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 2023 compared to 2022. 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 2022 compared to 2021, financial condition for 2021, and other 2021 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, 2022, filed with the SEC on March 31, 2023.
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, 2023. 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 Consolidated Financial Statements section of this 2023 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 Company adopted the Current Expected Credit Losses (“CECL”) requirements of Accounting Standards Codification (“ASC”) Topic 326 - “Financial Instruments-Credit Losses” (“ASC 326”) on January 1, 2023. The Company adopted the provisions of ASC 326 using the modified retrospective transition approach, and recorded a net decrease of $1.6 million to the beginning balance of retained earnings as of January 1, 2023, for the cumulative effect adjustment (net of tax effects). The Company uses the weighted average remaining maturity (“WARM”) method as the basis for the estimation of expected credit losses under CECL. The calculation of the allowance for credit losses (“ACL”) is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required ACL and are not included in the collective evaluation. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, when the Company determines that foreclosure is probable, the fair value of the collateral securing the loan, less estimated selling costs.
Although management uses the best information available to make these estimates, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. Changes in the circumstances considered when determining management’s estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the ACL in future periods. A discussion of facts and circumstances considered by management in determining the ACL is included in Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans Held for Investment.
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 2023
The significant financial results of and factors impacting the Company as of and for the year ended December 31, 2023 were:
Net income of $7.3 million, or $0.81 per diluted share for the year ended December 31, 2023, compared to $13.4 million, or $1.51 per diluted share for the year ended December 31, 2022.
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Net interest income was $42.4 million for the year ended December 31, 2023, compared to $45.8 million for the year ended December 31, 2022.
Net interest margin was 4.02% for 2023, compared to 4.21% for 2022.
Total deposits were $852.9 million at December 31, 2023, compared to $875.1 million at December 31, 2022.
Total demand deposits represented 64.0% of total deposits at December 31, 2023, compared to 73.7% at December 31, 2022.
Total loans (including loans held for sale) were $967.5 million at December 31, 2023, compared to $955.3 million at December 31, 2022.
Book value per common share increased to $13.10 at December 31, 2023, compared to $12.80 at December 31, 2022.
Provision (credit) for credit losses was $(395) thousand for the year ended December 31, 2023, compared to $(195) thousand for the year ended December 31, 2022. Net loan loss recoveries during 2023 were $214 thousand compared to $556 thousand in 2022.
The Bank’s Tier one leverage ratio was 10.88% at December 31, 2023 compared to 10.34% at December 31, 2022.
Non-accrual loans were $4.0 million at December 31, 2023 compared to $211 thousand at December 31, 2022.
The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance as of and for the year ended December 31, 2023, 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,
(dollars in thousands, except per share amounts)
Net income available to common stockholders
Basic earnings per share
Diluted earnings per share
Total assets
Gross loans (including loans held for sale)
Allowance for credit losses
Total deposits
Net interest margin
Return on average assets
Return on average common equity
Dividend payout ratio
Equity to assets ratio
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,
( dollars in thousands)
Non-accrual loans (net of guaranteed portion)
Non-accrual loans to total loans (including loans held for sale)
Allowance for credit losses to total loans held for investment
Allowance for credit losses to nonaccrual loans
Net (recoveries) charge-offs to average loans
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, 2023, compared to December 31, 2022. However, during this same period, gross loans (including loans held for sale) increased by $12.1 million, or 1.3%, to $967.5 million as of December 31, 2023 compared to $955.3 million as of December 31, 2022. Total deposits decreased by 2.5% to $852.9 million as of December 31, 2023, from $875.1 million as of December 31, 2022.
