale) at the year-end:
December 31,
(dollars in thousands)
Manufactured housing
$
315,825
$
297,363
Commercial real estate
545,317
480,801
Commercial
59,070
55,287
SBA
3,482
23,659
HELOC
2,613
3,579
Single family real estate
8,709
8,749
Consumer
Loans held for sale
21,033
23,408
Total loans
956,156
892,955
Less:
Allowance for loan losses
10,765
10,404
Deferred fees, net
Discount on SBA loans
Total loans, net
$
944,577
$
881,679
Percentage to Total Loans:
Manufactured housing
33.0
%
33.3
%
Commercial real estate
57.0
%
53.9
%
Commercial
6.2
%
6.2
%
SBA
0.4
%
2.6
%
HELOC
0.3
%
0.4
%
Single family real estate
0.9
%
1.0
%
Consumer
0.0
%
0.0
%
Loans held for sale
2.2
%
2.6
%
Total
100.0
%
100.0
%
Commercial Loans
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term. The collateral for these loans typically Uniform Commercial Code (“UCC-1”) lien filings, real estate, and personal guarantees. The Company does not extend material loans of this type in excess of five years.
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing, commercial and industrial properties. This loan category also includes SBA 504 loans and land loans.
Commercial and industrial real estate loans are primarily secured by nonresidential property. Office buildings or other commercial property primarily secure these types of loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 70% of appraised value of the underlying real property.
The Company makes real estate construction loans on commercial properties and single-family dwellings for speculative purposes. These loans are collateralized by first and second trust deeds on real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 75%.
SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or acquire machinery and equipment. The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture. Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%. Conventional and investor loans are sometimes funded by our secondary-market partners and CWB receives a premium for these transactions.
SBA Loans
SBA loans consist of SBA 7(a), Business and Industry loans (“B&I”), and SBA Paycheck Protection Program (PPP) loans. The SBA 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing. At present, the SBA guarantees as much as 85% on loans up to $150,000 and 75% on loans more than $150,000. The SBA’s maximum exposure amount is $3,750,000. The Company may sell a portion of the loans, however, under the SBA 7(a) loan program; the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
B&I loans are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 60% to 80% depending on the size of the loan. B&I loans are similar to the SBA 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.
In April of 2020, under the CARES Act, CWB began offering SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1% for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds to the lender or the date that is 10 months after the day of the covered period if the borrower does not apply for forgiveness within the 10-month period.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA B&I loan program. The FSA loans typically have a 90% guarantee up to $2,037,000 (amount adjusted annually based on inflation) for up to 40 years, but not always. The Company had $28.3 million of commercial agriculture loans at December 31, 2022, of which $15.9 million had FSA guarantees and were classified as held for sale.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs. Under the Farmer Mac I program, loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac. CWB receives an origination fee and an ongoing field servicing fee of 25 basis points to 115 basis points for maintaining the relationship with the borrower and performing certain loan compliance monitoring, and other duties as directed by the Central Servicer.
Manufactured Housing Loans
CWB originates loans secured by manufactured homes located in approved rental, co-operative ownership, condominium and planned unit development mobile home parks in Santa Barbara, Ventura and San Luis Obispo Counties as well as along the California coast from San Diego to San Francisco. The loans are made to borrowers for purchasing or refinancing new or existing manufactured homes. The loans are made under either fixed rate programs for terms of 10 to 20 years or adjustable-rate programs with terms of 25 to 30 years. The adjustable-rate loans generally have an initial fixed rate period of five years and then adjust annually subject to interest rate caps.
HELOC
Home equity lines of credit (“HELOC”) held at the Bank are lines of credit collateralized by residential real estate. Typically, HELOCs are collateralized by a second deed of trust. The combined loan-to-value, first trust deed and second trust deed, are not to exceed 75% on all HELOCs. The Bank is not actively originating new HELOCs.
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.
Single Family Real Estate Loans
Until the third quarter of 2015, the Company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-four family homes. These loans were made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction or home improvement.
Loan Maturities and Sensitivity to Interest Rates
The following table sets forth the amount of loans (including loans held for sale) outstanding by type of loan as of December 31, 2022 that were contractually due in one year or less, more than one year and less than five years, and more than five years based on remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less. The tables also present an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment, refinancing or other factors.
Due in One
Year or
Less
Due After One
Year to Five
Years
Due After
Five to 15
Years
Due
After 15
Years
Total
(in thousands)
Manufactured housing
Floating rate
$
6,910
$
32,134
$
104,923
$
61,027
$
204,994
Fixed rate
6,463
27,293
62,415
14,660
110,831
Commercial real estate
Floating rate
42,497
90,322
202,680
336,233
Fixed rate
7,448
57,032
144,604
-
209,084
Commercial
Floating rate
16,644
21,643
9,193
12,815
60,295
Fixed rate
3,958
8,339
2,337
-
14,634
SBA
Floating rate
1,020
3,011
3,752
8,656
Fixed rate
-
-
-
-
-
HELOC
Floating rate
2,556
-
-
2,613
Fixed rate
-
-
-
-
-
Single family real estate
Floating rate
1,546
4,295
6,743
Fixed rate
1,047
1,966
Consumer
Floating rate
-
-
-
-
-
Fixed rate
-
-
Total
$
85,501
$
244,576
$
535,246
$
90,833
$
956,156
Note that net deferred loan fees and discounts on SBA loans totaling $(0.8) million were not included in the above loan balances.
At December 31, 2022, total loans consisted of 64.8% with floating rates and 35.2% with fixed rates. Variable rate manufactured housing loans, which generally have an initial fixed rate period for the first five years, are included in floating rate loans.
The following table presents loans due after one year as of December 31, 2022:
Fixed Rate
Variable
Rate
Total
(in thousands)
Manufactured housing
$
104,368
$
198,084
$
302,452
Commercial real estate
201,636
293,736
495,372
Commercial
10,676
43,651
54,327
SBA
-
7,636
7,636
HELOC
-
2,556
2,556
Single family real estate
1,810
6,454
8,264
Consumer
-
Total
$
318,538
$
552,117
$
870,655
High Risk Industries Impacted By COVID-19
The industries most heavily impacted include retail, healthcare, hospitality, schools, and energy. The Company’s management team has evaluated the loans related to the affected industries and at December 31, 2022, the Bank’s loans to these industries were $220.1 million, which is 23.0% of our $955.3 million loan portfolio.
Importantly, of the selected industry loans, only a de minimis amount are on non-accrual status. Also, of the selected industries loans, $7.1 million, or 3.2%, are considered to be classified. Lastly, the Bank has not made payment accommodations to any of these loan borrowers as of December 31, 2022.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2022 and 2021, manufactured housing loans comprised 33.0% and 33.3%, of total loans, respectively. As of December 31, 2022 and 2021, commercial real estate loans accounted for approximately 57.0% and 53.9% of total loans, respectively. Approximately 24.5% and 27.8% of these commercial real estate loans were owner occupied at December 31, 2022 and 2021, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 50.4% and 53.7% at December 31, 2022 and 2021, respectively. The Company was within established policy limits at December 31, 2022 and 2021.
Interest Reserves
Interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and land development loan. The Company’s practice is to monitor the construction, sales and/or leasing progress to determine the feasibility of ongoing construction and development projects. If, at any time during the life of the loan, the project is determined not to be viable, the Company discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and/or legal action as deemed appropriate. At December 31, 2022, the Company had 14 loans with an outstanding balance of $38.4 million with available interest reserves of $4.2 million. Total construction and land loans are approximately 5.2% and 3.7% of the Company’s loan portfolio at December 31, 2022 and 2021, respectively.
Impaired loans
A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment. All other loans are measured for impairment based on the present value of future cash flows. Impairment is measured on a loan-by-loan basis for all impaired loans in the portfolio.
A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial difficulty. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans are also considered impaired.
The recorded investment in loans that are considered impaired is as follows:
December 31,
(in thousands)
Impaired loans with specific valuation allowances
$
3,443
$
4,487
Impaired loans without specific valuation allowances
2,614
4,749
Specific valuation allowance related to impaired loans
(184
)
(240
)
Impaired loans, net
$
5,873
$
8,996
Average investment in impaired loans
$
6,958
$
10,858
The following schedule summarizes impaired loans and the related allowance for loan losses allocated to those impaired loans by loan class as of the periods indicated:
Manufactured
Housing
Commercial
Real
Estate
Commercial
SBA
HELOC
Single Family
Real
Estate
Consumer
Total
Loans
Impaired Loans as of December 31, 2022:
(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded
$
2,918
$
$
$
$
-
$
$
-
$
3,443
Impaired loans with no allowance recorded
1,166
-
1,297
-
-
-
2,614
Total loans individually evaluated for impairment
4,084
1,364
-
-
6,057
Related Allowance for Loan Losses
Impaired loans with an allowance recorded
-
-
-
Impaired loans with no allowance recorded
-
-
-
-
-
-
-
-
Total loans individually evaluated for impairment
-
-
-
Total impaired loans, net
$
3,927
$
$
1,364
$
$
-
$
$
-
$
5,873
None of the impaired loans shown above are government guaranteed.
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
$
$
$
$
-
$
$
-
$
4,487
Impaired loans with no allowance recorded
1,358
1,402
1,505
-
-
4,749
Total loans individually evaluated for impairment
4,921
1,622
1,590
-
-
9,236
Related Allowance for Loan Losses
Impaired loans with an allowance recorded
-
-
-
Impaired loans with no allowance recorded
-
-
-
-
-
-
-
-
Total loans individually evaluated for impairment
-
-
-
Total impaired loans, net
$
4,711
$
1,605
$
1,590
$
$
-
$
$
-
$
8,996
Included in the above amounts are $0.3 million of impaired loans that are government guaranteed.
Total impaired loans decreased by $3.2 million at December 31, 2022 compared to December 31, 2021. Impaired commercial real estate loans decreased by $1.4 million, impaired manufactured housing loans decreased by $0.8 million, impaired SBA loans decreased by $0.4 million, impaired single family loans decreased by $0.3 million, and impaired commercial loans decreased by $0.2 million. The reduction in impaired loans was mainly due to payoffs or paydowns of impaired loan balances of $3.0 million during the year ended December 31, 2022.
The following schedule reflects recorded investment in certain types of loans at the dates indicated:
For the Year Ended December 31,
(in thousands)
Total nonaccrual loans
$
$
$
3,872
Government guaranteed portion of loans included above
-
-
(207
)
Total nonaccrual loans without government guarantees
$
$
$
3,665
Allowance for loan losses to total nonaccrual loans
5,102
%
1,841
%
%
Nonaccrual loans to total loans outstanding
0.02
%
0.06
%
0.43
%
TDR loans, gross
$
5,996
$
8,565
$
11,141
Loans 30 through 89 days past due with interest accruing
$
2,880
$
$
1,889
Allowance for loan losses to gross loans held for investment
1.15
%
1.20
%
1.23
%
Allowance for loan losses to impaired loans
177.73
%
112.65
%
81.56
%
Interest income recognized on impaired loans
$
$
$
Interest income that would have been recorded under the original terms of nonaccrual loans
$
$
$
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is usually no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table summarizes the composition of nonaccrual loans:
At December 31, 2022
At December 31, 2021
Nonaccrual
Balance
%
Percent of
Total Loans
Nonaccrual
Balance
%
Percent of
Total Loans
(dollars in thousands)
Manufactured housing
$
28.91
%
0.01
%
$
54.16
%
0.03
%
SBA
-
0.00
%
0.00
%
0.18
%
0.00
%
Single family real estate
71.09
%
0.01
%
45.66
%
0.03
%
Total nonaccrual loans
$
100.00
%
0.02
%
$
100.00
%
0.06
%
Total nonaccrual balances decreased $0.4 million to $0.2 million at December 31, 2022, from $0.6 million at December 31, 2021. None of the nonaccrual loans were guaranteed by the U.S. government or its agencies at December 31, 2022 or 2021. The percentage of nonaccrual loans to the total loan portfolio has decreased to 0.02% as of December 31, 2022 from 0.06% at December 31, 2021.
CWB or the SBA repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days. After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance. Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.
Net Loan (Recoveries) Charge-offs
The following table reflects net (recoveries) charge-offs by portfolio type for the periods indicated.
December 31,
(dollars in thousands)
Net charge-offs (recoveries):
Manufactured housing
$
(139
)
$
(218
)
$
(27
)
Commercial real estate
(80
)
(80
)
(80
)
Commercial
(190
)
(40
)
(133
)
SBA
(134
)
(47
)
(7
)
HELOC
(12
)
(6
)
(6
)
Single family real estate
-
(1
)
(1
)
Consumer
(1
)
-
Total net (recoveries) charge-offs
$
(556
)
$
(391
)
$
(254
)
Average loan balance
Manufactured housing
$
305,318
$
288,039
$
267,851
Commercial real estate
520,240
438,792
394,417
Commercial
69,994
71,866
91,602
SBA
13,331
73,672
63,955
HELOC
3,686
2,137
2,880
Single family real estate
8,935
9,996
11,069
Consumer
Total average loan balance
$
921,638
$
884,601
$
831,863
Net charge-offs annualized percentage
Manufactured housing
(0.05
)%
(0.08
)%
(0.01
)%
Commercial real estate
(0.02
)%
(0.02
)%
(0.02
)%
Commercial
(0.27
)%
(0.06
)%
(0.15
)%
SBA
(1.01
)%
(0.06
)%
(0.01
)%
HELOC
(0.33
)%
(0.28
)%
(0.21
)%
Single family real estate
0.00
%
(0.01
)%
(0.01
)%
Consumer
(0.75
)%
1.01
%
0.00
%
Total net (recoveries) charge-offs to average loans
(0.06
)%
(0.04
)%
(0.03
)%
At December 31, 2022, the allowance for loan losses was $10.8 million or 1.15% of gross loans compared to $10.4 million or 1.20% of gross loans at December 31, 2021.
The following table summarizes the allocation of allowance for loan losses by loan type. However, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:
December 31,
Amount
% of Loans in
Each
Category to
Gross Loans
Amount
% of Loans in
Each Category
to Gross
Loans
Manufactured housing
$
3,879
33.8
%
$
2,606
34.2
%
Commercial real estate
5,980
58.4
%
6,729
55.3
%
Commercial
6.2
%
6.4
%
SBA
0.4
%
2.7
%
HELOC
0.3
%
0.4
%
Single family real estate
0.9
%
1.0
%
Consumer
0.0
%
0.0
%
Total
$
10,765
100.0
%
$
10,404
100.0
%
The total allowance for loan losses increased by $0.4 million to $10.8 million at December 31, 2022 compared to the prior year. In addition, the Company had net recoveries of $0.6 million in 2022 compared to net recoveries of $0.4 million in 2021.
Investment Securities
Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Securities classified as held-to-maturity are debt securities that management has both the intent and ability to hold to maturity, regardless of changes in market conditions, liquidity needs, or general economic conditions. These types of securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits, and to manage liquidity, capital, and interest rate risk.
