INDEX
| PART I | | Page |
| | | 4 |
| | Item 1. | | 4 |
| | Item 1A. | | 8 |
| | Item 1B. | | 16 |
| | Item 2. | | 16 |
| | Item 3. | | 17 |
| | Item 4. | | 17 |
| | | | |
| PART II | | |
| | Item 5. | | 18 |
| | Item 6. | | 18 |
| | Item 7. | | 19 |
| | Item 7A. | | 49 |
| | Item 8. | | 51 |
| | Item 9. | | 95 |
| | Item 9A. | | 95 |
| | Item 9B. | | 96 |
| | Item 9C. | | 96 |
| | | | |
| PART III | | |
| | Item 10. | | 96 |
| | Item 11. | | 96 |
| | Item 12. | | 96 |
| | Item 13. | | 96 |
| | Item 14. | | 96 |
| | | | |
| PART IV | | |
| | Item 15. | | 96 |
| | Item 16. | | 97 |
| | | | |
| 100 |
| CERTIFICATIONS | 101 |
PART I
Forward-Looking Statements
This Annual Report on Form 10-K (this “Form 10-K”) contains certain forward-looking statements about the Company and the Bank that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Statements that are not historical or current facts, including statements about future financial and operational results, expectations, or intentions are forward-looking statements. Such statements reflect management's current views of future events and operations. These forward-looking statements are based on information currently available to the Company as of the date of this Form 10-K. It is important to note that these forward-looking statements are not guarantees of future performance and involve and are subject to significant risks, contingencies, and uncertainties, many of which are difficult to predict and are generally beyond our control including, but not limited to, risks related to liquidity of banking institutions both domestically and internationally, the reduction in the value of securities portfolios due to rising interest rates, and bank failures recently experienced in the financial sector, from the ongoing COVID-19 pandemic, wars and international conflicts, including the current military actions involving the Russian Federation and Ukraine, the strength of the United States economy in general and of the local economies in which we conduct operations, the effect of, and changes in, trade, monetary and fiscal policies and laws, including changes in interest rate policies of the Board of Governors of the Federal Reserve System, inflation, including the rising costs of oil and gas, supply chain interruptions, weather, natural disasters, climate change, increased unemployment, deterioration in credit quality of our loan portfolio and/or the value of the collateral securing the repayment of those loans, reduction in the value of our investment securities, the costs and effects of litigation and of adverse outcomes of such litigation, the cost and ability to attract and retain key employees, a breach of our operational or security systems, policies or procedures including cyber-attacks on us or third party vendors or service providers, regulatory or legal developments, United States tax policies, including our effective income tax rate, and our ability to implement and execute our business plan and strategy and expand our operations as provided therein. Actual results may differ materially from those set forth or implied in the forward-looking statements as a result of a variety of factors including the risk factors contained in documents filed by the Company with the Securities and Exchange Commission and are available in the “Investor Relations” section of our website, https://www.communitywest.com/sec-filings/documents/default.aspx.
For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see "Item 1A - Risk Factors” in this Form10-K. Forward-looking statements speak only as of the date they are made. The Company does not undertake any obligations to (and expressly disclaims an obligation to) update forward-looking statements to reflect circumstances and or events that occur after the date the forward-looking statements are made, except as required by law.
Purpose
The following discussion is designed to provide insight into the financial condition and results of operations of Community West Bancshares (“CWBC”) and its wholly owned subsidiary, Community West Bank N.A (“CWB” or the “Bank”) which includes 445 Pine Investments, LLC the Bank's wholly owned limited liability corporation ("445 Pine"). Unless otherwise stated, the Company refers to CWBC and CWB as a consolidated entity. References to “CWBC" or to the “holding company,” refer to Community West Bancshares, the parent company, on a stand-alone basis. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and notes to the Consolidated Financial Statements for the years ended December 31, 2022 and 2021, herein referred to as the “Consolidated Financial Statements”.