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RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
Year Ended
December 31,
Increase
Year Ended
December 31,
Increase
(Decrease)
(Decrease)
(in thousands, except per share amounts)
Consolidated Income Statement Data:
Interest income
Interest expense
Net interest income
Provision (credit) for credit losses
Net interest income after provision (credit) for credit losses
Non-interest income
Non-interest expenses
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share - basic
Earnings per share - diluted
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Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the years ended:
December 31, 2023
December 31, 2022
December 31, 2021
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
(dollars in thousands)
Interest-Earning Assets
Federal funds sold and interest-earning deposits
Investment securities
Loans (1)
Total interest-earnings assets
Nonearning Assets
Cash and due from banks
Allowance for credit losses
Other assets
Total Assets
Interest-Bearing Liabilities
Interest-bearing demand deposits
Savings
Certificates of deposit
Total interest-bearing deposits
FHLB advances and other borrowings
Total interest-bearing liabilities
Noninterest-Bearing Liabilities
Noninterest-bearing demand deposits
Other liabilities
Stockholders’ equity
Total Liabilities and Stockholders’ Equity
Net interest income and margin (2)
Net interest spread (3)
Total cost of deposits (4)
Total cost of funds (5)
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 credit losses. Interest income includes net accretion/(amortization) of deferred fees, costs, premiums, and discounts of $0.4 million, $0.9 million, and $3.3 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Net interest margin is computed by dividing net interest income by total average earning assets.
Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
Total cost of deposits (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense on interest-bearing deposits by the sum of total average interest-bearing deposits and noninterest-bearing demand deposits.
Total cost of funds (including the effect of noninterest-bearing demand deposits) is calculated by dividing total interest expense by the sum of total average interest-bearing liabilities and noninterest-bearing demand deposits.
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The table below sets forth the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
Year Ended December 31, 2023 versus
Year Ended December 31, 2022 versus
Increase (Decrease)
Due to Changes in (1)
Increase (Decrease)
Due to Changes in (1)
Volume
Rate
Total
Volume
Rate
Total
(in thousands)
Interest income:
Federal funds sold and interest-earning deposits
Investment securities
Loans
Total interest income
Interest expense:
Interest-bearing demand deposits
Savings
Time deposits
Total interest-bearing deposits
FHLB advances and other borrowings
Total interest expense
Net change
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, 2023, was $57.5 million, an increase from $49.1 million for the year ended December 31, 2022. The average yield on interest-earning assets during 2023 was 5.45%, compared to 4.51% during the prior year. The increase in interest income during 2023 was mainly the result of an increase in the rate earned on loans to 5.51% during for the year ended December 31, 2023, compared to 5.06% for the year ended December 31, 2022. This increase in the rates earned on loans resulted from increased loan rates on new originations, loan prepayment revenue, and the impact of higher benchmark interest rates for variable rate loans. The average balance of outstanding loans also increased by $32.9 million during 2023. In addition, interest income benefitted from an increase in the average rate earned on federal funds sold and interest earning deposits to 4.85% in 2023 compared to 1.03% in 2022, reflecting a full year’s benefit of the increases in the Federal Reserve’s target federal funds rate during 2022 and 2023. These increases were partially offset by decreases in the average outstanding balances of federal funds sold, interest-earning deposits, and investment securities.
Interest expense for the year ended December 31, 2023, increased by $11.8 million to $15.1 million compared to $3.3 million for the year ended December 31, 2022. For the year ended December 31, 2023, the cost of interest bearing deposits was 2.16%, compared to 0.38% for the year ended December 31, 2022. Including the impact of non-interest bearing deposits, the total cost of deposits was 1.65% for year ended December 31, 2023, compared to 0.28% for the year ended December 31, 2022. These increases reflect competitive pricing pressures and the Company’s decision to increase wholesale funding in response to the current operating environment.
The cost of FHLB advances and other borrowings was 1.03% and 0.90% for the years ended December 31, 2023 and 2022, respectively. The higher cost of other borrowings in 2023 was the result of the increased use of overnight advances from the FHLB and an advance on the Company’s line of credit to provide additional liquidity.
The net impact of these changes was a decrease in the net interest margin during 2023 to 4.02% compared to 4.21% for 2022. Net interest income was $42.4 million for the year ended December 31, 2023, which represented a $3.4 million decrease from net interest income of $45.8 million for the year ended December 31, 2022.