The weighted average yields of investment securities by maturity period were as follows at December 31, 2022:
December 31, 2022
Less than One
Year
One to Five
Years
Five to Ten
Years
Over Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available-for-sale
(dollars in thousands)
U.S. government agency notes
$
-
-
$
-
-
$
3.59
%
$
3,588
4.40
%
$
4,107
4.30
%
U.S. government agency CMO
-
-
-
-
-
-
4,296
4.63
%
4,296
4.63
%
U.S. Treasury securities
9,970
2.06
%
-
-
-
-
-
-
9,970
2.06
%
Corporate debt securities
-
-
-
-
8,315
3.74
%
-
-
8,315
3.74
%
Total
$
9,970
2.06
%
$
-
-
$
8,834
3.73
%
$
7,884
4.53
%
$
26,688
3.34
%
Securities held-to-maturity
U.S. government agency MBS
$
-
-
$
-
-
$
3.60
%
$
1,811
3.68
%
$
2,557
3.66
%
Total
$
-
-
$
-
-
$
3.60
%
$
1,811
3.68
%
$
2,557
3.66
%
Expected maturities may differ from contractual maturities because borrowers or issuers have the right to call or prepay certain investment securities. Changes in interest rates may also impact prepayment or call options.
The Company does not own any subprime mortgage-backed securities (“MBS”) in its investment portfolio. Gross unrealized losses at December 31, 2022 are primarily caused by interest rate fluctuations, credit spread widening, and reduced liquidity in applicable markets. The Company has reviewed all securities on which there was an unrealized loss in accordance with its accounting policy for other than temporary impaired (“OTTI”) described in Note 2 - Investment Securities and determined no impairment was required. At December 31, 2022, the Company had the intent and the ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
December 31,
(in thousands)
Balance, beginning of period
$
2,518
$
2,614
$
2,524
Additions
-
Proceeds from dispositions
(384
)
-
-
Gains (losses) on sales, net
(232
)
(16
)
Balance, end of period
$
2,250
$
2,518
$
2,614
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 assets acquired through foreclosure and are reported at fair value at the time of foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets are capitalized and costs related to holding the assets are charged to expense. At December 31, 2022 and 2021, the Company had $0.3 million and $0.3 million valuation allowance on foreclosed assets, respectively.
Deposits
The average balances by deposit type as of the dates presented below:
Year Ended December 31,
Average
Balance
Percent of
Total
Average
Balance
Percent of
Total
Average
Balance
Percent of
Total
(dollars in thousands)
Non-interest-bearing demand deposits
$
237,849
26.3
%
$
205,820
23.5
%
$
169,696
23.2
%
Interest-bearing demand deposits
480,472
53.2
%
467,720
53.3
%
314,659
43.1
%
Savings
24,317
2.7
%
20,749
2.4
%
17,419
2.4
%
Time deposits over $250,000
4,769
0.5
%
13,965
1.6
%
25,599
3.5
%
Other time deposits
156,019
17.3
%
168,143
19.2
%
203,511
27.8
%
Total deposits
$
903,426
100.0
%
$
876,397
100.0
%
$
730,884
100.0
%
Total deposits decreased to $875.1 million at December 31, 2022 from $950.1 million at December 31, 2021, a decrease of $75.0 million. Non-interest-bearing demand deposits increased by $6.6 million to $216.5 million at December 31, 2022, compared to $209.9 million December 31, 2021. Interest-bearing demand deposits decreased by $109.3 million to $428.2 million at December 31, 2022 compared to $537.5 million at December 31, 2021. Total demand deposits decreased by $102.7 million at December 31, 2022 compared to December 31, 2021, primarily due to net outflows of money market deposits as a result of the higher interest rate environment. Certificates of deposits increased by $27.9 million to $206.9 million at December 31, 2022 compared to $179.1 million at December 31, 2021. The increase in certificate of deposit balances related to increased balances from wholesale funding. Deposits have been the primary source of funding the Company’s asset growth. In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep ("ICS") services. Both CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits. At December 31, 2022 and 2021, the Company had $51.1 million and $6.5 million, respectively of CDARS deposits. At December 31, 2022 and 2021, the Company had $69.2 million and $93.3 million, respectively of ICS deposits.
Uninsured Deposits
Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regimes and any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regimes.
The following table presents time certificate of deposits over the FDIC insurance limits by maturities:
December 31,
Over
$ 250,000
Over
$ 250,000
Less than three months
$
1,295
$
4,703
Three to six months
5,882
Six to twelve months
1,251
2,941
Over twelve months
2,217
Total
$
5,693
$
14,112
The Company estimates its total uninsured deposits to be $332.1 million and $415.4 million as of December 31, 2022 and 2021, respectively.
The Company’s deposits may fluctuate as a result of local and national economic conditions. Management does not believe that deposit levels are influenced by seasonal factors.
The Company utilizes brokered deposits in accordance with strategic and liquidity planning.
Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
December 31,
FHLB and FRB PPPLF Advances
(in thousands)
Maximum month-end balance
$
110,000
$
105,000
$
200,103
Balance at year end
$
90,000
$
90,000
$
105,000
Average balance
$
90,795
$
94,343
$
132,855
Other Borrowings
Maximum month-end balance
$
-
$
-
$
10,000
Balance at year end
$
-
$
-
$
-
Average balance
$
-
$
-
$
6,940
Total borrowed funds
$
90,000
$
90,000
$
105,000
Weighted average interest rate at end of year
0.86
%
0.86
%
1.03
%
Weighted average interest rate during the year
0.90
%
1.04
%
1.27
%
FHLB and FRB Advances
The Company utilizes borrowed funds to support liquidity needs. The Company’s borrowing capacity at FHLB and FRB is determined based on collateral pledged, generally consisting of securities and loans. At December 31, 2022, no advances were outstanding from the FRB.
The Company also had $39.0 million of letters of credit with the FHLB at December 31, 2022 to secure public funds. The Company, through the Bank, has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. As of December 31, 2022, the Company had pledged $21.1 million of securities and $232.6 million of loans to the FHLB as collateral. At December 31, 2022, the Company had $41.6 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. As of December 31, 2022, there were $248.6 million of loans pledged as collateral to the FRB. There were no outstanding FRB advances as of December 31, 2022. Available borrowing capacity was $78.9 million as of December 31, 2022.
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%. The line of credit matured in September 2022 and the Company renewed the line of credit for an additional one-year term and increased the amount available to $10.0 million with no other changes to the financial terms or covenants. As of December 31, 2022 and 2021, there were no outstanding balances on the revolving line of credit.
Federal Funds Purchased Lines
The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There were no amounts outstanding on these lines as of December 31, 2022.
Preferred Stock
There are no shares of the Company's preferred stock outstanding as of December 31, 2022 and 2021.
Liquidity and Capital Resources
Capital Resources
The federal banking agencies have adopted risk-based capital adequacy guidelines that are used to assess the adequacy of capital in supervising bank holding companies and banks. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015, and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amended the regulatory risk-based capital rules applicable to the Company. Basel III redefined the regulatory capital elements and minimum capital ratios, introduced regulatory capital buffers above those minimums, revised rules for calculating risk-weighted assets and added a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. The final rule was effective January 1, 2020. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020. As of the fourth quarter 2021, the Company rescinded its CBLR election.
The following table illustrates the Bank’s regulatory ratios and the current adequacy guidelines as of December 31, 2022 and 2021. The fully phased in guidelines are also summarized.
Total
Capital
(To Risk-
Weighted
Assets)
Tier 1 Capital
(To Risk-
Weighted
Assets)
Common Equity
Tier 1
(To Risk-
Weighted Assets)
Leverage Ratio/Tier
1 Capital
(To Average Assets)
December 31, 2022
CWB's actual regulatory ratios
12.56
%
11.44
%
11.44
%
10.34
%
Minimum capital requirements
8.00
%
6.00
%
4.50
%
4.00
%
Well-capitalized requirements
10.00
%
8.00
%
6.50
%
5.00
%
Minimum capital requirements including fully phased in capital conservation buffer
10.50
%
8.50
%
7.00
%
N/A
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
%
5.00
%
Minimum capital requirements including fully phased in capital conservation buffer
10.50
%
8.50
%
7.00
%
N/A
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, amounts due from banks, and non-pledged marketable securities. CWB manages its liquidity risk through operating, investing, and financing activities. In order to ensure funds are available when necessary, on at least a quarterly basis, CWB projects the amount of funds that will be required. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. In addition, loans and securities are pledged to the FHLB providing $41.6 million in available borrowing capacity as of December 31, 2022. Loans pledged to the FRB discount window provided $78.9 million in borrowing capacity at December 31, 2022. As of December 31, 2022, there were no outstanding borrowings from the FRB.
The Bank has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits. Ultimately, public confidence is gained through profitable operations, sound credit quality and a strong capital position. CWB’s liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective. Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk. The Bank has asset/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues.
The Company, through CWB, has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. Total FHLB advances were $90.0 million and $90.0 million at December 31, 2022 and 2021, respectively, borrowed at fixed rates. At December 31, 2022, CWB had pledged to FHLB, securities of $21.1 million at carrying value and loans of $232.6 million. At December 31, 2021, the Company had pledged to FHLB, securities of $13.2 million at carrying value and loans of $286.6 million, and had $44.5 million available for additional borrowing.
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, a minimum Tier 1 leverage ratio of 7.0% a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The line of credit matured in September 2022 and the Company renewed the line of credit for an additional one-year term and increased the amount available to $10.0 million with no other changes to the financial terms or covenants. At December 31, 2022 and 2021, the line of credit balance was zero.
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits. The liquidity ratio of the Bank was 10.4%, and 21.7% at December 31, 2022 and 2021, respectively. The Bank’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, 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 2022, CWBC declared dividends of $2.6 million. On January 27, 2023, the Company's Board of Directors declared a $0.08 per share dividend payable February 28, 2023, to stockholders of record on February 10, 2023. 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.
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 accrued interest:
December 31, 2022
Less than
1 year
More
than 1
year
Total
(dollars in thousands)
Time deposit maturities
$
115,033
$
91,894
$
206,927
FHLB advances
-
90,000
90,000
Operating lease obligations
1,014
4,888
5,902
Total
$
116,047
$
186,782
$
302,829
In the ordinary course of business, we enter into various transactions to meet the financing needs of our customers, which, in accordance with generally accepted accounting principles, are not included in our consolidated balance sheets. These transactions include off-balance sheet commitments, including commitments to extend credit and standby letters of credit. The following table presents a summary of the Company's commitments to extend credit by expiration period:
At December 31, 2021
Less than
1 year
More
than 1
year
Total
(dollars in thousands)
Loan commitments to extend credit
$
76,498
$
19,813
$
3,700
Standby letters of credit
-
-
-
Total
$
76,498
$
19,813
$
3,700
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include lag, repricing, basis and prepayment risk.
Lag risk results from the inherent timing difference between the repricing of the Company’s adjustable-rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.
Repricing risk is caused by the mismatch in the maturities or repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This happens because loans tend to reprice more quickly than funding sources.
Basis risk is due to item pricing tied to different indices which tend to react differently. CWB’s variable products are mainly priced off the treasury and prime rates.
Prepayment risk results from borrowers paying down or paying off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. A majority of CWB’s loans have adjustable rates and are reset based on changes in the treasury and prime rates.
The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. In addition, increases in interest rates may reduce the amount of loan and commitment fees received by CWB.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as funding sources. CWB can sell a portion of its FSA and SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. The Company has not used derivative instruments to help manage risk but will consider such instruments in the future if the perceived need should arise.
For further discussion regarding the impact to the Company of interest rate changes, see Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Litigation
See Part 1. Item 3: Legal Proceedings of this Form 10-K.
SUPERVISION AND REGULATION
Introduction
CWBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated, and examined by the Board of Governors of the Federal Reserve System (the “FRB”). In addition to the regulation of the Company by the FRB, CWB is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency (“OCC”). The Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain prescribed limits. The Company is also subject to jurisdiction of the Securities and Exchange Commission ("SEC") and to the disclosure and regulatory requirements of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), and through the listing of the common stock on the NASDAQ Capital Select Market, the Company is subject to the rules of NASDAQ.
Banking is a complex, highly regulated industry. The primary goals of the rules and regulations are to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by Management decisions and general economic conditions, but also by the requirements of applicable state and federal statues, regulations and the policies of various governmental regulatory authorities.
From time to time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting or expanding the scope of permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations of banks and bank holding companies are frequently made in Congress and by various bank and other regulatory agencies. Future changes in the laws, regulations or polices that impact CWBC and CWB cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.
Securities Registration and Listing
CWBC’s common stock is registered with the SEC under the Exchange Act and, therefore, is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act as well as the Securities Act both administered by the SEC. CWBC is required to file annual, quarterly and other current reports with the SEC. The SEC maintains an Internet site, http://www.sec.gov, at which CWBC’s filings with the SEC may be accessed. CWBC’s SEC filings are also available on its website at www.communitywest.com.
CWBC’s common stock is listed on the NASDAQ Capital Market and trade under the symbol “CWBC.” As a company listed on the NASDAQ Capital Market, CWBC is subject to NASDAQ standards for listed companies. CWBC is also subject to certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”), the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and other federal and state laws and regulations that govern financial presentations, corporate governance requirements for board audit and compensation committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act was enacted in 2010 and effectuated a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council to identify systemic risks in the financial system and oversee and coordinate the actions of the U.S. financial regulatory agencies.
The Dodd-Frank Act and the regulations promulgated thereunder require, among other things, that: (i) the consolidated capital requirements of depository holding companies must be not less stringent than those applied to depository institutions; (ii) the reserve ratio of the Deposit Insurance Fund was raised to 1.35%; (iii) publicly traded companies, such as CWBC, must provide their stockholders with a non-binding vote on executive compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (iv) the deposit insurance amounts for banks, savings institutions, and credit unions be permanently increased to $250,000 per qualified depositor; (v) authority was given to the federal banking regulators to prohibit extensive compensation to executives of depository institutions and their holding companies with assets in excess of $1.0 billion; (vi) Section 23A of the Federal Reserve Act was broadened and prohibits a depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and if representing more than 10% of capital, is approved by the disinterested directors; (vii) interstate branching rights were expanded; and (viii) bank entities, under the (“Volker Rule”), were prohibited from conducting certain investment activities that are considered proprietary trading with their own accounts.
2018 Regulatory Reform - The EGRRCPA
In 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCPA maintained most of the regulatory structure established by the Dodd-Frank Act, it amended certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as CWB, and for large banks with assets of more than $50 billion.
The EGRRCPA, among other matters, expanded the definition of qualified mortgages which may be held by a financial institution and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8-10%. Any qualifying depository institution or its holding company that exceeds the “Community Bank Leverage Ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the ratio will be considered to be "well capitalized" under the prompt corrective action rules. The EGRRCPA also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the EGRRCPA includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
The current administration has expressed a commitment to reemphasize restrictions on financial institutions and the enforcement of the protective measures included in the Dodd-Frank Act. At this time, the Company cannot predict which provisions will be enforced and what effect, if any, such action may have upon the results of operations and financial condition of the Company and the Bank.
Financial Institutions Capital Rules
The Basel III accord was developed by the Basel Committee on Banking Supervision to strengthen regulation, supervision, and risk management and avoid disruptions in financial markets. The Basel III standards, among other things: (i) implemented increased capital levels for CWBC and CWB; (ii) introduced a new capital measure of common equity Tier 1 capital known as "CET1" and related regulatory capital ratio of CET1 to risk-weighted assets; (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iv) mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (v) expanded the scope of the deductions from and adjustments to capital. Under Basel III, for most banking organizations the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to Basel III specific requirements.
Under Basel III, the minimum capital ratios are as follows: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; (iii) 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and (iv) 4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage ratio”). The Basel III capital conservation buffer is designed to absorb losses and protect the financial institution during periods of economic difficulties. Banking institutions with a ratio of CET1 to risk-weighted assets, Tier 1 to risk-weighted assets, or total capital to risk-weighted assets above the minimum but below the capital conservation buffer face limitations on their ability to pay dividends, repurchase shares, or pay discretionary bonuses based on the amount of the shortfall and the institution’s "eligible retained income." Under the capital conservation buffer, CWBC and CWB are required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of: (i) CET1 to risk-weighted assets of at least 7%; (ii) Tier 1 capital to risk-weighted assets of at least 8.5%; and (iii) total capital to risk-weighted assets of at least 10.5%.