GENERAL
Community West Bancshares, a California corporation, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, or “BHCA,” with corporate headquarters in Goleta, California. CWBC's common stock is listed on Nasdaq under the trading symbol "CWBC". CWBC's principal business is to serve as the holding company for its wholly owned subsidiary Community West Bank, N.A. ("CWB"), a national banking association chartered by the Office of the Comptroller of the Currency (“OCC”). Through CWB, the Company provides a variety of financial products and services to customers through seven full-service branch offices in the cities of Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, and Paso Robles, California.
The Company’s operations and financial results in 2020 and 2021 (and to a lesser extent in 2022) were influenced by the COVID-19 global pandemic (the COVID-19 pandemic, or the pandemic). Such impacts have included significant volatility in the global stock and fixed income markets, the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the Paycheck Protection Program (PPP) administered by the Small Business Administration, and a variety of rulings from the Company’s banking regulators. The impact of COVID-19 has led to financial stress for many businesses and workers throughout the communities we serve.
Human Capital
The Company’s vision is to be recognized as an outstanding financial services company creating remarkable experiences for its clients, shareholders, and communities. Attracting, retaining, and developing qualified employees and providing them with a remarkable employee experience is a key to providing a remarkable client experience and is an important contributor to the Company’s success.
Employee Profile
The following table describes the composition of the Company’s workforce at December 31, 2022.
| | | Number |
| Full-time | | 134 |
| Part-time | | 3 |
| Temporary | | 2 |
| | | |
| Women | 87 or | 64.9% |
| Minorities | 61 or | 45.5% |
None of the employees are represented by a labor union or subject to a collective bargaining agreement.
Talent acquisition
The Company’s demand for qualified candidates grows as the Company’s business grows. Building a diverse and inclusive workforce is a critical component of the Company’s plan. The Company utilizes a workforce analysis model in its Affirmative Action Plan to analyze the composition of the workforce and identify any areas of underutilization or opportunity for inclusion of women, minorities, veterans, and the disabled. The Company actively recruits in venues identified to have significant populations of candidates who are female or from underrepresented categories. The Company also posts all jobs in the State CalJobs career site, which promotes employment opportunities specifically to veterans and those with disabilities. The Company attracts talented individuals with a combination of competitive pay and benefits. Through systematic talent management, career development, and succession planning the Company is striving to source a larger percentage of candidates internally and develop systems of career planning and growth that are attractive to external candidates.
Professional Development
The Company’s performance management program is an interactive practice that engages employees through quarterly check-ins, mid-year and annual reviews and annual goal setting for achievement of both Company and individual goals. The Company offers a variety of programs to help employees learn new skills, establish and meet personalized development goals, take on new roles and become better leaders.
Employee Engagement
The Company recognizes that employees who are involved in, enthusiastic about, and committed to their work and workplace contribute meaningfully to the success of the Company. On a regular basis, the Company solicits employee feedback through a confidential company-wide survey on culture, management, career opportunities, compensation, and benefits. The results of this survey are reviewed with management and are used to update employee programs, initiatives, and communications. The Company has a number of other engagement initiatives including town hall meetings with the Company’s Chief Executive Officer and other senior leaders. The Company supports and empowers the grassroots Elevate committee, made up of entry to mid-level employees from all departments and branches, and the Leadership Committee, comprised of both emerging and senior level leaders across all divisions.
Succession Planning
The Company is focused on facilitating internal succession by fostering internal mobility, enhancing its talent pool through professional development and certification programs, structuring its training programs to develop skills and competencies for 21st century banking and business acumen, and expending opportunities through structured diversity and inclusion initiatives.
Health and Safety
We consider the health and safety of our employees to be a critical component of the employee experience. Consequently, we offer our employees and their families access to health and wellness programs that provide comprehensive physical and mental health benefits, including medical, dental, and vision coverages, paid and unpaid leave, as well as life insurance and disability coverage. We offer health savings and spending accounts, paid parental leave, and assistance with childcare expenses. Throughout the pandemic we have remained focused on providing a safe work environment, making structural changes to the workplace, and adhering to governmental mandates and guidance while implementing protocols to protect our employees, including the option for certain employees to work from home.