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Provision for credit losses
The provision (credit) for credit losses consisted of the following components for the periods indicated:
(in thousands)
Provision (credit) for credit losses for:
Loans
Off-balance sheet commitments
Total provision (credit) for credit losses (1)
In accordance with the applicable GAAP rules in place at the time, the only item reported on the Provision (credit) for credit losses line on the consolidated income statements for the years ended December 31, 2022 and 2021, was the provision (credit) for credit losses for loans. The provision for credit losses for off-balance sheet commitments for those periods was recorded in other non-interest expense.
The Company recorded net loan recoveries of $214 thousand and $556 thousand for years ended December 31, 2023 and 2022, respectively. The percentage of nonaccrual loans to the total loan portfolio (including loans held for sale) was 0.41% as of December 31, 2023, compared to 0.02% at December 31, 2022. The ACL compared to nonaccrual loans was 311% as of December 31, 2023, compared to 5,102% as of December 31, 2022. Total past due loans increased to $16.9 million as of December 31, 2023, from $2.9 million as of December 31, 2022. Of the total increase of $14.1 million in delinquent loans greater than 30 days during 2023, $9.7 million of the increase related to loans that were 30-59 days past due, while $4.3 million of the increase related to loans that were greater than 90 days past due.
Non-interest Income
The following tables present a summary of non-interest income for the periods presented:
Year Ended December 31,
Increase
Year Ended December 31,
Increase
(Decrease)
(Decrease)
(in thousands)
Other loan fees
Gains from loan sales, net
Document processing fees
Service charges
Other income
Total non-interest income
Total non-interest income decreased $225 thousand for the year ended December 31, 2023, compared to the year ended December 31, 2022. The decrease was primarily due to lower origination fee income from Farmer Mac loans and lower loan sale gains due to lower loan sale volume during 2023 compared to the prior year. These decreases were partially offset by an increase in service charges due to an increase in the volume of nonsufficient funds and account analysis charges during the period.
Non-Interest Expenses
The following tables present a summary of non-interest expenses for the periods presented:
Year Ended December 31,
Increase
Year Ended December 31,
Increase
(Decrease)
(Decrease)
(in thousands)
Salaries and employee benefits
Occupancy, net
Professional services
Advertising and marketing
Data processing
Depreciation
FDIC assessment
Other expenses
Total non-interest expenses
Total non-interest expenses for the year ended December 31, 2023, increased by $4.5 million from the prior year. The increase of $2.0 million in salaries and employee benefits during the year was due to wage competition, increased benefit and insurance costs, and an increase in stock-based compensation expense. The $0.8 million increase in professional services expenses was the result of increased accounting and consulting costs related to the proposed merger with Central Valley Community Bancorp, testing of the effectiveness of the Company’s internal control over financial reporting, and to support strategic and technology initiatives. FDIC assessment expense increased $0.4 million during 2023 as a result of higher premiums due to higher wholesale funding concentrations. The increase in other expenses of $0.9 million during the year is related to legal expense recoveries recorded during the year ended December 31, 2022 and merger related legal fees incurred in 2023.
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Income Taxes
The provision for income taxes for the year ended December 31, 2023, was $3.5 million compared to $5.3 million for the year ended December 31, 2022. The effective income tax rate was 32.3% and 28.1% for 2023 and 2022, respectively. The increase in the effective tax rate is due to merger-related expenses that are not deductible for income tax purposes.
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 $5.8 million at December 31, 2023, were reported in the consolidated balance sheets as a component of other assets.
ASC Topic 740 - Income Taxes (“ASC 740”) 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, 2023 and 2022. 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, 2023 and 2022.
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 $4.4 million to $1.09 billion at December 31, 2023. The majority of the decrease was related to decreases in securities available-for-sale of $11.5 million and in other assets of $9.4 million, respectively. These decreases were partially off by an increase in total loans held for investment of $16.5 million to $950.8 million at December 31, 2023, 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 2.8% to $560.4 million at December 31, 2023, compared to $545.3 million at December 31, 2022, and comprised 57.9% of the gross loan portfolio (including loans held for sale) at December 31, 2023. Manufactured housing loans increased by 4.6% to $330.4 million at December 31, 2023, compared to $315.8 million at December 31, 2022, and represented 34.1% of the gross loan portfolio.