Basel III provides for a number of deductions from and adjustments to CET1. These include the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Basel III provides a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset classes.
CWBC
General. As a bank holding company, CWBC is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to regulation by the FRB. According to FRB Policy, CWBC is expected to act as a source of financial strength for CWB, to commit resources to support it in circumstances where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to periodic examination by the FRB. CWBC is also required to file periodic reports of its operations and any additional information regarding its activities and those of its subsidiaries as may be required by the FRB.
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct from CWB. CWBC has the ability to raise capital on its own behalf or borrow from external sources, CWBC may also obtain additional funds from dividends paid by, and fees charged for services provided to, CWB. However, regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC.
Transactions with Affiliates and Insiders. CWBC and any subsidiaries it may purchase or organize are deemed to be affiliates of CWB within the meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans by CWB to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of CWB’s capital, in the case of any one affiliate, and is limited to 20% of CWB’s capital, in the case of all affiliates. In addition, transactions between CWB and other affiliates must be on terms and conditions that are consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. CWBC and CWB are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s executive officers, directors, and principal shareholders; any company controlled by any such executive officer, director, or shareholder; or any political or campaign committee controlled by such executive officer, director, or principal shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders, must not involve more than the normal risk of repayment or present other unfavorable features, and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities. Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” CWBC, therefore, is permitted to engage in a variety of banking-related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities, and merchant banking. CWBC has not elected to qualify for these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, CWB may not extend credit, lease or sell property, furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:
•
the customer must obtain or provide some additional credit, property, or services from or to CWB other than a loan, discount, deposit, or trust services;
•
the customer must obtain or provide some additional credit, property, or service from or to CWBC or any subsidiaries; or
•
the customer must not obtain some other credit, property, or services from competitors, except reasonable requirements to assure soundness of credit extended.
Capital Adequacy. Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “Supervision and Regulation - CWB - Regulatory Capital Guidelines,” assign various risk percentages to different categories of assets and capital is measured as a percentage of risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500 allows CWBC to pay a dividend to its shareholders only to the extent that CWBC has retained earnings and, after the dividend, CWBC’s:
•
assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and
•
current assets would be at least equal to current liabilities.
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
The Sarbanes-Oxley Act of 2002 (“SOX”). SOX provides a permanent framework that improves the quality of independent audits and accounting services, improves the quality of financial reporting, strengthens the independence of accounting firms, and increases the responsibility of management for corporate disclosures and financial statements.
SOX provisions are significant to all companies that have a class of securities registered under Section 12 of the Exchange Act or are otherwise reporting to the SEC (or the appropriate federal banking agency) pursuant to Section 15(d) of the Exchange Act, including CWBC. In addition to SEC rulemaking to implement SOX, NASDAQ has adopted corporate governance rules intended to allow shareholders to more easily and effectively monitor the performance of companies and directors.
As a result of SOX, and its regulations, CWBC has incurred substantial cost to interpret and ensure compliance with the law and its regulations including, without limitation, increased expenditures by CWBC in auditors’ fees, attorneys’ fees, outside advisors' fees, and increased errors and omissions insurance premium costs. Future changes in the laws, regulations, or policies that impact CWBC cannot necessarily be predicted and may have a material effect on the business and earnings of CWBC.
CWB
General. CWB, as a national banking association which is a member of the Federal Reserve System, is subject to regulation, supervision and regular examination by the OCC and FDIC. CWB’s deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of CWB's business and establish a comprehensive framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 150%.
The following table sets forth the regulatory capital for CWB and CWBC (on a consolidated basis) at December 31, 2022.
Adequately
Capitalized
Well
Capitalized
Capital
Conservation
Buffer Fully
Phased-In
CWB
CWBC
(consolidated)
Total risk-based capital
8.00
%
10.00
%
10.50
%
12.56
%
12.62
%
Tier 1 risk-based capital ratio
6.00
%
8.00
%
8.50
%
11.44
%
11.46
%
Common Equity Tier 1
4.50
%
6.50
%
7.00
%
11.44
%
11.46
%
Tier 1 leverage capital ratio
4.00
%
5.00
%
N/A
10.34
%
8.90
%
Prompt Corrective Action Authority. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
•
“well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 8% or more, has a common equity tier 1 capital ratio of 6.5% or more, has a leverage capital ratio of 5% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure;
•
“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more, a common equity tier 1 capital ratio of 4.5% or more, and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized;”
•
“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 6%, a common equity tier 1 capital that is less than 4.5%, or a leverage capital ratio that is less than 4% (3% under certain circumstances);
•
“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a leverage capital ratio that is less than 3%; and
•
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%.
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by their holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital levels to be categorized as “well capitalized” will be deemed to be “adequately capitalized” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal, and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
The OCC, as the primary regulator for national banks, also has a broad range of enforcement measures, from cease-and-desist powers and the imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Limitations on Dividend Payments. CWB is a national bank, governed by the National Bank Act and the rules and regulations of the OCC. National banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent the approval of the OCC, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. A dividend in excess of that amount constitutes a reduction in permanent capital and requires the prior approval of the OCC and the approval of two-thirds of the bank’s shareholders.
Brokered Deposit Restrictions. Well-capitalized banks are not subject to limitations on brokered deposits, while an adequately capitalized bank is able to accept, renew, or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized banks are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2022, CWB is deemed to be “well capitalized” and, therefore, is eligible to accept brokered deposits.
FDIC Insurance and Insurance Assessments. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.
The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund to 1.35% of insured deposits by September 30, 2020, and broadened the base for FDIC insurance assessments so that assessments are based on average consolidated total assets, less average tangible equity capital of a financial institution rather than on its insured deposits. The Deposit Insurance Fund reserve ratio actually reached 1.36% on September 30, 2018, ahead of the September 30, 2020, deadline, but then fell below the 1.35% level to 1.30% due to extraordinary growth in insured deposits and, accordingly, the FDIC adopted a restoration plan. Under that plan, the FDIC is providing updates at least semi-annually. The semi-annual update as of March 31, 2022, showed a decline of four basis points in the reserve ratio to 1.23%. As a result, in June 2022, the FDIC adopted an amendment to the restoration plan resulting in a uniform increase in the base deposit insurance assessment of two basis points beginning with the first quarter of 2023 to meet the 1.35% level by 2028. With the recent bank failures, the FDIC may consider a further amendment to the deposit insurance assessment to meet the required level.
The FDIC may terminate its insurance of deposits if it finds that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e. g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC.
Failure of CWB to maintain and implement an adequate OFAC program, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. CWB has augmented its systems and procedures to accomplish this. CWB believes that the ongoing cost of compliance with OFAC programs is not likely to be material to CWB.
Anti-Money Laundering. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations requires CWB to take steps to prevent the use of it or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training, and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties, and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures, and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing.
CWB must provide BSA/AML training to employees, designate a BSA compliance officer, and annually audit the BSA/AML program to assess its effectiveness. The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of BSA and AML.
The Anti-Money Laundering Act of 2020 (the “AML Act”) was enacted effective January 1, 2021, and presents the most comprehensive revisions and enhancements to anti-money laundering and counter terrorism laws since the Currency and Foreign Transactions Reporting Act of 1970 and the USA PATRIOT Act of 2001 (the “BSA”). The impact of the new legislation will not be fully known until required regulations are adopted and implemented, but the AML Act represents significant changes and reaffirms and broadens the government’s oversight and commitment to addressing the illicit activities and financing of terrorism.
Many of the provisions of the AML Act deal with the operations of the federal agencies primarily responsible for addressing terrorism financing and the safeguarding of the national security of the United States, such as the U.S. Treasury and its Financial Crimes Enforcement Network (“FinCEN”), including the requirement for FinCEN to engage anti-money laundering and terrorist financing investigations experts and the requirement to facilitate information sharing with other federal and state and even foreign law enforcement agencies. On June 30, 2021, FinCEN issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism to encourage banks to incorporate the priorities into their risk-based BSA compliance programs. The priorities identified were: (i) corruption; (ii) cybercrime and cyber security; (iii) terrorist financing; (iv) fraud; (v) transnational crime organizations; (vi) drug trafficking; (vii) human trafficking; and (viii) proliferation financing through support networks.
The AML Act also expands the reach of federal anti-money laundering laws by extending their applicability to a broader range of industries, such as entities involved in futures, precious metals, precious stones and jewels, antiquities, and cryptocurrency. On September 24, 2021, FinCEN issued proposed rules to include a person engaged in the trade of antiquities under the definition of “financial institution” subjecting such person to regulations prescribed by the Secretary of the Treasury.
The AML Act aims to balance the burdens imposed by reporting on financial institutions and the benefits derived by Federal law enforcement agencies. The AML Act requires a review of currency transaction and suspicious activity reports submitted by financial institutions to determine to what extent the reporting can be streamlined and made more useful. Included is the obligation to review the dollar thresholds for reporting currency transactions and to establish automated processes for filing simple, non-complex categories of reports. It calls for greater integration between financial institution systems and the electronic filing system to allow for automatic population of report fields and the submission of transaction data.
Other provisions of the AML Act enhance enforcement. One section provides protection for financial institutions keeping open a customer’s account or transaction at the request of a federal law enforcement agency or at the request of a state or local agency with the concurrence of FinCEN. Other sections increase civil penalties for financial institutions and persons violating the recordkeeping and reporting obligations. Persons found to have committed repeated “egregious violations” may be barred from serving on boards of directors of financial institutions and fined in an amount that is equal to the profit gained by such person by reason of such violation. If that person is a partner, director, officer or employee of a financial institution, that person may be ordered to repay any bonus paid to that person, irrespective of the amount of the bonus or how it was calculated.
New criminal penalties have been created for concealing from or misrepresenting to a financial institution any material facts concerning: (i) the ownership or control of assets involved in a monetary transaction involving a senior foreign political figure in amounts exceeding $1 million; or (ii) the source of funds in a monetary transaction involving an entity found to be a primary money laundering concern. Other enforcement enhancement provisions in the AML Act authorize the Treasury to pay whistleblower awards leading to fines or forfeitures of at least $50,000 up to the lower of $150,000 or 25% of the fine or forfeiture and allows for the payment to whistleblowers of up to 30% of the fine or forfeiture.
One of the most significant portions of the AML Act is the Corporate Transparency Act (“CTA”), which will require the reporting of certain information regarding “beneficial owners” of “reporting companies” to a confidential database to be established by FinCEN. Reporting companies are defined as any corporation, limited liability company, or other entity formed in the U.S. under the laws of a state or Indian Tribe or registered as a foreign entity to do business in the U.S., other than those specifically excluded, such as: (i) companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934; (ii) banks, bank holding companies, and credit unions; (iii) money transmitters, registered broker-dealers, registered investment advisors, and investment companies; (iv) public utilities and insurance companies; (v) 503(c)(3) entities; (vi) entities that employ more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5.0 million in the prior year, and have an operating presence in the U.S.; and (vii) certain “inactive” entities.
A beneficial owner is any individual who directly or indirectly exercises substantial control over an entity or owns or controls 25% or more of the ownership interest of an entity. The reporting company will be required to provide FinCEN with the legal name, date of birth, current resident or business address, and an acceptable identification number of the beneficial owner. In September 2022, FinCEN issued a final rule to implement the beneficial ownership information reporting which will require most corporations, limited liability companies, and other entities created or doing business in the U.S. before January 1, 2024, to report on their beneficial owners by January 1, 2025.
Under the CTA, the Treasury is to minimize the burden on reporting companies and ensure the information deposited in the database is maintained in the strictest confidence and made available for inspection or disclosure by FinCEN only for the purposes set forth in the AML Act and only to: (i) federal agencies engaged in national security, intelligence, or law enforcement; (ii) state, local, or Tribal law enforcement agencies, subject to authorization by a court of competent jurisdiction; (iii) financial institutions subject to customer due diligence requirements with the consent of the reporting company; (iv) requests by a federal or other appropriate regulatory agency; (v) certain Treasury officials for tax administration purposes; and (vi) authorized federal agencies on behalf of a properly recognized foreign authority. On January 25, 2022, FinCEN issued proposed regulations for a pilot program to permit financial institutions to share suspicious activity information with their foreign branches, subsidiaries and affiliates to combat illicit finance risks under the AML Act.
The foregoing is only a summary of selected provisions of the AML Act. Given that regulations implementing the new AML Act are being proposed but have not yet been adopted or implemented, the Company cannot determine at this time the effect, if any, the AML Act will have on CWBC’s or CWB’s future results of operations or financial condition.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations.
In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks. In 2019 and 2020, the federal banking regulators proposed for public comment rules to modernize the agencies’ regulations under the CRA. In July 2021, the FRB, FDIC, and the OCC issued an interagency statement committing to joint agency action on CRA. In December 2021, the OCC adopted a final rule that rescinded its 2020 Community Reinvestment Act Rule and replaced it with a rule based largely on the prior CRA regulations issued jointly by the federal banking regulators in 1995 and subsequently amended. The OCC indicated that this action was intended to assist and promote the interagency process by reestablishing generally uniform rules that apply to all insured depository institutions.
CWB had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Safeguarding of Customer Information and Privacy. The bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. CWB has adopted an information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, are prohibited from disclosing such information. CWB has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of CWB.
In November 2021, the federal bank regulatory agencies issued a joint rule to improve the sharing of information about cyber incidents involving U.S. banks. The rule requires a banking organization to notify its primary federal regulator (and its service providers) as soon as possible (and no later than 36 hours after determination) after it experiences a significant computer-security incident. The compliance date of this rule was May 1, 2022.
Consumer Compliance and Fair Lending Laws. CWB is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax Compliance Act, CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act. The enforcement of Fair Lending laws has been an increasing area of focus for regulators, including the FDIC and the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems, and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees, and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.
Other Aspects of Banking Law. CWB is also subject to federal statutory and regulatory provisions covering, among other things, security procedures, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject bank holding companies and banks to increased supervision and disclosure, compliance costs, and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, resulting in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, BSA compliance, as well as other safety and soundness concerns.
It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which CWB’s businesses would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in CWB’s operations and increased compliance costs.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk is interest rate risk (“IRR”). To minimize the volatility of net interest income at risk (“NII”) and the impact on economic value of equity (“EVE”), the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by the Board’s Asset Liability Committee (“ALCO”). ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies, including IRR exposure.
To mitigate the impact of changes in interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the Company actively manages the amounts and maturities. While the Company has some assets and liabilities in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk but will consider such instruments in the future if the perceived need should arise.
The Company uses a simulation model, combined with downloaded detailed information from various application programs, and assumptions regarding interest rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates. The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase and decrease in interest rates compared to a flat interest rate scenario. The model assumes that the rate change shock occurs immediately.
The following table presents the impact of that analysis in dollars and percentages at December 31, 2022.