Governance
Our Board of Directors are committed to executing on our long-term vision. Our Board members are accomplished leaders from diverse backgrounds bringing the perspective skills and experience necessary to use independent judgment that will effectively challenge and drive continued success. Our Board members approve the strategy and ethical standards for the entire organization.
At the end of 2022, the CWBC Board consisted of thirteen directors which included the CWBC President and Chief Executive Officer and twelve independent directors. One director self-identified as a minority, three directors self-identified as female, eight directors self-identified as male, and one director chose not to disclose a gender.
PRODUCTS AND SERVICES
CWB is focused on relationship-based banking to small to medium-sized businesses and their owners, professional, high-net worth individuals, and non-profit organizations in the communities served by its branch offices. The products and services provided include deposit products such as checking accounts, savings accounts, money market accounts and fixed rate, fixed maturity certificates of deposits, cash management products, and lending products, including commercial, commercial real estate, agricultural, and consumer loans.
Competition in our markets remains strong. The Company continues to be competitive due to its focus on high quality customer service and our experienced relationship bankers who have strong relationships within the communities we serve.
Manufactured Housing
The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved mobile home parks throughout California primarily on or near the coast. The parks must meet specific criteria. The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. These loan products are partially guaranteed by the U.S. Department of Agriculture (“USDA”), the Farm Service Agency (“FSA”), and the USDA Business and Industry loan program. The FSA typically issues a 90% guarantee up to $2,037,000 (amount adjusted annually based on inflation) for up to 40 years.
The Company also originates and sells loans to the secondary market through the Federal Agricultural Mortgage Corporation ("Farmer Mac") program. Farmer Mac provides the Company with access to flexible, low-cost financing and effective risk management tools to help farm, ranch, and rural utility customers.
Small Business Administration Lending
CWB has been a preferred lender/servicer of loans guaranteed by the Small Business Administration (“SBA”) since 1990. The Company originates SBA loans which can be sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The primary SBA loan program that CWB offers is the Section 504 (“504”) program.
CWB also offers Business & Industry ("B & I") loans. These loans are similar to the SBA product, except they are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 80%. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market.
As a Preferred Lender, CWB has been delegated the loan approval, closing and most servicing and liquidation responsibility from the SBA.
Under the CARES Act, CWB offered SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1% for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds to the lender or the date that is ten months after the day of the covered period if the borrower does not apply for forgiveness within the ten-month month period.
Loans to One Borrower
Under federal law, the unsecured obligations of any one borrower to a national bank generally may not exceed 15% of the sum of the Bank’s unimpaired capital and unimpaired surplus, and the secured and unsecured obligations of any one borrower. CWB was approved to increase this lending limit under the OCC’s Special Lending Limits Program to 25%. This program ensures that national bank lending limits, such as CWB’s, would remain competitive with state-chartered banks. In addition, California state banking law generally limits the amount of funds that a state-chartered bank may lend to a single borrower to 15% of the bank's capital for unsecured loans and 25% of the bank's capital for secured loans, and considers real estate secured loans as “secured” for lending limits purposes.
Foreign Operations
The Company has no foreign operations. The Bank may provide loans, letters of credit and other trade-related services to commercial enterprises that conduct business outside the United States.
Customer Concentration
The Company does not have any customer relationships that individually account for 10% or more of consolidated or segment revenues, respectively.
COMPETITION
The financial services industry is highly competitive. Many of the Bank's competitors are much larger in total assets and capitalization, have greater access to capital markets, have higher lending limits, and can offer a broader range of financial services than the Bank can offer and may have lower cost structures.
This increasingly competitive environment is primarily a result of long-term changes in regulation that made mergers and geographic expansion easier; changes in technology and product delivery systems and web-based tools; the accelerating pace of consolidation among financial services providers; and the flight of deposit customers to perceived increased safety and higher interest rates. We compete for customers with other banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, and other non-bank financial services providers. This strong competition for deposit and loan products directly affects the rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets.
Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive. The competitive environment is also significantly impacted by federal and state legislation that makes it easier for non-bank financial institutions to compete with the Company.
GOVERNMENT POLICIES
The Company’s operations are affected by various state and federal legislative changes and by regulations and policies of various regulatory authorities, including those of the states in which it operates and the U.S. government. These laws, regulations and policies include, for example, statutory maximum legal lending rates, domestic monetary policies by the Board of Governors of the Federal Reserve System (the "FRB") which impact interest rates, U.S. fiscal policy, anti-terrorism and money laundering legislation and capital adequacy and liquidity constraints imposed by bank regulatory agencies. Changes in these laws, regulations and policies may greatly affect our operations. See “Item 1A Risk Factors – Curtailment of government guaranteed loan programs could affect a segment of our business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation.”
Additional Available Information
The Company maintains an Internet website at http://www.communitywest.com. The Company makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act as amended. This and other information related to the Company is available free of charge through this website as soon as reasonably practicable after it has been electronically filed or furnished to the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site, https://www.sec.gov, in which all forms filed electronically may be accessed. The Company’s internet website and the information contained therein are not intended to be incorporated in this Form 10-K. In addition, the Company's annual report is available in print, free of charge, to any stockholder who requests it in writing to our Investor Relations Department at Community West Bancshares, 445 Pine Avenue, Goleta, California 93117, Attention Richard Pimentel, or by email to rpimentel@communitywestbank.com.
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties are discussed below and elsewhere in this Form 10-K. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition. Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business. See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section of this Form 10-K.
Terrorist attacks and threats of war may impact all aspects of our operations, revenues, costs, and stock price in unpredictable ways.
The recent special military actions of the Russian Republic and its invasion of Ukraine and the resulting geopolitical uncertainty have had and may continue to have an impact on the European Union and the United Kingdom and, other countries, including the U.S. The threat that these military operations may expand beyond Ukraine may have a negative impact as well. Significant increases in the price of oil and natural gas have occurred and are likely to continue putting additional inflationary pressures on central banks, including the FRB. It is expected that interest rate hikes that have occurred during 2022 are likely to continue in 2023 based on announcements by the FRB, but the amount, timing, and frequency of such increases are not fully known at this time. The Russian Republic has also threatened increased cyberattacks as part of its recent actions which could affect the Bank and its customers. Additionally, the United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions on Russian banks and wealthy individuals as well as halting certification of the Nord Stream 2 gas pipeline. They have denied Russian banks access the Society for Worldwide Interbank Financial Telecommunications or SWIFT which is expected to slow down international trade and make such transactions costlier to accomplish which could also negatively affect the Bank and its customers. In response to the Russian military actions, many businesses headquartered in the Eurozone and the United States have stopped doing business with Russia which may negatively affect the profitability of those companies. The international turmoil has already had and may continue to have a negative impact on the stock market generally and, in turn, on our stock price. The full impact of the actions by the Russian Republic regarding Ukraine over the past year and which are likely to continue in 2023 are not fully known at this time, but they could have a material adverse impact on our business, financial condition, results of operations, and stock price.
Risks Relating to the Bank and to the Business of Banking in General
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.
While real estate values and unemployment rates remain stable, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
| • | loan delinquencies, problem assets, and foreclosures may increase; |
| • | the sale of foreclosed assets may slow; |
| • | demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets; |
| • | collateral securing our outstanding loans could decline in value, exposing us to increased risk in our loans or reducing customers' borrowing power; |
| • | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and |
| • | the amount of our low-cost or non-interest-bearing deposits may decrease and the composition of our deposits may be adversely affected. |
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Interest rate changes, which are beyond our control, could harm our profitability.
Our profitability depends to a large extent upon net interest income, which is the difference between interest income and dividends we earn on interest-earning assets, such as loans and investments, and interest expense we pay on interest-bearing liabilities, such as deposits and borrowings. Any change in general market interest rates, whether as a result of changes in the monetary policy of the Federal Reserve or otherwise, may have a significant effect on net interest income and prepayments on our loans. After maintaining its federal funds rate target in a range of 0% to 0.25% since March 2020, as part of its efforts to combat inflation, the Federal Reserve raised the federal funds target to a range of 4.25% to 4.50% between March 2022 and December 2022. Additional rate increases are anticipated in 2023 before the Federal Reserve stops raising the federal funds rate.