Total liabilities decreased $8.0 million, or 0.8%, to $970.8 million at December 31, 2023, from $978.9 million at December 31, 2022. The majority of this decrease was due to a reduction in deposit balances, specifically demand deposits. Total deposits decreased $22.1 million to $852.9 million at December 31, 2023, from $875.1 million at December 31, 2022. Interest-bearing demand deposits were $377.5 million at December 31, 2023, a decrease of $50.6 million from $428.2 million at December 31, 2022. Noninterest-bearing demand deposits decreased $47.9 million to $168.6 million at December 31, 2023, from $216.5 million at December 31, 2022. These decreases were a result of both planned and unplanned withdrawals due to competition that put pressure on pricing and client retention. The decreases in demand deposits were partially offset by increases of $83.6 million in time deposits and $10.0 million in other borrowings at December 31, 2023.
Total stockholders’ equity increased to $116.2 million at December 31, 2023, from $112.7 million at December 31, 2022. This increase was primarily from net income of $7.3 million and stock-based compensation and exercises of stock options totaling $920 thousand, partially offset by common stock dividends declared and paid of $2.8 million and the $1.6 million cumulative effect adjustment of the impact of adoption of ASC 326 on January 1, 2023. Book value per common share was $13.10 at December 31, 2023 compared to $12.80 at December 31, 2022.
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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:
(in thousands)
Cash and due from banks
Interest-earning deposits in other institutions
Investment securities available-for-sale
Investment securities held-to-maturity
Investment securities measured at fair value
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock
Loans held for sale and loans held for investment, net
Servicing assets
Other assets acquired through foreclosure, net
Premises and equipment, net
Other assets
TOTAL ASSETS
LIABILITIES:
Deposits:
Non-interest-bearing demand
Interest-bearing demand
Savings
Time certificates over $250,000
Other time certificates
Total deposits
FHLB advances and other borrowings
Other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Loans Held for Sale
As of December 31, 2023 and 2022, the Company had approximately $4.5 million and $5.2 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, 2023 and 2022, the Company had $12.1 million and $15.8 million of USDA loans included in loans held for sale, respectively.
Loan Portfolio
Market Summary
Total gross loans, including loans held for sale, increased by $12.2 million during 2023 to $968.4 million. The majority of this increase was driven by growth in the commercial real estate and manufactured housing loan portfolios. Total commercial real estate loans increased by $15.1 million and total manufactured housing loans increased by $14.5 million at December 31, 2023.
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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
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Loans held for sale
Total loans
Less:
Allowance for credit losses
Deferred fees, net
Discount on SBA loans
Total loans, net
Percentage to Total Loans:
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Loans held for sale
Total
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 consists of Uniform Commercial Code (“UCC-1”) lien filings, real estate, and personal guarantees. The Company does not extend material loans of this type with maturity dates 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, such as office buildings or other commercial property. 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.
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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.
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 USDA, FSA, and the USDA B&I loan program. The FSA loans typically have a 90% guarantee up to $2,236,000 (amount adjusted annually based on inflation) for up to 40 years, but not always. The Company had $24.4 million of commercial agriculture loans at December 31, 2023, of which $12.2 million had FSA guarantees and were classified as held for sale.
CWB is an approved 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.
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, or home improvement projects.
Consumer Loans
Consumer loans consist of automobile and general-purpose loans made to individuals, as well as overdraft deposit accounts.
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, 2023, 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.
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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
Fixed rate
Commercial real estate
Floating rate
Fixed rate
Commercial
Floating rate
Fixed rate
SBA
Floating rate
Fixed rate
HELOC
Floating rate
Fixed rate
Single family real estate
Floating rate
Fixed rate
Consumer
Floating rate
Fixed rate
Total
Note that net deferred loan fees and discounts on SBA loans totaling $892 thousand were not included in the above loan balances.