Sensitivity of Net Interest Income
Interest Rate Scenario (change in basis point from Base)
Down
Down
Down
Base
Up 100
Up 200
Up 300
Up 400
Up 500
(dollars in thousands)
Interest income
$
46,911
$
50,112
$
53,046
$
55,852
$
58,342
$
61,024
$
63,687
$
66,343
$
64,147
Interest expense
4,002
5,525
7,055
8,600
11,588
14,577
17,565
20,553
21,602
Net interest income
$
42,909
$
44,587
$
45,991
$
47,252
$
46,754
$
46,447
$
46,122
$
45,790
$
42,545
% change
(9.2
)%
(5.6
)%
(2.7
)%
(1.1
)%
(1.7
)%
(2.4
)%
(3.1
)%
(10.0
)%
At December 31, 2021, the following table presents the impact of that analysis in dollars and percentages:
Sensitivity of Net Interest Income
Interest Rate Scenario (change in basis point from Base)
Down 100
Base
Up 100
Up 200
Up 300
Up 400
Up 500
(dollars in thousands)
Interest income
$
43,537
$
44,317
$
48,378
$
52,374
$
56,312
$
60,223
$
64,147
Interest expense
2,705
2,838
6,591
10,344
14,096
17,849
21,602
Net interest income
$
40,832
$
41,479
$
41,787
$
42,030
$
42,216
$
42,374
$
42,545
% change
(1.6
)%
0.7
%
1.3
%
1.8
%
2.2
%
2.6
%
As of December 31, 2022 , the Fed Funds target rate was a range of 4.25% to 4.50% and the prime rate was 7.50%. As of December 31, 2021, the Fed Funds target rate was a range of 0.00% to 0.25% and the prime rate was 3.25%.
Economic Value of Equity. We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance sheet items, defined as economic value of equity, using a simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At December 31, 2022 and 2021, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. The following tables show projected change in economic value of equity for this set of rate shocks.
Economic Value of Equity
As of December 31, 2022
Interest Rate Scenario (change in basis point from Base)
Down 300
Down 200
Down 100
Base
Up 100
Up 200
Up 300
Up 400
Up 500
(dollars in thousands)
Assets
$
1,130,386
$
1,112,276
$
1,088,217
$
1,064,756
$
1,038,587
$
1,012,244
$
985,932
$
960,955
$
937,615
Liabilities
940,198
905,486
872,742
841,887
819,738
798,767
778,903
760,083
746,313
Net present value
$
190,188
$
206,790
$
215,475
$
222,869
$
218,849
$
213,477
$
207,029
$
200,872
$
191,302
% change
(14.7
)%
(7.2
)%
(3.3
)%
(1.8
)%
(4.2
)%
(7.1
)%
(9.9
)%
(14.2
)%
Economic Value of Equity
As of December 31, 2021
Interest Rate Scenario (change in basis point from Base)
Down 100
Base
Up 100
Up 200
Up 300
Up 400
Up 500
(dollars in thousands)
Assets
$
1,207,530
$
1,176,520
$
1,153,486
$
1,129,670
$
1,105,275
$
1,081,304
$
1,058,075
Liabilities
1,061,422
1,018,843
989,950
962,681
936,934
912,614
889,633
Net present value
$
146,108
$
157,677
$
163,536
$
166,989
$
168,341
$
168,690
$
168,442
% change
(7.3
)%
3.7
%
5.9
%
6.8
%
7.0
%
6.8
%
For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in this Form 10-K begin on page 50 immediately following the index to consolidated financial statements page to this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Community West Bancshares
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Community West Bancshares and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses (allowance) is a valuation account that reflects the Company’s estimate of known and inherent probable losses on existing loans held for investment. The allowance for loan losses was $10.8 million at December 31, 2022, which consists of two components: the valuation allowance for loans individually evaluated for impairment (specific reserves), representing $0.2 million, and the valuation allowance for loans collectively evaluated for impairment (general reserves), representing $10.6 million.
The Company’s general reserves include a quantitative reserve based on historical experience and a qualitative reserve based on management’s evaluation of several internal and external factors (qualitative factors). For Manufactured Housing loans, the quantitative general reserve is calculated on the basis of loss history. For all other loan types, migration analysis taking into account the risk rating of loans that are charged off is used to determine the quantitative general reserve. The quantitative general reserves are then further adjusted based upon qualitative factors that affect the specific portfolios. These qualitative factors include the Company’s concentrations of credit, international risk, trends in volume, maturity and composition of loans, volume and trend in delinquency, nonaccrual and classified assets, economic conditions, geographic distance, policy and procedures or underwriting standards, staff experience and ability, value of underlying collateral, competition, legal or regulatory environment, and quality of loan review and Board oversight. The evaluation of these qualitative factors requires that management make significant judgments regarding these factors, which may significantly impact the estimated allowance.
We identified the qualitative factors applied to the general reserve of the allowance as a critical audit matter as auditing management’s determination of qualitative general reserve factors involved a high degree of auditor judgment given the highly subjective nature of management’s judgments.
Our audit procedures related to the Company’s qualitative factors applied to the general reserve of the allowance for loan losses included the following, among others:
•
We obtained an understanding of management’s controls that are related to the estimation of the qualitative factors and tested those controls for both design effectiveness and operating effectiveness. These controls included management’s determination, review and approval of qualitative factors and the data that was utilized in establishing the qualitative factors.
•
We tested management’s process and evaluated their judgments and assumptions used to establish the qualitative factors, which included:
−
Testing the completeness and accuracy of data used by management in determining the qualitative factors by agreeing them to internal and external source data.
−
Evaluating the reasonableness of management’s judgments and assumptions used in the development of the qualitative factors, including the directional consistency and magnitude of the qualitative factors applied.
/s/ RSM US LLP
We have served as the Company’s auditor since 2015.
San Francisco, California
March 31, 2023
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm (PCAOB ID 49)
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
COMMUNITY WEST BANCSHARES
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands, except share amounts)
Assets:
Cash and due from banks
$
1,379
$
1,621
Interest-earning demand deposits in other financial institutions
63,311
206,754
Cash and cash equivalents
64,690
208,375
Investment securities - available-for-sale, at fair value; amortized cost of $27,790 at December 31, 2022 and $19,588 at December 31, 2021
26,688
19,711
Investment securities - held-to-maturity, at amortized cost; fair value of $2,423 at December 31, 2022 and $2,974 at December 31, 2021
2,557
2,815
Investment securities - measured at fair value
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
4,533
4,441
Loans held for sale, at lower of cost or fair value
21,033
23,408
Loans held for investment
934,309
868,675
Allowance for loan losses
(10,765 )
(10,404 )
Total loans held for investment, net
923,544
858,271
Other assets acquired through foreclosure, net
2,250
2,518
Premises and equipment, net
6,104
6,576
Other assets
39,878
30,689
Total assets
$
1,091,502
$
1,157,052
Liabilities:
Deposits:
Non-interest-bearing demand
$
216,494
$
209,893
Interest-bearing demand
428,173
537,508
Savings
23,490
23,675
Certificates of deposit ($250,000 or more)
6,693
17,612
Other certificates of deposit
200,234
161,443
Total deposits
875,084
950,131
Federal Home Loan Bank advances
90,000
90,000
Other liabilities
13,768
15,546
Total liabilities
978,852
1,055,677
Stockholders’ equity:
Common stock - no par value, 60,000,000 shares authorized; 8,798,412 shares issued and outstanding at December 31, 2022 and 8,650,166 at December 31, 2021
45,694
44,431
Retained earnings
67,727
56,852
Accumulated other comprehensive (loss) income
(771
)
Total stockholders’ equity
112,650
101,375
Total liabilities and stockholders’ equity
$
1,091,502
$
1,157,052
See the accompanying Notes to Consolidated Financial Statements.
COMMUNITY WEST BANCSHARES
CONSOLIDATED INCOME STATEMENTS
Year Ended December 31,
Interest and dividend income:
(in thousands, except per share amounts)
Loans, including fees
$
46,657
$
45,123
$
42,948
Investment securities and other
2,481
Total interest and dividend income
49,138
46,078
43,854
Interest expense:
Deposits
2,511
2,835
5,483
Federal Home Loan Bank advances and other borrowings
1,782
Total interest expense
3,328
3,704
7,265
Net interest income
45,810
42,374
36,589
Provision (credit) for loan losses
(195
)
(181
)
1,223
Net interest income after provision (credit) for loan losses
46,005
42,555
35,366
Non-interest income:
Other loan fees
1,161
1,349
1,546
Gains from loan sales, net
Document processing fees
Service charges
Other income
1,700
1,115
Total non-interest income
3,978
3,753
3,912
Non-interest expenses:
Salaries and employee benefits
19,637
18,624
18,287
Occupancy, net
4,180
3,254
3,036
Professional services
2,923
1,645
1,801
Advertising and marketing
Data processing
1,265
1,215
1,055
Depreciation
FDIC assessment
Other expenses
1,058
1,258
1,285
Total non-interest expenses
31,272
27,995
27,523
Income before provision for income taxes
18,711
18,313
11,755
Provision for income taxes
5,262
5,212
3,510
Net income
$
13,449
$
13,101
$
8,245
Earnings per share:
Basic
$
1.54
$
1.53
$
0.97
Diluted
$
1.51
$
1.50
$
0.97
Weighted average number of common shares outstanding:
Basic
8,722
8,568
8,473
Diluted
8,892
8,723
8,543
Dividends declared per common share
$
0.295
$
0.270
$
0.195
See the accompanying Notes to Consolidated Financial Statements.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
(in thousands)
Net income
$
13,449
$
13,101
$
8,245
Other comprehensive (loss) income, net:
Unrealized (loss) income on securities available-for-sale (AFS), net (tax effect of $362, ($24), ($47) for each respective period presented)
(863
)
Net other comprehensive (loss) income
(863
)
Comprehensive income
$
12,586
$
13,158
$
8,358
See the accompanying Notes to Consolidated Financial Statements.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Preferred Stock
Common Stock
Accumulated
Other
Comprehensive
Retained
Total
Stockholders’
Shares
Amount
Shares
Amount
Income (Loss)
Earnings
Equity
(in thousands)
Balance January 1, 2020
-
$
-
8,472
$
42,586
$
(78
)
$
39,470
$
81,978
Net income
-
-
-
-
-
8,245
8,245
Exercise of stock options
-
-
-
-
Stock based compensation
-
-
-
-
-
Common stock repurchases
-
-
-
-
-
-
-
Dividends on common stock
-
-
-
-
-
(1,652
)
(1,652
)
Other comprehensive income, net
-
-
-
-
-
Balance, December 31, 2020:
-
-
8,473
42,909
46,063
89,007
Net income
-
-
-
-
-
13,101
13,101
Exercise of stock options
-
-
1,204
-
-
1,204
Stock based compensation
-
-
-
-
-
Common stock repurchases
-
-
-
-
-
-
-
Dividends on common stock
-
-
-
-
-
(2,312
)
(2,312
)
Other comprehensive income, net
-
-
-
-
-
Balance, December 31, 2021:
-
-
8,650
44,431
56,852
101,375
Net income
-
-
-
-
-
13,449
13,449
Exercise of stock options
-
-
-
-
Grant of restricted stock awards, net of forfeitures
-
-
-
-
-
-
Stock based compensation
-
-
-
-
-
Dividends on common stock
-
-
-
-
-
(2,574
)
(2,574
)
Other comprehensive loss, net
-
-
-
-
(863
)
-
(863
)
Balance, December 31, 2022:
-
$
-
8,798
$
45,694
$
(771
)
$
67,727
$
112,650
See the accompanying Notes to Consolidated Financial Statements.
COMMUNITY WEST BANCSHARES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands)
Cash flows from operating activities:
Net income
$
13,449
$
13,101
$
8,245
Adjustments to reconcile net income to cash provided by operating activities:
Provision (credit) for loan losses
(195
)
(181
)
1,223
Depreciation
Stock-based compensation
Deferred income taxes
(505
)
(959
)
Net (accretion) amortization of discounts and premiums for investment securities
(76
)
(Gains) losses on:
Sale of repossessed assets, net
(116
)
-
-
Sale of loans, net
(257
)
(475
)
(920
)
Sale of assets, net
-
Loans originated for sale
(22,069
)
(41,077
)
(55,186
)
Proceeds from sales of loans held for sale
21,331
41,552
56,106
Proceeds from principal paydowns on loans held for sale
3,370
7,346
9,897
Change in fair value of equity securities
(99 )
Changes in:
Other assets
(9,196
)
(2,805
)
Other liabilities
(1,778
)
1,093
(401
)
Servicing assets, net
(139
)
(615
)
Net cash provided by operating activities
5,856
22,220
15,843
Cash flows from investing activities:
Principal pay downs and maturities of available-for-sale securities
32,236
3,894
5,069
Purchase of available-for-sale securities
(40,360
)
(6,250
)
(3,000
)
Principal pay downs and maturities of held-to-maturity securities
1,743
1,511
Loan originations and principal collections, net
(65,078
)
(41,596
)
(91,763
)
Purchase of bank owned life insurance
-
-
(2,500
)
Purchase of restricted stock, net
(92
)
(546
)
Purchase of premises and equipment, net
(239
)
(206
)
(338
)
Proceeds from sale of other assets acquired through foreclosure
-
-
Net cash used in investing activities
(72,894
)
(42,223
)
(91,567
)
Cash flows from financing activities:
Net (decrease) increase in deposits
(75,047
)
183,946
15,251
Proceeds from FHLB advances
45,000
-
90,000
Repayments of FHLB advances
(45,000 )
(15,000 )
(50,000 )
Exercise of stock options
1,204
Cash dividends paid on common stock
(2,574
)
(2,312
)
(1,652
)
Net cash (used in) provided by financing activities
(76,647
)
167,838
53,603
Net (decrease) increase in cash and cash equivalents
(143,685
)
147,835
(22,121
)
Cash and cash equivalents at beginning of year
208,375
60,540
82,661
Cash and cash equivalents at end of year
$
64,690
$
208,375
$
60,540
Supplemental disclosure:
Cash paid during the period for:
Interest
$
3,260
$
3,880
$
8,050
Income taxes
4,957
5,802
2,350
Non-cash investing and financing activity:
Transfers to other assets acquired through foreclosure, net
-
Operating lease right-of-use asset
-
-
Operating lease liability
-
-
See the accompanying Notes to Consolidated Financial Statements.
COMMUNITY WEST BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full-service banking through its wholly owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”). These entities are collectively referred to herein as the “Company.”
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry. The accounts of the Company and its consolidated subsidiary are included in these consolidated financial statements. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses and fair value of investment securities available for sale. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of Management, all adjustments considered necessary have been reflected in the financial statements during their preparation.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate, and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2022 and 2021, manufactured housing loans comprised 33.1% and 33.3%, respectively, of total loans. As of December 31, 2022 and 2021, commercial real estate loans accounted for approximately 57.1% and 53.9% of total loans, respectively. Approximately 24.5% and 27.8% of these commercial real estate loans were owner occupied at December 31, 2022 and 2021, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 50.4% and 53.7% at December 31, 2022 and 2021, respectively. The Company was within established lending policy limits at December 31, 2022 and 2021.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended December 31, 2022 and 2021 have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.
Business Segments
Reportable business segments are determined using the “management approach” and are intended to present reportable segments consistent with how the chief operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of December 31, 2022, 2021 and 2020, the Company had only one reportable business segment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from loans originated by the Company and deposits are reported net.
The Company maintains amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash Reserve Requirement
Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in cash or with the Federal Reserve Bank (“FRB”). The amount of the reserve varies by bank as the bank is permitted to meet this requirement by maintaining the specified amount as an average balance over a two-week period. The Federal Reserve reduced the reserve requirement ratio to zero percent across all deposit tiers as of March 26, 2020, to aid institutions impacted by COVID-19.
Investment Securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”), or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (loss) (“OCI”), except for impaired securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income. The changes in the fair values of trading securities are reported in non-interest income. Securities classified as AFS are debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Trading securities are carried at their estimated fair value. The changes in the fair value of trading securities are adjusted through non-interest income monthly.