As interest rates rise, our existing customers who have adjustable-rate loans may see their loan payments increase and, as a result, may experience difficulty repaying those loans. Increasing delinquencies, nonaccrual loans, and defaults lead to higher loan loss provisions, and potentially greater eventual losses that would lower our current profitability and capital ratios.
CWBC and CWB have liquidity risk.
Like all financial institutions, liquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As can be seen from recent events regarding the operations and failures of other banks in the U.S., an inability to raise funds through deposits, borrowings, the sale of loans, the sale of investment securities at or above the value of such securities on the Company's books, and other sources could have a material adverse effect on liquidity. Access to funding sources in amounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a market downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors that are not specific to CWB, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole which have been experienced in recent months in both domestic and foreign markets. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits (“CD”) markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to CWBC, thereby negatively impacting its separate liquidity.
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance these programs will be available as needed.
As of December 31, 2022, the Company has borrowings from the FHLB of San Francisco of $90.0 million and no borrowings from the FRB. The Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. Any change or termination could have an adverse effect on the Company’s liquidity and profitability. In addition, the Federal Reserve recently announced the creation of a new Bank Term Funding Program offering qualifying banks loans for up to one year in length collateralized by qualifying assets including U.S. securities valued at par to be a source of liquidity in an effort to eliminate an institution's need to quickly sell such securities to meet liquidity needs.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs, and profitability. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Allowance for loan losses may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our consolidated financial condition and/or consolidated results of operations. The Company maintains an allowance for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date. Provisions are taken from earnings and applied to the allowance for loan losses as the risk of loss in the loan and commitment portfolios increases. Conversely, credits to earnings from the allowance for loan losses are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and commitment portfolios. As of December 31, 2022, the Company’s allowance for loan losses was $10.8 million, or 1.15% of gross loans held for investment. In addition, as of December 31, 2022, we had $0.2 million in loans on nonaccrual status. In determining the level of the allowance for loan losses, Management makes various assumptions and judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information known to Management at the time of the analysis. If Management’s assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses which could have a material adverse effect on the Company’s consolidated financial condition and/or consolidated results of operations. While the allowance for loan losses was determined to be adequate at December 31, 2022, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, or life insurance and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to repay loans in accordance with their original terms and, if not, the cumulative effect may have an adverse effect on our financial condition and/or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2022, approximately $591.2 million, or 62%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate. The real estate securing our loan portfolio is concentrated in California. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. A decline in the real estate market, particularly within California, could materially and adversely affect the business of the Company because a significant portion of its loans are secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and the Company would be more likely to suffer losses on loans. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires, and other natural disasters particular to California.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation, and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that the Company can pay, restrict the ability of institutions to guarantee the Company's debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”). Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and consolidated financial condition.
We are periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations, and reputation may be negatively impacted.
CWBC is subject to regulation and supervision by the FRB and CWB is subject to supervision and regulation by the OCC with applicable laws and regulations governing the types, amounts, and terms of investments and loans we make, disclosures of products and services we offer to our customers, the levels of capital we must maintain, and the rates of interest we may pay. Those regulations continuously change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. While legislation enacted in 2018 was designed to reduce some of the obligations imposed by the Dodd-Frank Act, recent events, including the failure of two U.S. based financial institutions has resulted in the current administration reaffirming that it will take affirmative action to assure compliance by financial institutions with applicable law, including many of the provisions of the Dodd-Frank Act. In addition, it is likely that the FDIC will consider whether to raise the base deposit insurance assessment to support any losses sustained by those recent bank failures. Such actions could increase CWB's costs. No assurances can be given that future changes in applicable laws and regulations like the enactment of the Anti-Money Laundering Act of 2020 would not impose regulatory restrictions resulting in a negative impact on CWBC. For further discussion, see “SUPERVISION AND REGULATION” herein.