At December 31, 2023, total loans consisted of 60.9% with floating rates and 39.1% 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, 2023:
Fixed Rate
Variable
Rate
Total
(in thousands)
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices on the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company 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, 2023 and 2022, manufactured housing loans comprised 34.1% and 33.0%, of total loans (including loans held for sale), respectively. As of December 31, 2023 and 2022, commercial real estate loans accounted for approximately 57.9% and 57.0% of total loans (including loans held for sale), respectively. Approximately 27.5% and 24.5% of these commercial real estate loans were owner occupied at December 31, 2023 and 2022, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 50.3% and 50.4% at December 31, 2023 and 2022, respectively. The Company was within established policy limits at December 31, 2023 and 2022.
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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, 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 or legal action as deemed appropriate. At December 31, 2023, the Company had 12 loans with an outstanding balance of $ 43.8 million with available interest reserves of $ 1. 4 million. Total construction and land loans are approximately 5.3% and 5.2% of the Company’s loan portfolio at December 31, 2023 and 2022, respectively.
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and results of operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans.
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
Allowance for credit losses to total nonaccrual loans
Nonaccrual loans to total loans outstanding
Loans 30 through 89 days past due with interest accruing
Allowance for credit losses to gross loans held for investment
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 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, 2023
At December 31, 2022
Nonaccrual
Balance
Percent of
Total Loans
Nonaccrual
Balance
Percent of
Total Loans
(dollars in thousands)
Manufactured housing
Commercial real estate
Commercial
HELOC
Single family real estate
Total nonaccrual loans
Total nonaccrual loan balances increased by $3.8 million to $4.0 million at December 31, 2023, from $0.2 million at December 31, 2022. None of the nonaccrual loans were guaranteed by the U.S. government or its agencies at December 31, 2023 or 2022. The percentage of nonaccrual loans to the total loan portfolio increased to 0.41% as of December 31, 2023, from 0.02% at December 31, 2022.
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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
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total net (recoveries) charge-offs
Average loan balance
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total average loan balance
Net charge-offs annualized percentage
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total net (recoveries) charge-offs to average loans
Collateral Dependent Loans
Beginning on January 1, 2023, the Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio, or that have been identified as collateral dependent, are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated selling costs. The Company may increase or decrease the ACL for collateral dependent loans based on changes in the estimated fair value of the collateral. Changes in the ACL for all other individually evaluated loans are based substantially on the Company’s evaluation of cash flows expected to be received from such loans.
The following table presents the amortized cost basis of collateral dependent loans by class of loans and by collateral type as of December 31, 2023:
Manufactured
Homes
Single
Family
Residence
Machinery &
Equipment
Total
December 31, 2023:
(in thousands)
Manufactured housing
Commercial real estate
Commercial
Single family real estate
Total
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Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information, it was probable that the Company would have been unable to collect the scheduled payments of principal or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value, and the probability of collecting scheduled principal or interest payments. Loans that experienced insignificant payment delays or payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considered the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company used the fair value of collateral method to measure . All other loans were measured for based on the present value of future cash flows.
The following schedule summarizes impaired loans and specific reserves by loan class as of December 31, 2022:
Manufactured
Housing
Commercial
Real
Estate
Commercial
SBA
HELOC
Single
Family
Real
Estate
Consumer
Total
Loans
Impaired Loans as of December 31, 2022:
(in thousands)
Recorded Investment:
Impaired loans with an allowance recorded
Impaired loans with no allowance recorded
Total loans individually evaluated for impairment
Related Allowance for Loan Losses:
Allowance for impaired loans
Total impaired loans, net of allowance
Allowance for Credit Losses
The Company adopted the CECL requirements of ASC 326 on January 1, 2023. The Company uses the WARM method as the basis for the estimation of expected credit losses under CECL. The WARM method utilizes a historical average annual charge-off rate over a historical lookback period as a foundation for estimating credit losses for the remaining outstanding balances of loans in a segment at a particular consolidated balance sheet date. The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required allowance for credit loss and are not included in the collective evaluation, as discussed above.
At December 31, 2023, the allowance for credit losses for loans was $12.5 million or 1.31% of gross loans compared to $10.8 million or 1.15% of gross loans at December 31, 2022.