Interest income on securities is recognized based on the coupon rate and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual life of the security using the interest method. For mortgage-backed securities, estimates of prepayments are considered in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than amortized cost, 2) the financial condition and near term prospects of the issuer, 3) the impact of changes in market interest rates, and 4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security. Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss is recognized in earnings, and 2) market or other factors is recognized in other comprehensive income or loss. For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment is recognized in earnings equal to the entire difference between the securities cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
The Company’s subsidiary bank is a member of the FHLB system and maintains an investment in capital stock of the FHLB. The bank also maintains an investment in FRB stock. These investments are considered equity securities with no actively traded market. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is reported in interest and dividend income. We conduct a periodic review and evaluation of our FHLB and FRB stock to determine if any impairment exists. No impairment existed in the years ended December 31, 2022 or 2021.
Loans Held For Sale
Loans which are originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision. Loans held for sale are mostly comprised of SBA and commercial agriculture loans. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of loans are included in gains from loan sales, net in the accompanying consolidated statements of income. The Company did not incur any lower of cost or fair value provision in the years ended December 31, 2022, 2021 and 2020.
Loans Held for Investment and Interest and Fees from Loans
Loans are recognized at the principal amount outstanding, net of unearned income, loan participations and amounts charged off. Unearned income includes deferred loan origination fees reduced by loan origination costs. Unearned income on loans is amortized to interest income over the life of the related loan using the level yield method.
Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs and premiums and discounts paid on purchased loans are accounted for though interest income.
Nonaccrual loans: For all loan types, when a borrower discontinues making payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when Management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection. Other personal loans are typically charged off no later than 120 days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed. Subsequent payments received from the customer are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.
Impaired loans: A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment. The collateral-dependent loans that recognize impairment are charged down to the fair value less costs to sell. All other loans are measured for impairment either based on the present value of future cash flows or the loan’s observable market price.
Troubled debt restructurings (“TDR”): A TDR is a loan on which the Company, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominately term extensions. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a troubled debt restructuring in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
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 takes into account the risk rating of loans that are charged off in each loan category. Loans that are considered Doubtful are typically charged off. The following is a description of the characteristics of loan ratings. Loan ratings are reviewed as part of our normal loan monitoring process, but, at a minimum, updated on an annual basis.
Substantially Risk Free - These borrowers have virtually no probability
of default or loss given default and present no identifiable or potential adverse risk to the Company. Documented repayment is either backed by the full faith and credit of the United States Government or secured by cash collateral at a ratio of 115% of the principal borrowed. The collateral must be in the possession of the Company and free from potential claim. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations.
Nominal Risk - This rating is for the highest quality borrowers with nominal probability of default or loss given default from the transaction. Typically, this is a borrower with a well-established record of financial performance, a strong equity position, abundant liquidity, and excellent debt service ability. The borrower’s financial outlook is stable due to a broad range of operations or products and is able to weather an economic downturn without significant impact to liquidity or net worth. Typically, this borrower will be publicly owned or have access to public debt or equity, all investment grade. In addition, these credits will conform in all aspects to established loan policies and procedures, laws, rules, and regulations. Transactions can include marketable securities as collateral, properly margined.
Pass/Watch - The loans in the three remaining pass categories range from minimal risk to Watch. Loans rated in the first two categories are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in the minimal and moderate risk categories are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment. In the case of individuals, borrowers with this rating are quality borrowers demonstrating a reasonable level of secure income, a net worth adequate to support the loan and presenting a good primary source as well as an adequate secondary source of repayment. An asset in the Watch category indicates that although the borrower meets the criteria for a rating of acceptable risk or better, the credit possesses an identified and elevated risk level that should be resolved in a short period of time. Technical risks include, but are not limited to, inadequate or improperly executed documentation, which may be material, serious delays in the submission of financial information, or covenant violations that are not indicative of a protracted trend.
Special Mention - A special mention loan has potential weaknesses that require management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the full collection of amounts due. They are characterized by the distinct possibility that the Company will sustain some loss if the borrower’s deficiencies are not corrected.
Doubtful - A loan classified doubtful has all the weaknesses inherent in one classified 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 on outstanding balances in the period in which they are considered uncollectible.
The Company’s ALL is maintained at a level believed appropriate by management to absorb known and inherent probable losses on existing loans. The allowance is charged for losses when management believes that full recovery on the loan is unlikely. The following is the Company’s policy regarding charging off loans.
Commercial, CRE and SBA Loans
Charge-offs on these loan categories are taken as soon as all or a portion of any loan balance is deemed to be uncollectible. A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Generally, loan balances are charged down to the fair value of the collateral, if, based on a current assessment of the fair value, an apparent deficiency exists. In the event there is no perceived equity, the loan is charged-off in full. Unsecured loans which are delinquent over 90 days are also charged-off in full.
Single Family Real Estate, HELOC’s and Manufactured Housing Loans
Consumer loans and residential mortgages secured by one-to-four family residential properties, HELOC and manufactured housing loans in which principal or interest is due and unpaid for 90 days, are evaluated for impairment. Loan balances are charged-off to the fair value of the property, less estimated selling costs, if, based on a current appraisal, an apparent deficiency exists. In the event there is no perceived equity, the loan is generally fully charged-off.
Consumer Loans
All consumer loans (excluding real estate mortgages, HELOCs and savings secured loans) are charged-off or charged-down to net recoverable value before becoming 120 days or five payments delinquent.
The ALL calculation for the different loan portfolios is as follows:
•
Commercial Real Estate, Commercial, Commercial Agriculture, SBA, HELOC, Single Family Residential, and Consumer - Migration analysis combined with risk rating is used to determine the required ALL for all non-impaired loans. In addition, the migration results are adjusted based upon qualitative factors that affect the specific portfolio category. Specific reserves on impaired loans are determined based upon the individual characteristics of the loan.
•
Manufactured Housing - The ALL is calculated on the basis of loss history and risk rating, which is primarily a function of delinquency. In addition, the loss results are adjusted based upon qualitative factors that affect this specific portfolio.
The Company evaluates and individually assesses for impairment loans classified as substandard or doubtful in addition to loans either on nonaccrual, considered a TDR, or when other conditions such as delinquency or covenant violations exist. 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 the time of evaluation. When evaluating non-real estate collateral securing the loan, the Company will use audited financial statements or appraisals no more than twelve months old at the time of evaluation. Additionally, for both real estate and non-real estate collateral, the Company may use other sources to determine value as deemed appropriate.
•
The loan’s observable market price.
Interest income is not recognized on impaired loans except for limited circumstances in which a loan, although impaired, continues to perform in accordance with the loan contract and the borrower provides financial information to support maintaining the loan on accrual.
The Company determines the appropriate ALL on a monthly basis. Any differences between estimated and actual observed losses from the prior month are reflected in the current period in determining the appropriate ALL and adjusted as deemed necessary. The review of the appropriateness of the ALL takes into consideration such factors as concentrations of credit, changes in the growth, size, and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees, and economic and environmental conditions that may affect the borrowers’ ability to pay and/or the value of the underlying collateral. Additional factors considered include geographic location of borrowers, changes in the Company’s product-specific credit policy, and lending staff experience. These estimates depend on the outcome of future events and, therefore, contain inherent uncertainties.
Another component of the ALL considers qualitative factors related to non-impaired loans. The qualitative portion of the allowance on each of the loan pools is based on changes in any of the following factors:
•
Concentrations of credit
•
International risk
•
Trends in volume, maturity, and composition of loans
•
Volume and trend in delinquency, nonaccrual, and classified assets
•
Economic conditions
•
Geographic distance
•
Policy and procedures or underwriting standards
•
Staff experience and ability
•
Value of underlying collateral
•
Competition, legal, or regulatory environment
•
Quality of loan review and Board oversight
Off Balance Sheet and Credit Exposure
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate for loan losses on off-balance sheet instruments is included within other liabilities on the consolidated balance sheets and the charge to income that establishes this liability is included in other expense on the consolidated income statements.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter. Building improvements are amortized between twenty and thirty years or based on their useful lives. Generally, the estimated useful lives of other items of premises and equipment are as follows:
Years
Building and improvements
20 - 30
Furniture and equipment
5 - 10
Electronic equipment and software
3 - 5
Leases
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding Right of Use (“ROU”) asset and operating lease liability are recorded in separate line items on the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made and is reduced by lease incentives that are paid or are payable to the Company. Variable lease payments that depend on an index are included in lease payments based on the rate in effect at the commencement date of the lease. Lease payments are recognized on a straight-line basis as part of occupancy expense over the lease term.
As the rate implicit in the lease is not readily determinable, the Company’s incremental borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less, therefore, these leases are not recorded on the Company’s consolidated balance sheets. Lease expense of these leases is recognized over the lease term on a straight-line basis. The Company’s lease agreements may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the option will be exercised.
In addition to the package of practical expedients, the Company also elected the practical expedient that allows lessees to make an accounting policy election to not separate non-lease components from the associated lease component, and instead account for them all together as part of the applicable lease component. The majority of the Company’s non-lease components, such as common area maintenance and taxes, are variable and expensed as incurred. Variable payment amounts are determined in arrears by the landlord depending on actual costs incurred.
Other Assets Acquired Through Foreclosure, Net
Other assets acquired through foreclosure 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 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. Subsequent to the legal ownership date, the Company periodically performs a new valuation and the other assets acquired through foreclosure are 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.
Servicing Assets
The guaranteed portion of certain SBA loans can be sold into the secondary market. Servicing assets are recognized as separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing asset and resulting gain on sale for SBA loan sales are calculated based on the difference between the best actual par and premium bids on an individual loan basis.
SBA servicing assets measured at fair value were $26 thousand and $44 thousand for the years ended December 31, 2022 and 2021, respectively. Changes in the fair values are recorded in other income in the consolidated income statements.
In prior periods, the Company carried SBA servicing assets measured under the amortization method. There were no remaining SBA servicing assets measured at amortized cost at December 31, 2022 or 2021.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) seller/servicer. Servicing assets/liabilities are recognized as separate assets/liabilities as certain servicing requirements are retained. Servicing assets are amortized over the period of estimated net servicing income. CWB uses Farmer Mac prepayment statistics in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based on the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis. The initial servicing asset and resulting gain is calculated based on the contractual net servicing fees. Farmer Mac servicing assets are valued based on the net servicing fee, estimated life of seven years, and discounted by the bank’s borrowing rate. Farmer Mac servicing assets measured under the amortization method were $1.5 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively. Servicing assets are recorded in other assets on the consolidated balance sheets.
Year Ended December 31
SBA servicing assets measured at fair value
(in thousands)
Balance, beginning of period
$
$
$
Additions
-
-
-
Amortization, net
-
-
-
Valuation adjustment
(18 )
Balance, end of period
$
$
$
Year Ended December 31
SBA servicing assets measured using the amortization method
(in thousands)
Balance, beginning of period
$ -
$
$
Additions
-
-
-
Amortization, net
-
(6
)
(14
)
Valuation adjustment
-
(21
)
-
Balance, end of period
$ -
$
-
$
Year Ended December 31
Farmer Mac servicing assets measured using the amortization method
(in thousands)
Balance, beginning of period
$ 1,556
$
1,391
$
Additions
Amortization, net
(359 )
(310
)
(294
)
Valuation adjustment
-
-
-
Balance, end of period
$ 1,454
$
1,556
$
1,391
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to have been surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge and exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank Owned Life Insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other income in the consolidated income statements. The cash surrender value of the underlying policies was $8.7 million and $9.8 million as of December 31, 2022 and 2021, respectively, and was recorded in other assets on the consolidated balance sheets. There are no loans offset against cash surrender values, and there are no restrictions as to the use of proceeds.
Fair Value of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
•
Level 1- Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•
Level 2- Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing, or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market.
•
Level 3- Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of discounted cash flow models and similar techniques.
The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.
FASB ASC 825, Financial Instruments (“ASC 825”) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2022 or 2021. The estimated fair value amounts for December 31, 2022 and 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.
The information presented in Note 16 - Fair Value Measurement should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks approximate their fair value.
Investment securities
The fair value of Farmer Mac class A stock is based on quoted market prices and are categorized as Level 1 of the fair value hierarchy.
The fair value of other investment securities was determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.
FRB and FHLB stock
CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintains an investment in FRB stock. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.
Loans
Fair value for loans is estimated based on exit-pricing discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value based on a third-party independent valuation. As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values of impaired loans using a discounted cash flow method to measure impairment have been categorized as Level 3.
Deposit liabilities
The amount payable at demand at report date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date. The fair value measurement of deposit liabilities is categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses based on the market rates for similar types of borrowing arrangements. The FHLB advances have been categorized as Level 2 in the fair value hierarchy.
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby letters of credit) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of the awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize forfeitures as they occur.
Income Taxes
The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements. Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting. These items represent “temporary differences.” Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. Deferred tax assets net of deferred tax liabilities are included in other assets on the consolidated balance sheets.
Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
The Company is subject to the provisions of ASC 740, Income Taxes (“ASC 740”). ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income available to common shareholders. Diluted earnings per share include the effect of all dilutive potential common shares for the period. Potentially dilutive common shares include stock options.
The factors used in the earnings per share computation are as follows:
Year Ended December 31
(dollars in thousands, except per share amounts)
Net income available to common stockholders
$
13,449
$
13,101
$
8,245
Weighted average number of common shares outstanding - basic
8,722,481
8,567,839
8,472,709
Add: Dilutive effects of assumed exercises of stock options
169,646
155,099
70,120
Weighted average number of common shares outstanding - diluted
8,892,127
8,722,938
8,542,829
Earnings per share:
Basic
$
1.54
$
1.53
$
0.97
Diluted
$
1.51
$
1.50
$
0.97
Stock options for 95,304; 101,010; and 391,064 shares of common stock were not considered in computing diluted earnings per share for the years ended December 31, 2022, 2021, and 2020, respectively, because they were antidilutive.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” 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 Company established a committee comprised of executive management and members of Accounting and Credit Administration and is using a third-party software provider specializing in CECL loss modeling. The Company performed parallel runs of the model for the three-month periods ending June 30, September 30, and December 31, 2022. The results of the parallel runs identified an expected increase to the Allowance for Credit Losses between $1.7 million and $1.9 million and an increase to the reserve for unfunded commitments of approximately $500 thousand. The Company will record the initial adjustment and after-tax charge to retained earnings in the first quarter of 2023.
In March 2020, the FASB issued ASU-2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. As of December 31, 2021, the Company had $4.2 million of securities with rates tied to LIBOR and is currently evaluating the impact of the amended guidance and does not anticipate a material impact to the consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” This Update eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors that currently exists. However, the Update requires new disclosures related to certain loan restructurings when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the new amendments require an entity to disclose current period charge-offs by year of origination of the loan in the existing vintage disclosures. The amendments in this Update are effective for the Company beginning on January 1, 2023. The Update requires prospective transition for the disclosures related to loan restructurings for borrowers experiencing financial difficulty and the presentation of gross charge-offs in the vintage disclosures. The adoption of this standard is not expected to have a material effect on the Company’s consolidated operating results or consolidated financial condition, however the required disclosures will be added to the Company’s consolidated financial statements subsequent to the date of adoption.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this Update clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring the fair value of that security. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The amendments also require the following disclosures for equity securities subject to contractual sale restrictions: a) the fair value of equity securities subject to contractual sale restrictions reflected in the consolidated balance sheets; b) the nature and remaining duration of the restriction(s); and c) the circumstances that could cause a lapse in the restriction(s). This new guidance will be effective for the Company on January 1, 2024. Early adoption is permitted. The amendments in this Update should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed at the date of adoption. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
2.