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to affect the implementation of the Basel III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the FRB. For a further discussion of the capital rules, see “SUPERVISION AND REGULATION” herein.
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial, and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s consolidated results of operations and consolidated financial condition may be adversely affected.
The Company is exposed to the risk of environmental liabilities with respect to properties to which we obtain title.
Approximately 62% of the Company’s loan portfolio at December 31, 2022 was secured by real estate. In the course of our business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and prospects.
Changes in interest rates could adversely affect the Company’s profitability, business and prospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates and can impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an adverse effect on the Company’s business, asset quality and prospects. The Company’s operating income and net income depend to a great extent on its net interest margin. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and the interest rates paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions, and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. If the rate of interest paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities increases more than the rate of interest received on loans, securities, and other earning assets increases, the Company’s net interest income, and therefore earnings, would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other interest-bearing liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. No assurances can be given that the Company will be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business, consolidated financial condition, consolidated results of operations, and cash flows.
We may be impacted by the transition from LIBOR as a reference rate.
The London Interbank Offered Rate (LIBOR) had been used extensively in the United States and globally as a reference rate for various commercial and financial contracts, including adjustable-rate mortgages, corporate debt, interest rate swaps and other derivatives. In November 2020, the FRB issued a statement supporting the release of a proposal and supervisory statements designed to provide a clear end date for U.S. Dollar LIBOR (USD LIBOR), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the date LIBOR ceases to be issued.
In December 2022, the FRB issued a final rule replacing USD LIBOR, effective June 30, 2023, with a new index calculated by short-term repurchase agreements, backed by United States Treasury securities, otherwise known as the Secured Overnight Financing Rate (SOFR). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it is a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions.
The Company had $4.2 million of investment securities and $0.4 million of loans (comprised of two (2) loans) tied to LIBOR at December 31, 2022 and is working through the transition away from LIBOR. The Bank has identified the 1-year Constant Treasury Maturity (CMT) index to replace the 1-year LIBOR index for the two remaining loans tied to LIBOR. The Bank transitioned from LIBOR and has been using the CMT index for its fixed rate real estate pricing over the past five years. All of the investment securities tied to LIBOR contain replacement language identifying SOFR as a replacement index for current LIBOR-based investments. The transition from LIBOR could create additional costs or risk for us. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, our failure to adequately manage this transition process with our customers could impact our reputation.
The Company’s future success will depend on our ability to compete effectively in a highly competitive market.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including "fintech lenders, commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks, and other financial institutions compete with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we conduct our business from many local commercial banks as well as numerous national commercial banks and regionally based commercial banks. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected.
In order to remain competitive in our industry and provide our customers with the latest products and services, we must be able to keep up with the changes in technology. Many of the financial institutions and the financial technology companies with which we compete have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse effect on our customer relations and, in turn, our financial condition and results of operations.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate consolidated financial statements on a timely basis could be impaired, which could result in a loss of investor confidence in our consolidated financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our consolidated financial information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our consolidated financial statements. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our system of internal control can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate consolidated financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action that could require us to restate our consolidated financial statements. Any such restatement could result in a loss of public confidence in the reliability of our consolidated financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our consolidated financial condition and consolidated results of operations.
Our accounting policies and methods are fundamental to how we record and report our consolidated financial condition and consolidated results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period consolidated financial statements. Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board ("FASB"), the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes can be difficult to predict and can materially impact how we record and report our consolidated financial condition and consolidated results of operations. In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period consolidated financial statements.
One change is ASU 2016-13, which was released by the Financial Accounting Standards Board in 2016 and was effective for the Company on January 1, 2023. Prior to adoption of ASU 2016-13, the impairment model used by financial institutions to assess the adequacy of the allowance for loan losses was based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will be replaced by the current expected credit loss ("CECL") model, in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model has necessitated significantly greater data requirements and changes to methodologies to accurately account for expected losses over the life of a loan. The Company is currently evaluating the impact of the adoption of the new standard on our consolidated financial statements and anticipates the allowance will increase and the increase will decrease shareholders’ equity as well as the Company’s and Bank’s regulatory capital ratios.