During the year ended December 31, 2023, the allowance for credit losses on loans increased by $1.7 million to $12.5 million from $10.8 million at December 31, 2022. When the Company adopted the provisions of ASC 326 on January 1, 2023, it recorded the required $1.8 million increase, net of tax, directly to retained earnings. The Company recorded a provision (credit) for credit losses for loans of $(339) thousand during the year ended December 31, 2023, primarily due to a reduction in the qualitative factor related to the percentage of the state of California that was experiencing a drought. This reduction was partially offset by growth in the loan portfolio and an increase in historical loss factors for certain pools.
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The following table summarizes the allocation of the ACL by loan type. However, allocation of a portion of the ACL 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
(dollars in thousands)
Manufactured housing
Commercial real estate
Commercial
SBA
HELOC
Single family real estate
Consumer
Total
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, 2023:
December 31, 2023
Less than One
Year
One to Five Years
Five to Ten
Years
Over Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available-for-sale
(dollars in thousands)
U.S. government agency notes
U.S. government agency CMO
Corporate debt securities
Total
Securities held-to-maturity
U.S. government agency MBS
Total
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 net unrealized losses on available-for-sale securities increased to $1.5 million at December 31, 2023 compared to $1.1 million at December 31, 2022. The increase in the net unrealized losses during 2023 was the result of increases in benchmark interest rates during the same period. As of December 31, 2023, there was no ACL for available-for-sale or held-to-maturity securities. For available-for-sale securities where the security’s estimated fair value was below its amortized cost, such declines were deemed non-credit related and recorded as an adjustment to accumulated other comprehensive income, net of tax. Non-credit related declines in the fair value of available-for-sale investment securities can be attributed to changes in interest rates and other market-related factors. The Company did not record an allowance for credit losses for held-to maturity securities because the likelihood of non-repayment is remote.
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During the year ended December 31, 2023, we recorded an allowance for credit losses for available-for-sale securities (through the provision for credit losses) of $103 thousand related to corporate debt securities whose issuers experienced downgrades in their credit ratings to below what is considered to be investment grade. The ACL was determined using the discounted cash flow method, using estimated loss rates that were derived from averages for corporate debt securities with similar credit ratings. During the fourth quarter of 2023, the ACL was reversed (through the provision (credit) for credit losses) because of improvements in the credit quality of the issuers of the impacted bonds.
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
Additions
Proceeds from dispositions
Gains (losses) on sales, net
Balance, end of period
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, 2023 and 2022, the Company had a $114 thousand and $305 thousand 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
Interest-bearing demand
Savings
Certificates of deposit ($250,000 or more)
Other certificates of deposit
Total deposits
Total deposits decreased to $852.9 million at December 31, 2023, from $875.1 million at December 31, 2022, a decrease of $22.1 million. Non-interest-bearing demand deposits decreased by $47.9 million to $168.6 million at December 31, 2023, compared to $216.5 million at December 31, 2022. Interest-bearing demand deposits decreased by $50.6 million to $377.5 million at December 31, 2023, compared to $428.2 million at December 31, 2022. Total demand deposits decreased by $98.5 million at December 31, 2023, compared to December 31, 2022, primarily due to net outflows of money market deposits as a result of the higher interest rate environment. Time deposits increased by $83.6 million to $290.5 million at December 31, 2023, compared to $206.9 million at December 31, 2022. The increase in time 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, 2023 and 2022, the Company had $117.4 million and $69.2 million, respectively, of ICS deposits. At December 31, 2023 and 2022, the Company had $17.7 million and $51.1 million, respectively, of CDARS deposits.
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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 as of December 31, 2023:
Over
Less than three months
Three to six months
Six to twelve months
Over twelve months
Total
The Company estimates its total uninsured deposits to be $187.6 million and $332.1 million as of December 31, 2023 and 2022, 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.
FHLB Advances and Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
December 31,
FHLB and FRB PPPLF Advances
(dollars in thousands)
Maximum month-end balance
Balance at year end
Average balance
Other Borrowings
Maximum month-end balance
Balance at year end
Average balance
Total borrowed funds
Weighted average interest rate at end of year
Weighted average interest rate during the year
FHLB and FRB Advances
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, 2023, the Company had $90.0 million of advances outstanding from the FHLB. No advances were outstanding from the FRB at December 31, 2023.