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as follows:
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized (Losses)
Fair
Value
Securities available-for-sale
(in thousands)
U.S. government agency notes
$
4,081
$
$
-
$
4,107
U.S. government agency collateralized mortgage obligations (“CMO”)
4,475
-
(179
)
4,296
U.S. Treasury securities
9,984
-
(14 )
9,970
Corporate debt securities
9,250
-
(935 )
8,315
Total
$
27,790
$
$
(1,128
)
$
26,688
Securities held-to-maturity
U.S. government agency mortgage-backed securities (“MBS”)
$
2,557
$
$
(137
)
$
2,423
Total
$
2,557
$
$
(137
)
$
2,423
Securities measured at fair value
Equity securities: Farmer Mac class A stock
$
$
$
-
$
Total
$
$
$
-
$
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
$
$
-
$
5,508
U.S. government agency CMO
4,862
(10
)
4,883
Corporate debt securities
9,250
(32 )
9,320
Total
19,588
(42
)
19,711
Securities held-to-maturity
U.S. government agency MBS
$
2,815
$
$
-
$
2,974
Total
$
2,815
$
$
-
$
2,974
Securities measured at fair value
Equity securities: Farmer Mac class A stock
$
$
$
-
$
Total
$
$
$
-
$
At December 31, 2022 and 2021, $21.1 million and $13.2 million of securities at carrying value, respectively, were pledged to the Federal Home Loan Bank (“FHLB”), as collateral for current and future advances.
The Company had no sales of investment securities in 2022, 2021, or 2020.
The maturity periods and weighted average yields of investment securities at December 31, 2022 and 2021 were as follows:
December 31, 2022
Less than One
Year
One to Five
Years
Five to Ten
Years
Over Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available-for-sale
(dollars in thousands)
U.S. government agency notes
$
-
-
$
-
-
$
3.59
%
$
3,588
4.40
%
$
4,107
4.30
%
U.S. government agency CMO
-
-
-
-
-
-
4,296
4.63
%
4,296
4.63
%
U.S. Treasury securities
9,970
2.06 %
-
-
-
-
-
-
9,970
2.06 %
Corporate debt securities
-
-
-
-
8,315
3.74
%
-
-
8,315
3.74
%
Total
$
9,970
2.06
%
$
-
-
$
8,834
3.73
%
$
7,884
4.53
%
$
26,688
3.34
%
Securities held-to-maturity
U.S. government agency MBS
$
-
-
$
-
-
$
3.60
%
$
1,811
3.68
%
$
2,557
3.66
%
Total
$
-
-
$
-
-
$
3.60
%
$
1,811
3.68
%
$
2,557
3.66
%
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
$
-
-
$
0.59
%
$
4,847
1.30
%
$
-
-
$
5,508
1.21
%
U.S. government agency CMO
-
-
3,905
0.50
%
0.77
%
-
-
4,883
0.55
%
Corporate debt securities
-
-
9,320
3.74 %
-
-
-
-
9,320
3.74 %
Total
$
-
0.00
%
$
13,886
2.68
%
$
5,825
1.21 %
$
-
0.00
%
$
19,711
2.25
%
Securities held-to-maturity
U.S. government agency MBS
$
-
-
$
2,065
2.87
%
$
3.58
%
$
-
-
$
2,815
3.06
%
Total
$
-
-
$
2,065
2.87
%
$
3.58
%
$
-
-
$
2,815
3.06
%
The amortized cost and fair value of investment securities by contractual maturities as of the periods presented were as shown below:
December 31,
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Securities available for sale
(in thousands)
Due in one year or less
$
9,984
$
9,970
$
-
$
-
After one year through five years
-
-
13,786
13,886
After five years through ten years
9,768
8,834
5,802
5,825
After ten years
8,038
7,884
-
-
Total
$
27,790
$
26,688
$
19,588
$
19,711
Securities held to maturity
Due in one year or less
$
-
$
-
$
-
$
-
After one year through five years
-
-
2,065
2,137
After five years through ten years
After ten years
1,811
1,718
-
-
Total
$
2,557
$
2,423
$
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.
As of December 31, 2022 and 2021, securities that were in an unrealized loss position and length of time that individual securities have been in a continuous loss position are summarized as follows:
December 31, 2022
Less Than Twelve
Months
More Than Twelve
Months
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale
(in thousands)
U.S. government agency CMO
$
(130
)
$
3,690
$
(49
)
$
$
(179
)
$
4,296
U.S. Treasury securities
(14 )
9,970
-
-
(14 )
9,970
Corporate debt securities
(764
)
6,986
(171
)
1,329
(935
)
8,315
Total
$
(908
)
$
20,646
$
(220
)
$
1,935
$
(1,128
)
$
22,581
Securities held-to-maturity
U.S. government agency MBS
$
(137
)
$
2,115
$
-
$
-
$
(137
)
$
2,115
Total
$
(137
)
$
2,115
$
-
$
-
$
(137
)
$
2,115
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 notes
$
-
$
-
$
-
$
-
$
-
$
-
U.S. government agency CMO
-
-
(10
)
(10
)
Corporate debt securities
(32 )
2,968
-
-
(32 )
2,968
Total
$
(32
)
$
2,968
$
(10
)
$
$
(42
)
$
3,945
As of December 31, 2022 and 2021, there were 37 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 bonds approach their maturity date, repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2022 and 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 AND LOANS SERVICED FOR OTHERS
As of December 31, 2022 and 2021, the Company had approximately $5.2 million and $6.3 million, respectively, of SBA loans included in loans held for sale. The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program. As of December 31, 2022 and 2021, the Company had $15.9 million and $17.1 million of USDA loans included in loans held for sale, respectively.
The unpaid balance of loans serviced for others as of the periods presented are shown below:
December 31, 2022
December 31, 2021
(in thousands)
Farmer Mac
$
155,522
$
142,677
SBA
1,926
2,709
USDA, FSA, and USDA Business and Industry
Total loans serviced for others
$
158,183
$
146,131
4.
LOANS HELD FOR INVESTMENT
The composition of the Company’s loans held for investment loan portfolio follows:
December 31,
(in thousands)
Manufactured housing
$
315,825
$
297,363
Commercial real estate
545,317
480,801
Commercial
59,070
55,287
SBA
3,482
23,659
HELOC
2,613
3,579
Single family real estate
8,709
8,749
Consumer
Gross loans held for investment
935,123
869,547
Deferred fees, net
(787 )
(838
)
Discount on SBA loans
(27
)
(34 )
Loans held for investment
934,309
868,675
Allowance for loan losses
(10,765 )
(10,404 )
Loans held for investment, net
$
923,544
$ 858,271
The following tables present the contractual aging of the recorded investment in past due held for investment loans by class of loans:
December 31, 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
$
314,997
$
$
$
-
$
$
$
315,825
$
-
Commercial real estate:
Commercial real estate
481,599
1,160
-
-
1,160
-
482,759
-
SBA 504 1st trust deed
12,947
-
-
-
-
-
12,947
-
Land
11,237
-
-
-
-
-
11,237
-
Construction
38,374
-
-
-
-
-
38,374
-
Commercial
59,070
-
-
-
-
-
59,070
-
SBA
2,529
-
-
-
3,482
-
HELOC
2,613
-
-
-
-
-
2,613
-
Single family real estate
8,559
-
-
-
-
8,709
-
Consumer
-
-
-
-
-
-
Total
$
932,032
$
2,778
$
$
-
$
2,880
$
$
935,123
$
-
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
$
$
-
$
-
$
$
$
297,363
$
-
Commercial real estate:
Commercial real estate
431,062
-
-
-
-
-
431,062
-
SBA 504 1st trust deed
16,961
-
-
-
-
-
16,961
-
Land
7,185
-
-
-
-
-
7,185
-
Construction
25,593
-
-
-
-
-
25,593
-
Commercial
55,287
-
-
-
-
-
55,287
-
SBA
23,296
-
23,659
-
HELOC
3,579
-
-
-
-
-
3,579
-
Single family real estate
8,491
-
-
-
-
8,749
-
Consumer
-
-
-
-
-
-
Total
$
868,278
$
$
$
-
$
$
$
869,547
$
-
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is no longer recognized on the loan. Interest 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 years ended December 31, 2022, 2021, and 2020 was $38 thousand, $154 thousand, and $255 thousand, respectively.
No nonaccrual loans were guaranteed by any government agencies at December 31, 2022. Included in nonaccrual loans are $314 thousand of loans guaranteed by government agencies at December 31, 2021.
The guaranteed portion of each SBA loan is repurchased from investors when those loans become past due 120 days by either CWB or the SBA directly. After the foreclosure and collection process is complete, the principal balance of loans repurchased by CWB are reimbursed by the SBA. Although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB; therefore, a repurchase reserve has not been established related to these loans.
Allowance for Loan Losses
The following tables summarize the changes in the allowance for loan losses by portfolio type:
For the Year Ended December 31,
Manufactured
Housing
Commercial
Real Estate
Commercial
SBA
HELOC
Single Family
Real Estate
Consumer
Total
(in thousands)
Beginning balance
$
2,606
$
6,729
$
$
$
$
$
$
10,404
Charge-offs
-
-
-
(182
)
-
-
-
(182
)
Recoveries
-
Net (charge-offs) recoveries
-
Provision (credit) for loan losses
1,134
(829
)
(366
)
(135
)
(3
)
(195
)
Ending balance
$
3,879
$
5,980
$
$
$
$
$
$
10,765
Beginning balance
$
2,612
$
5,950
$
1,379
$
$
$
$
$
10,194
Charge-offs
-
-
-
-
-
-
(1
)
(1
)
Recoveries
-
Net (charge-offs) recoveries
(1
)
Provision (credit) for loan losses
(224
)
(496
)
(143
)
(13
)
(4
)
-
(181
)
Ending balance
$
2,606
$
6,729
$
$
$
$
$
$
10,404
Beginning balance
$
2,184
$
5,217
$
1,162
$
$
$
$
$
8,717
Charge-offs
-
-
-
-
-
-
-
-
Recoveries
-
Net (charge-offs) recoveries
-
Provision (credit) for loan losses
(8
)
(1
)
1,223
Ending balance
$
2,612
$
5,950
$
1,379
$
$
$
$
$
10,194
The following tables present impairment method information related to loans and allowance for loan losses by loan portfolio segment:
Manufactured
Housing
Commercial
Real Estate
Commercial
SBA
HELOC
Single Family
Real Estate
Consumer
Total
Loans
Loans Held for Investment as of December 31, 2022:
(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded
$
2,918
$
$
$
$
-
$
$
-
$
3,443
Impaired loans with no allowance recorded
1,166
-
1,297
-
-
-
2,614
Total loans individually evaluated for impairment
4,084
1,364
-
-
6,057
Loans collectively evaluated for impairment
311,741
545,108
57,706
3,441
2,613
8,350
929,066
Total loans held for investment
$
315,825
$
545,317
$
59,070
$
3,482
$
2,613
$
8,709
$
$
935,123
Unpaid Principal Balance
Impaired loans with an allowance recorded
$
2,918
$
$
$
$
-
$
$
-
$
3,443
Impaired loans with no allowance recorded
1,166
-
1,297
-
-
-
2,614
Total loans individually evaluated for impairment
4,084
1,364
-
-
6,057
Loans collectively evaluated for impairment
311,741
545,108
57,706
3,441
2,613
8,350
929,066
Total loans held for investment
$
315,825
$
545,317
$
59,070
$
3,482
$
2,613
$
8,709
$
$
935,123
Related Allowance for Loan Losses
Impaired loans with an allowance recorded
$
$
$
-
$
$
-
$
$
-
$
Impaired loans with no allowance recorded
-
-
-
-
-
-
-
-
Total loans individually evaluated for impairment
-
-
-
Loans collectively evaluated for impairment
3,722
5,962
10,581
Total loans held for investment
$
3,879
$
5,980
$
$
$
$
$
$
10,765
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
$
$
$
$
-
$
$
-
$
4,487
Impaired loans with no allowance recorded
1,358
1,402
1,505
-
-
4,749
Total loans individually evaluated for impairment
4,921
1,622
1,590
-
-
9,236
Loans collectively evaluated for impairment
292,442
479,179
53,697
23,239
3,579
8,066
860,311
Total loans held for investment
$
297,363
$
480,801
$
55,287
$
23,659
$
3,579
$
8,749
$
$
869,547
Unpaid Principal Balance
Impaired loans with an allowance recorded
$
3,563
$
$
$
$
-
$
$
-
$
4,745
Impaired loans with no allowance recorded
1,358
1,402
1,505
-
-
-
4,491
Total loans individually evaluated for impairment
4,921
1,622
1,590
-
-
9,236
Loans collectively evaluated for impairment
292,442
479,179
53,697
23,239
3,579
8,066
860,311
Total loans held for investment
$
297,363
$
480,801
$
55,287
$
23,659
$
3,579
$
8,749
$
$
869,547
Related Allowance for Loan Losses
Impaired loans with an allowance recorded
$
$
$
-
$
$
-
$
$
-
$
Impaired loans with no allowance recorded
-
-
-
-
-
-
-
-
Total loans individually evaluated for impairment
-
-
-
Loans collectively evaluated for impairment
2,396
6,712
10,164
Total loans held for investment
$
2,606
$
6,729
$
$
$
$
$
$
10,404
No impaired loans were guaranteed by government agencies at December 31, 2022. There were $0.3 million of impaired loans guaranteed by government agencies at December 31, 2021.
A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table above as “Impaired loans with no allowance recorded.” The valuation allowance disclosed above is included in the allowance for loan losses reported in the consolidated balance sheets as of December 31, 2022 and 2021.
The following table summarizes the average investment in impaired loans by class of loans and the related interest income recognized:
Average
Investment
in Impaired
Loans
Interest
Income
Average
Investment
in Impaired
Loans
Interest
Income
Average
Investment
in Impaired
Loans
Interest
Income
Manufactured housing
$
4,396
$
$
5,816
$
$
7,483
$
Commercial real estate:
Commercial real estate
-
-
-
-
-
SBA 504 1st
1,509
Land
-
-
-
-
-
-
Construction
-
-
-
-
-
-
Commercial
1,459
1,506
1,660
SBA
HELOC
-
-
-
-
-
-
Single family real estate
1,606
2,279
Consumer
-
-
-
-
-
-
Total
$
6,958
$
$
10,858
$
$
12,351
$
Interest income recorded on these loans materially approximated income that would have been recorded on the cash basis during each period presented. The Company is not committed to lend significant 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 classifies problem and potential problem loans as “Special Mention,” “Substandard,” “Doubtful” and “Loss”. For a detailed discussion on these risk classifications see Note 1 - Summary of Significant Accounting Policies - Allowance for Loan Losses. Risk ratings are updated as part of the normal loan monitoring process, at a minimum, annually.
The following tables present gross loans by risk rating:
December 31, 2022
Pass
Special
Mention
Substandard
Doubtful
Total
(in thousands)
Manufactured housing
$
314,771
$
-
$
1,054
$
-
$
315,825
Commercial real estate:
Commercial real estate
460,110
13,381
8,008
-
481,499
SBA 504 1st trust deed
12,477
-
-
12,947
Land
11,237
-
-
-
11,237
Construction
38,374
-
-
-
38,374
Commercial
52,384
2,723
2,728
-
57,835
SBA
1,644
-
-
-
1,644
HELOC
2,613
-
-
-
2,613
Single family real estate
8,554
-
-
8,709
Consumer
-
-
-
Total, net
$
902,271
$
16,104
$
12,415
$
-
$
930,790
Government guaranteed loans
4,333
-
-
-
4,333
Total
$
906,604
$
16,104
$
12,415
$
-
$
935,123
December 31, 2021
Pass
Special
Mention
Substandard
Doubtful
Total
(in thousands)
Manufactured housing
$
295,810
$
-
$
1,553
$
-
$
297,363
Commercial real estate:
Commercial real estate
415,471
3,043
11,255
-
429,769
SBA 504 1st trust deed
14,646
-
2,315
-
16,961
Land
7,185
-
-
-
7,185
Construction
25,593
-
-
-
25,593
Commercial
50,372
2,265
-
52,663
SBA
1,891
-
-
2,005
HELOC
3,579
-
-
-
3,579
Single family real estate
8,487
-
-
8,749
Consumer
-
-
-
Total, net
$
823,143
$
3,069
$
17,764
$
-
$
843,976
Government guaranteed loans
23,610
-
1,961
-
25,571
Total
$
846,753
$
3,069
$
19,725
$
-
$
869,547
There were no loans classified as “Loss” at December 31, 2022 or 2021.
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 December 31, 2022 and 2021, was $6.0 million and $8.6 million, respectively. TDRs that were performing according to their modified terms as of December 31, 2022 and 2021, were $5.8 million and $8.4 million, respectively.
The following tables summarize the financial effects of TDR loans by class for the periods presented:
For the Year Ended December 31, 2022
Number
of Loans
Pre-
Modification
Recorded
Investment
Post
Modification
Recorded
Investment
Balance of
Loans with
Rate
Reduction
Balance of
Loans
with
Term
Extension
Effect on
Allowance
for
Loan
Losses
(dollars in thousands)
Manufactured housing
$
$
$
-
$
-
$
-
Total
$
$
$
-
$
-
$
-
For the year ended December 31 2021
Number
of Loans
Pre-
Modification
Recorded
Investment
Post
Modification
Recorded
Investment
Balance of
Loans with
Rate
Reduction
Balance of
Loans
with
Term
Extension
Effect on
Allowance
for
Loan
Losses
(dollars in thousands)
Manufactured housing
$
$
$
-
$
-
$
-
Total
$
$
$
-
$
-
$
-
For the year ended December 31 2020
Number
of Loans
Pre-
Modification
Recorded
Investment
Post
Modification
Recorded
Investment
Balance of
Loans with
Rate
Reduction
Balance of
Loans
with
Term
Extension
Effect on
Allowance
for
Loan
Losses
(dollars in thousands)
Manufactured housing
$
$
$
$
$
Commercial
1,469
1,469
-
-
SBA
-
-
-
Total
$
1,542
$
1,542
$
$
$
A TDR loan is deemed to have a payment default when the borrower fails to make two consecutive payments or the collateral is transferred to repossessed assets. The Company had no TDR’s with payment defaults for the twelve months ended December 31, 2022, 2021, or 2020.
At December 31, 2022, there were no material loan commitments outstanding on TDR loans.
Related Parties
Principal stockholders, directors, and executive officers of the Company, together with companies they control and family members, are considered to be related parties. In the ordinary course of business, the Company has extended credit to these related parties. Federal banking regulations require that any such extensions of credit not be offered on terms more favorable than would be offered to non-related party borrowers of similar creditworthiness.
The following table summarizes the aggregate activity in such loans:
Year Ended December 31,
(in thousands)
Balance, beginning
$
2,919
$
2,989
New loans
-
Repayments and other
(297
)
(235
)
Balance, ending
$
2,622
$
2,919
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 2022 or 2021.
Unfunded loan commitments outstanding with related parties total approximately $0.3 million at December 31, 2022 and $0.6 million at December 31 2021.
5.
PREMISES AND EQUIPMENT
Year Ended December 31,
(in thousands)
Bank premises and land
$
3,983
$
3,959
Furniture, fixtures, and equipment
10,865
10,637
Leasehold improvements
4,992
4,986
Construction in progress
19,962
19,722
Accumulated depreciation
(13,858
)
(13,146
)
Premises and equipment, net
$
6,104
$
6,576
6.
OTHER ASSETS ACQUIRED THROUGH FORECLOSURE
The following table summarizes the changes in other assets acquired through foreclosure:
December 31,
(in thousands)
Balance, beginning of period
$
2,518
$
2,614
$
2,524
Additions
-
Proceeds from dispositions
(384
)
-
-
Gains (losses) on sales, net
(232
)
(16
)
Balance, end of period
$
2,250
$
2,518
$
2,614
7.
DEPOSITS
The table below summarizes deposits by type:
December 31,
(in thousands)
Non-interest bearing demand deposits
$
216,494
$
209,893
Interest-bearing deposits:
NOW accounts
38,068
39,289
Money market deposit account
390,105
498,219
Savings accounts
23,490
23,675
Time deposits of $250,000 or more
6,693
17,612
Other time deposits
200,234
161,443
Total deposits
$
875,084
$
950,131
Of the total deposits at December 31, 2022, $668.2 million may be immediately withdrawn. Time certificates of deposit are the only deposits which have a specified maturity.
The summary of the contractual maturities for all time deposits is as follows:
(in thousands)
$
115,033
34,606
9,485
42,972
4,831
Total
$
206,927
The Company through the bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) services, which provides Federal Deposit Insurance Corporation (“FDIC”) insurance for large deposits. Federal banking law and regulation place restrictions on depository institutions regarding brokered deposits as they pose increased liquidity risk for institutions that gather significant amounts of brokered deposits. At December 31, 2022 and 2021, the Company had $51.1 million and $6.5 million, respectively, of reciprocal CDARS deposits. At December 31, 2022 and 2021, the Company had $69.2 million and $93.3 million, respectively of ICS deposits.
The Company also accepts deposits from related parties which totaled $29.3 million at December 31, 2022 and $41.8 million at December 31, 2021.
8.
BORROWINGS
FHLB Advances - The following table summarizes the Company’s FHLB advances by maturity date:
December 31,
Contractual Maturity Date
Amount
Rate
Amount
Rate
(dollars in thousands)
April 15, 2025
$ 6,000
0.76 %
$ 6,000
0.76 %
April 15, 2025
39,000
0.78 %
39,000
0.78 %
June 23, 2025
30,000
0.95 %
30,000
0.95 %
June 23, 2025
15,000
0.92
%
15,000
0.92
%
Total FHLB advances
$
90,000
$
90,000
Weighted average rate
0.86
%
0.86
%
All of the Company’s outstanding advances as of December 31, 2022 and 2021 were at fixed rates of interest.
The Company also had $39.0 million of letters of credit with FHLB at December 31, 2022 to secure public funds. The Company, through the Bank, has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. At December 31, 2022, the Company had $21.1 million of securities and $232.6 million of loans pledged to the FHLB. At December 31, 2022, the Company had $41.6 million available for additional borrowing. At December 31, 2021, the Company had pledged to the FHLB, $13.2 million of securities and $286.6 million of loans. At December 31, 2021, CWB had $44.5 million available for additional borrowing. Total FHLB interest expense for the years ended December 31, 2022, 2021 and 2020 was $0.8 million, $0.9 million and $1.4 million, respectively.
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%. The line of credit matured in September 2022 and the Company renewed the line of credit for an additional one-year term and increased the amount available to $10.0 million with no other changes to the financial terms or covenants. As of December 31, 2022 and 2021, there were no outstanding balances on the revolving line of credit.
Federal Reserve Bank - The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. As of December 31, 2022 and 2021, there were $248.6 million and $259.5 million, respectively, of loans pledged as collateral to the FRB. There were no outstanding FRB advances as of December 31, 2022 and 2021. Available borrowing capacity was $78.9 million and $119.0 million as of December 31, 2022 and 2021, respectively.
Federal Funds Purchased Lines- The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There were no amounts outstanding on these lines as of December 31, 2022 and 2021.
9.
COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the borrowers’ current financial condition may indicate less ability to pay than when the commitment was originally made. In the case of standby letters of credit, the risk arises from the possibility of the failure of the customer to perform according to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to pay for completion of the contract and the Company would look to its customer to repay these funds with interest. To minimize the risk, the Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that customer.
Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party in borrowing arrangements. Typically, letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
Year Ended December 31,
(in thousands)
Commitments to extend credit
$
100,011
$
85,238
Standby letters of credit
-
Total
$
100,011
$
85,255
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As funds have not been disbursed on these commitments, they are not reported as loans outstanding. Credit losses related to these commitments are not included in the allowance for credit losses reported in Note 4 - Loans Held for Investment of these consolidated financial statements and are accounted for as a separate loss contingency as a liability. This loss contingency for unfunded loan commitments and letters of credit was $94 thousand and $94 thousand as of December 31, 2022 and 2021, respectively. Changes to this liability are adjusted through other non-interest expense.
Loan Sales and Servicing
The Company retains a certain level of risk relating to the servicing activities and retained interest in sold loans. In addition, during the period of time that the loans are held for sale, the Company is subject to various business risks associated with the lending business, including borrower default, foreclosure, and the risk that a rapid increase in interest rates would result in a decline of the value of loans held for sale to potential purchasers.
In connection with certain loan sales, the Company enters agreements which generally require the company to repurchase or substitute loans in the event of a breach of a representation or warranty made by the Company to the loan purchaser, any misrepresentation during the loan origination process or, in some cases, upon any fraud or early default on such loans.
The Company has sold loans that are guaranteed or insured by government agencies for which the Company retained all servicing rights and responsibilities. The Company is required to perform certain monitoring functions in connection with these loans to preserve the guarantee by the government agency and prevent loss to the Company in the event of nonperformance by the borrower. Management believes that the Company is in compliance with these requirements.
Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes in interest rate levels) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments as well as its future net interest income will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in the net portfolio value and net interest income resulting from hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, the Board of Directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits. As of December 31, 2022, the Company’s interest rate risk profile was within Board-approved limits.
The Company’s subsidiary bank has an Asset and Liability Management Committee charged with managing interest rate risk within Board approved limits. Such limits are structured to prohibit an interest rate risk profile that is significantly asset or liability sensitive.
Other
The Company is involved in various other litigation matters of a routine nature that are being handled and defended in the ordinary course of the Company’s business. In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters will not have a material impact on the Company’s financial position or results of operations.
10.
STOCKHOLDERS’ EQUITY
Common Stock
During the years ended December 31, 2022, 2021, and 2020, the Company paid $2.6 million, $2.3 million, and $1.7 million, respectively, of dividends on common stock.
In 2021, the Board of Directors extended the repurchase program for $4.5 million until August 31, 2023. Under this program the Company has repurchased 350,189 common stock shares for $3.1 million at an average price of $8.75 per share. There were no shares repurchased during the years ended December 31, 2022, 2021, or 2020.
Equity Compensation Plans
The Company has two stock-based compensation plans that are currently available. Both stock options and restricted stock awards can be granted under the terms of the plans. Stock options granted under the terms of the plan generally have a vesting period of 5 years and a contractual life of 10 years, while restricted stock awards generally vest over 5 years. The Company recognizes compensation cost ratably over the requisite service period for all awards. As of December 31, 2022, 353,301 shares were available for future grants.
Stock Options: The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. The expected volatility is based on the historical volatility of the stock of the Company over the expected life of the stock options. The risk-free rate for the periods within the contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend rate assumption was the Company’s annual dividend yield at grant date.
A summary of the assumptions used in calculating the fair value of stock option awards during the years ended December 31, 2022, 2021 and 2020 are as follows:
December 31,
Expected life in years
6.3
6.4
6.3
Risk-free interest rate
2.53
%
1.80
%
0.66
%
Expected volatility
28.81
%
36.40
%
24.20
%
Annual dividend yield
2.05
%
1.94
%
2.54
%
A summary of stock option activity under the plan is presented below:
Year ended December 31, 2022
Option
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Term
Aggregate
Intrinsic
Value
(dollars in thousands, except exercise price)
Outstanding options, beginning of period
685,547
$
9.47
Granted
55,500
14.14
Exercised
(110,497
)
8.82
Forfeited or expired
(24,600
)
11.12
Outstanding options, end of period
605,950
$
9.95
5.84
$
3,041
Options exercisable, end of period
337,270
$
8.99
4.47
$
2,257
Options expected to vest, end of period
552,049
$
9.76
5.58
$
2,875
As of December 31, 2022, there was $0.4 million of total unrecognized compensation cost related to unvested stock options granted under the Company’s plan. That cost is expected to be recognized over a weighted average period of 3.3 years. The total intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020, was $0.5 million, $0.9 million, and a de minimis amount, respectively.
Restricted Stock Awards: Compensation expense for restricted stock awards is recognized over the vesting period of the awards based on the trading price of the Company’s stock at the grant date. Restricted stock awards generally vest evenly over a five-year period from the date of grant.
The following table summarizes the change in nonvested restricted stock awards for the year ended December 31, 2022:
Nonvested
Restricted Stock
Awards
Weighted Average
Grant-Date Fair
Value
Unvested options, beginning of period
14,084
$
12.50
Granted
23,665
14.40
Vested
(2,815
)
12.50
Forfeited
-
-
Unvested options, end of period
34,934
$
13.78
As of December 31, 2022, there was $0.3 million of total unrecognized compensation cost related to unvested restricted stock awards granted under the Company’s plan. That cost is expected to be recognized over a weighted average period of 4.3 years.
11.
CAPITAL REQUIREMENTS
The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015, and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amend the regulatory risk-based capital rules applicable to the Company. Basel III redefines the regulatory capital elements and minimum capital ratios, introduces regulatory capital buffers above those minimums, revises rules for calculating risk-weighted assets and adds a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. The final rule was effective January 1, 2020. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020. As of the fourth quarter 2021, the Company rescinded its CBLR election.
The following tables illustrates the Bank’s regulatory ratios and the Federal Reserve’s current adequacy guidelines as of December 31, 2022 and 2021. The Federal Reserve’s fully phased-in guidelines are also summarized.
Total Capital
(To Risk-
Weighted
Assets)
Tier 1
Capital
(To Risk-
Weighted
Assets)
Common
Equity Tier
(To Risk-
Weighted
Assets)
Leverage
Ratio/Tier1
Capital
(To
Average
Assets)
December 31, 2022
CWB’s actual regulatory ratios
12.56
%
11.44
%
11.44
%
10.34
%
Minimum capital requirements
8.00
%
6.00
%
4.50
%
4.00
%
Well-capitalized requirements
10.00
%
8.00
%
6.50
%
5.00
%
Minimum capital requirements including fully phased in capital conservation buffer
10.50
%
8.50
%
7.00
%
N/A
Total Capital
(To Risk-
Weighted
Assets)
Tier 1 Capital
(To Risk-
Weighted
Assets)
Common
Equity Tier 1
(To Risk-
Weighted
Assets)
Leverage
Ratio/Tier1
Capital
(To Average
Assets)
December 31, 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
%
5.00
%
Minimum capital requirements including fully phased in capital conservation buffer
10.50
%
8.50
%
7.00
%
N/A
As of the most recent formal notification from the Bank’s primary regulatory agency, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.
12.
REVENUE RECOGNITION
The Company adopted ASU No, 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 on January 1, 2018. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as servicing rights, financial guarantees and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to non-interest income streams such as deposit related fees, interchange fees and merchant income. However, the recognition of these income streams did not change upon the adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, check orders, account analysis fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees and account analysis fees is generally satisfied, and the related income recognized, over the period in which the service is provided. Check orders and other deposit-related fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied and related income recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Exchange Fees and Other Service Charges
Exchange fees and other service charges are primarily comprised of debit and credit card income, merchant services income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or MasterCard. Merchant services income is primarily fees charged to merchants to process their debit and credit card transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Other service charges include fees from processing wire transfers, cashier’s checks and other services. The Company’s performance obligation for exchange and other service charges is 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
Years Ended December 31,
In-scope of Topic 606:
Service charges on deposit accounts
$
$
$
Exchange fees and other service charges
Non-interest income (in-scope of Topic 606)
Non-interest income (out-of-scope of Topic 606)
3,125
3,042
3,457
Total
$
3,978
$
3,753
$
3,912
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and income is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2022 and 2021, the Company did not have any signficant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.