The Company also had $27.0 million of letters of credit with the FHLB at December 31, 2023 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, 2023, the Company had pledged $9.3 million of securities and $371.9 million of loans to the FHLB as collateral. At December 31, 2023, the Company had $112.8 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. As of December 31, 2023, there were $293.7 million of loans pledged as collateral to the FRB. There were no outstanding FRB advances as of December 31, 2023. Available borrowing capacity was $110.7 million as of December 31, 2023.
Line of Credit
The Company has an unsecured line of credit agreement to borrow up to $10.0 million at Prime + 0.25%. The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to 1, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The Company was in compliance with all of the covenants at December 31, 2023. The line of credit matured in September 2023 and the Company renewed the line of credit for an additional two-year term with no other changes to the financial terms or covenants. As of December 31, 2023, there was $10.0 million outstanding on the revolving line of credit and the interest rate in effect was 8.75%; there were no outstanding balances on the revolving line of credit as of December 31, 2022.
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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, 2023.
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, 2023 and 2022. 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, 2023
CWB’s actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully phased in capital conservation buffer
December 31, 2022
CWB’s actual regulatory ratios
Minimum capital requirements
Well-capitalized requirements
Minimum capital requirements including fully phased in capital conservation buffer
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.
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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 $112.8 million in available borrowing capacity as of December 31, 2023. Loans pledged to the FRB discount window provided $110.7 million in borrowing capacity at December 31, 2023. As of December 31, 2023, 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 fixed rate FHLB advances were $90.0 million at December 31, 2023 and 2022. At December 31, 2023, CWB had pledged to FHLB securities with a carrying value of $9.3 million and loans of $371.9 million.
The Company has an unsecured line of credit agreement to borrow up to $10.0 million at Prime + 0.25%. The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to 1, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The line of credit matured in September 2023 and the Company renewed the line of credit for an additional two-year term with no other changes to the financial terms or covenants. As of December 31, 2023, there was $10.0 million outstanding on the revolving line of credit; there were no outstanding balances on the revolving line of credit as of December 31, 2022.
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 9.57%, and 10.36% at December 31, 2023 and 2022, 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 its 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 2023, CWBC declared dividends of $2.8 million. On January 26, 2024, the Company’s Board of Directors declared a $0.08 per share dividend payable February 29, 2024, to stockholders of record on February 9, 2024. 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, 2023
Less than
1 year
More
than 1
year
Total
(in thousands)
Time deposit maturities
FHLB advances
Operating lease obligations
Total
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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:
December 31, 2023
Less than
1 year
More
than 1
year
Total
(in thousands)
Loan commitments to extend credit
Standby letters of credit
Total
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 (prior to CWBC's merger with Central Valley Community Bancorp) through the listing of the common stock on the NASDAQ Capital Select Market, the Company is subject to the rules of NASDAQ.
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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.
Prior to CWBC's merger with Central Valley Community Bancorp, effective April 1, 2024, CWBC’s common stock was listed on the NASDAQ Capital Market and traded 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.
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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 credit losses for loans, 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 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, and 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.
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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:
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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 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, 2023.
Adequately
Capitalized
Well
Capitalized
Capital
Conservation
Buffer Fully
Phased-In
CWB
CWBC
(consolidated)
Total risk-based capital
Tier 1 risk-based capital ratio
Common Equity Tier 1
Tier 1 leverage capital ratio
The adoption of CECL on January 1, 2023, resulted in a $1.6 million reduction to stockholders’ equity, net of taxes. Banking organizations that experienced a reduction in retained earnings from the adoption of CECL have the option to elect a phase-in approach for up to 3 years of the “day 1” adverse impact to regulatory capital. The Company made this election and will phase in the impact of the transition to CECL over a three-year period, starting with the first quarter of 2023.
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;
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“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, 2023, 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.
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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”), along with 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 “ Due Diligence” practices) and other obligations to maintain appropriate policies, procedures, and controls to aid the process of , detecting, and reporting money 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.
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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.
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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.
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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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