13.
INCOME TAXES
The provision for income taxes consisted of the following:
December 31,
Current:
(in thousands)
Federal
$
3,518
$
3,671
$
2,874
State
1,994
2,046
1,595
5,512
5,717
4,469
Deferred:
Federal
(178
)
(371
)
(651
)
State
(72
)
(134
)
(308
)
(250
)
(505
)
(959
)
Total provision for income taxes
$
5,262
$
5,212
$
3,510
A reconciliation between the statutory income tax rate and the Company’s effective tax rate is as follows:
December 31,
Federal income tax at statutory rate
21.0
%
21.0
%
21.0
%
State franchise tax, net of federal benefit
8.2
%
8.6
%
8.6
%
Other
(1.1
)%
(1.1
)%
0.3
%
Tax law change
0.0
%
0.0
%
0.0
%
Total provision for income taxes
28.1
%
28.5
%
29.9
%
The cumulative tax effects of the primary temporary differences are as shown in the following table:
December 31,
Deferred Tax Assets:
(in thousands)
Allowance for loan losses
$
3,127
$
2,978
Bonus accrual
Deferred compensation
1,057
Lease liability
1,555
1,549
Deferred state taxes
Unrealized loss on AFS securities
-
Other
Total gross deferred tax assets
7,057
6,555
Deferred tax asset valuation allowance
-
-
Total deferred tax assets
7,057
6,555
Deferred Tax Liabilities:
Depreciation
(469
)
(527
)
Right of use asset
(1,535 )
(1,489 )
Unrealized gain on AFS securities
-
(57
)
Other
-
(41
)
Total deferred tax liabilities
(2,004
)
(2,114
)
Net deferred tax assets
$
5,053
$
4,441
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis including operating losses and tax credit carryforwards. Net deferred tax assets of $5.1 million and $4.4 million at December 31, 2022 and December 31, 2021, respectively, are reported in other assets on the consolidated balance sheets.
Accounting standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
There was no valuation allowance on deferred tax assets at December 31, 2022 or December 31, 2021.
The Company is subject to the provisions of ASC 740, Income Taxes (ASC 740). ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December 31, 2022 or 2021.
The Company is subject to income taxation in the United States and certain state jurisdictions. The Company’s federal and state income tax returns are filed on a consolidated basis. The Company is generally open to examination by tax authorities for the years 2019 and later and state tax authorities for the years 2018 and later.
14.
LEASES
The Company has operating leases for office space, which typically have 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. As of December 31, 2022, the balance of the right-of-use assets was $5.2 million and the lease liabilities were $5.3 million. The right-of-use assets are included in other assets and the lease liabilities are included in other liabilities in the accompanying consolidated balance sheets.
Lease cost:
Operating lease cost
$
1,012
$
1,000
Sublease income
-
-
Total lease cost
$
1,012
$
1,000
Other information:
Cash paid for amounts included in the measurement of lease liabilities - operating leases
$
1,003
$
Weighted average remaining lease term in years - operating leases
7.02
8.17
Weighted average discount rate - operating leases
3.26
%
3.25
%
Future minimum operating lease payments as of December 31, 2022 are as follows:
$
1,014
1,025
Thereafter
1,538
Total future minimum lease payments
$
5,902
Less: remaining imputed interest
(641
)
Total lease liabilities
$
5,261
15.
EMPLOYEE BENEFIT PLANS
401(k) Plan:
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants are able to defer up to a maximum of $20,500 (for those under 50 years of age in 2022) of their annual compensation. The Company may elect to match a discretionary amount each year, which was 3% of the participant’s eligible compensation. The Company’s total contribution to the plan was $0.3 million, $0.3 million, and $0.4 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Deferred Compensation Plans:
A deferred compensation plan covers the executive officers. Under the plan, the Company pays each participant a percentage of their base salary plus interest. Vesting occurs at age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred compensation for the years ended December 31, 2022, 2021, and 2020 was $0.3 million, $0.2 million, and $0.3 million, respectively. The Company recognized a deferred compensation liability of $2.1 million and $2.0 million as of December 31, 2022 and 2021, respectively.
The Company also provides an unfunded nonqualified deferred compensation arrangement to provide supplemental retirement benefits for the Participants which are a select group of management or highly compensated employees of the Company. The Participants may defer up to 30% of their base salary and bonus each plan year. The 36-month certificate of deposit rate is paid on the vested balance.
Salary Continuation
The Company has agreements with certain key officers, which provide for a monthly cash payment to the officers or beneficiaries in the event of death, disability or retirement, beginning in the month after the retirement date or death and extending for a period of fifteen years subject to vesting. The income from the policy investments will help fund this liability.
At December 31, 2022 and 2021, the Company had accrued salary continuation liability for these agreements of $1.5 million and $1.2 million, respectively, which was included in other liabilities on the consolidated balance sheets. The cash surrender value of the life insurance policies was $8.7 million and $9.8 at December 31, 2022 and 2021, respectively, and is included in other assets on the consolidated balance sheets.
16.
FAIR VALUE MEASUREMENT
The fair value of an asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction occurring in the principal market for such asset or liability. ASC 820 establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1”) and the lowest priority to unobservable inputs (“Level 3”). The three levels of the fair value hierarchy under ASC 820 and the methods and assumptions used by the Company in estimating the fair value of its financial instruments are described in Note 1 - Summary of Significant Accounting Policies - Fair Value of Financial Instruments of these Notes to the Consolidated Financial Statements.
The following tables summarize the fair value of assets measured on a recurring basis:
Fair Value Measurements at the End of the Reporting
Period Using:
December 31, 2022
Quoted
Prices
in Active
Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Assets:
(in thousands)
Investment securities measured at fair value
$
$
-
$
-
$
Investment securities available-for-sale:
U.S. government agency notes
-
4,107
-
4,107
U.S. government agency CMOs
-
4,296
-
4,296
U.S. Treasury securities
-
9,970
-
9,970
Corporate debt securities
-
8,315
-
8,315
Interest only strips
-
-
Servicing assets
-
-
$
$
26,688
$
$
26,946
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
$
$
-
$
-
$
Investment securities available-for-sale:
U.S. government agency notes
-
5,508
-
5,508
U.S. government agency CMOs
-
4,883
-
4,883
Corporate debt securities
-
9,320
-
9,320
Interest only strips
-
-
Servicing assets
-
-
1,600
1,600
$
$
19,711
$
1,615
$
21,574
Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.
On certain SBA loan sales, the Company retained interest only strips (“I/O strips”), which represent the present value of excess net cash flows generated by the difference between (a) interest at the stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid to third-party investors and (ii) contractual servicing fees. I/O strips are classified as level 3 in the fair value hierarchy. The fair value is determined on a quarterly basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds. I/O strip valuation adjustments are recorded as additions or offsets to loan servicing income.
Historically, the Company has elected to use the amortizing method for the treatment of servicing assets and has measured for impairment on a quarterly basis through a discounted cash flow analysis prepared by an independent third-party using industry prepayment speeds. In connection with the sale of certain SBA and USDA loans the Company recorded servicing assets and elected to measure those assets at fair value in accordance with ASC 825-10. Significant assumptions in the valuation of servicing assets include estimated loan repayment rates, the discount rate, and servicing costs, among others. Servicing assets are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis, as follows:
Fair Value Measurements at the End of the
Reporting Period Using
Total
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Active
Markets
for
Similar
Assets
(Level 2)
Unobservable
Inputs
(Level 3)
(in thousands)
As of December 31, 2022:
Impaired loans
$
3,805
$
-
$
3,805
$
-
Other assets acquired through foreclosure
2,250
-
2,250
-
$
6,055
$
-
$
6,055
$
-
As of December 31, 2021:
Impaired loans
$
3,785
$
-
$
3,785
$
-
Other assets acquired through foreclosure
2,518
-
2,518
-
$
6,303
$
-
$
6,303
$
-
The Company records certain loans at fair value on a non-recurring basis. When a loan is considered impaired an allowance for a loan loss is established. The fair value measurement and disclosure requirement applies to loans measured for impairment using the practical expedients method permitted by accounting guidance for impaired loans. Impaired loans are measured at an observable market price, if available or at the fair value of the loan’s collateral, if the loan is collateral dependent. The fair value of the loan’s collateral is determined by appraisals or independent valuation. When the fair value of the loan’s collateral is based on an observable market price or current appraised value, given the current real estate markets, the appraisals may contain a wide range of values and accordingly, the Company classifies the fair value of the impaired loans as a non-recurring valuation within Level 2 of the valuation hierarchy. For loans in which impairment is determined based on the net present value of cash flows, the Company classifies these as a non-recurring valuation within Level 3 of the valuation hierarchy.
Other assets acquired through foreclosure are carried at the lower of book value or fair value less estimated costs to sell. Fair value is based upon independent market prices obtained from certified appraisers or the current listing price, if lower. When the fair value of the collateral is based on a current appraised value, the Company reports the fair value of the foreclosed collateral as non-recurring Level 2. When a current appraised value is not available or if management determines the fair value of the collateral is further impaired, the Company reports the foreclosed collateral as non-recurring Level 3.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of the Company’s financial instruments are as follows:
December 31, 2022
Carrying
Fair Value
Amount
Level 1
Level 2
Level 3
Total
Financial assets:
(in thousands)
Cash and cash equivalents
$
64,690
$
64,690
$
-
$
-
$
64,690
FRB and FHLB stock
4,533
-
4,533
-
4,533
Investment securities - available-for-sale
26,688
-
26,688
-
26,688
Investment securities - held-to-maturity
2,557
-
2,423
-
2,423
Investment securities - measured at fair value
-
-
Loans held for sale and loans held for investment, net
944,577
-
892,134
3,805
895,939
Accrued interest receivable
5,295
-
5,295
-
5,295
Servicing assets
1,480
-
-
2,646
2,646
Interest only strips
-
-
Financial liabilities:
Deposits
875,084
-
867,697
-
867,697
FHLB advances
90,000
-
83,322
-
83,322
Accrued interest payable
-
-
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
$
-
$
-
$
208,375
FRB and FHLB stock
4,441
-
4,441
-
4,441
Investment securities - available-for-sale
19,711
-
19,711
-
19,711
Investment securities - held-to-maturity
2,815
-
2,974
-
2,974
Investment securities - measured at fair value
-
-
Loans held for sale and loans held for investment, net
881,679
-
870,868
5,452
876,320
Accrued interest receivable
5,841
-
5,841
-
5,841
Servicing assets
1,600
-
-
2,254
2,254
Interest only strips
-
-
Financial liabilities:
Deposits
950,131
-
948,648
-
948,648
FHLB advances
90,000
-
88,409
-
88,409
Accrued interest payable
-
-
Fair value of commitments
Loan commitments on which the committed interest rates were less than the current market rate are insignificant at December 31, 2022 and 2021. The estimated fair value of standby letters of credit outstanding at December 31, 2022 and 2021 were also insignificant.
17.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in other comprehensive income by component, net of tax for the period indicated:
Year Ended December 31,
Unrealized holding gains (losses) on AFS
(in thousands)
Beginning balance
$
$
$
(78
)
Other comprehensive income (loss) before reclassifications
(863
)
Amounts reclassified from accumulated other comprehensive income
-
-
-
Net current-period other comprehensive income
(863
)
Ending balance
$
(771
)
$
$
There were no reclassifications out of accumulated other comprehensive income for the years ended December 31, 2022, 2021 and 2020.
18.
PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of the holding company are presented in the following tables:
COMMUNITY WEST BANCSHARES
Condensed Balance Sheets
December 31,
(in thousands)
Assets:
Cash and cash equivalents (including interest-bearing deposits in other financial institutions)
$
$
Investment in subsidiary
112,183
100,642
Other assets
Total assets
$
112,669
$
101,379
Liabilities and Stockholders’ Equity:
Other borrowings
$ -
$ -
Other liabilities
Total liabilities
Total stockholders’ equity
112,650
101,375
Total liabilities and stockholders’ equity
$
112,669
$
101,379
COMMUNITY WEST BANCSHARES
Condensed Income Statements
December 31,
(in thousands)
Interest income
$
-
$
-
$
Interest expense
Net interest expense
(16
)
(17
)
(293
)
Provision for loan losses
-
-
-
Net interest income after provision for loan losses
(16
)
(17
)
(293
)
Equity in income from consolidated subsidiary
13,779
13,271
8,826
Total income
13,763
13,254
8,533
Total non-interest expenses
Income before income tax benefit
13,238
12,834
8,122
Income tax benefit
(211
)
(267
)
(123
)
Net income
$
13,449
$
13,101
$
8,245
COMMUNITY WEST BANCSHARES
Condensed Statements of Cash Flows
December 31,
(in thousands)
Cash Flows from Operating Activities:
Net income
$
13,449
$
13,101
$
8,245
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed income from subsidiary
(13,779
)
(13,271
)
(8,826
)
Stock-based compensation
Changes in:
Other assets
(221
)
(1
)
Other liabilities
(215
)
(185
)
Net cash used in operating activities
(247
)
(26
)
(448
)
Cash Flows from Investing Activities:
Net dividends from and investment in subsidiary
1,375
1,600
1,197
Net cash provided by investing activities
1,375
1,600
1,197
Cash Flows from Financing Activities:
Common stock dividends paid
(2,574
)
(2,312
)
(1,652
)
Proceeds from issuance of common stock
1,204
Net cash used in financing activities
(1,600
)
(1,108
)
(1,648
)
Net (decrease) increase in cash and cash equivalents
(472
)
(899
)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
$
$

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of the Chief Executive Officer, and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2022. Based on that evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2022, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s reports that it files with or submits to the SEC under the Exchange Act.
Report on Management’s Assessment of Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control - Integrated Framework (2013 framework). Management concluded that, based on its assessment, the Company’s internal control over financial reporting was effective as of December 31, 2022.
Changes in Internal Control Over Financial Reporting
The Company’s management has also evaluated, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, whether there were any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter ended December 31, 2022. Based upon this evaluation, the Company’s management has determined that there were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
This Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Commission that permit the Company to provide only the management’s report in this Form 10-K.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item regarding the Company’s directors and executive officers, and corporate governance, including information with respect to beneficial ownership reporting compliance, will appear in the Proxy Statement we will deliver to our shareholders in connection with our 2023 Annual Meeting of Shareholders (the “Proxy Statement”) to be filed pursuant to Regulation 14A within 120 days after the end of the Company's last fiscal year. Such information is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its directors, principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions and employees. A copy of the code of ethics is available on the Company’s website at www.communitywest.com.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item will appear in the Proxy Statement we will deliver to our shareholders in connection with our 2023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this Item regarding security ownership of certain beneficial owners and management will appear in the Proxy Statement we will deliver to our shareholders in connection with our 2023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Information relating to securities authorized for issuance under the Company’s equity compensation plans is contained under “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities - Securities Authorized for Issuance Under Equity Compensation Plans” herein.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our 2023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are incorporated by reference from Item 8 hereto:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Income Statements for the three years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the three years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules other than those listed above have been omitted because they are either not applicable or the information is otherwise included.