Natural disasters, severe weather and wild fires may impact all aspects of our operations, revenues, costs and stock price in unpredictable ways
In the last few years, California has experienced extensive wildfires that have burned millions of acres, destroyed thousands of homes and commercial properties, and resulted in the loss of life not only in California generally but also directly in our market area. Those natural disasters were followed by significant rains in the winters of 2022 and 2023 resulting in flooding and further loss of property. While the recent rains in California may have helped to reduce the drought experienced in recent years, to the extent that flooding is experienced it could adversely affect our customers. The potential resurgence of drought conditions could also negatively affect our customers. As of December 31, 2022, CWB had $28.3 million of agricultural loans (some of which are classified as held for sale). The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty and a substantial portion of our customers businesses and residences are located in areas susceptible to such events as earthquakes, floods, droughts and wildfires. The occurrence of such events could adversely impact our customers' and their businesses and ability to repay their loans, all of which could have a material adverse effect on CWBC.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet and telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us, and/or our customers that use our internet banking, electronic banking, or some other form of our telecommunications systems. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place, which losses could adversely affect the Company and its consolidated financial condition or consolidated results of operations.
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of these information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur, or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our consolidated financial condition and consolidated results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity, and availability of the Company’s and our customers’ information across all geographic and product lines and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software, and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks, and other events that could have an adverse security impact and result in significant losses by us and/or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsourced or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses, or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data, or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, or penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees, especially seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level. In particular, our relative success to date has been partly the result of our skills of our senior management and management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their communities. These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share. From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer. If the Company is unable to hire or retain qualified employees it may not be able to successfully execute its business strategy. If the Company or its employee is found to have violated any non-solicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.
We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations. We may need to raise additional capital in the future to achieve and maintain those adequate capital levels. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.
The COVID-19 pandemic and measures intended to prevent its spread will likely continue to have an effect on our business results of operations and financial condition.
Although the United States ("U.S.") and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including disruptions of global supply chains. The growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications has contributed to rising inflation. The extent to which the COVID-19 pandemic impacts our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the severity and duration of any resurgence of COVID-19 variants.
Risks Relating to our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends and continue with share repurchases is subject to restrictions.
As a holding company with no significant assets other than the Bank, CWBC is dependent on dividends from the Bank to fund operating expenses and estimated tax payments. The ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions is subject to the restrictions of the National Bank Act. In addition, it is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 7 - Management's Discussion and Analysis of Operations - Regulatory Matters- Dividends” in this Form 10-K.
In the event the Bank is unable to pay dividends to CWBC, it is likely that CWBC, in turn, would have to discontinue cash dividends and share repurchases and may have difficulty meeting its other financial obligations. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock.
For the year ended December 31, 2022, the Bank paid $1.4 million in dividends to CWBC. No assurances can be given that future performance will justify the payment of dividends in any particular year. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code.
Issuance of additional common stock or other equity securities in the future could dilute the ownership interest of existing shareholders.
In order to maintain capital at desired or regulatory-required levels, or to fund future growth, the board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for, or representing rights to acquire shares of the common stock. The sale of these shares may significantly dilute the ownership interests of shareholders. New investors in the future may also have rights, preferences and privileges senior to current shareholders which may adversely impact current shareholders. In addition, the Company issues options to purchase common stock and restricted stock awards under its equity compensation plans to plan participants, including directors, officers and other employees of the Company and/or the Bank, which may dilute the ownership interests of shareholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
The Company is headquartered at 445 Pine Avenue in Goleta, California. This facility houses the Company's corporate offices and the manufactured housing lending division. The Company operates seven domestic branch locations, two of which are owned. All other properties are leased by the Company, including the corporate headquarters.
The Company continually evaluates the suitability and adequacy of its offices. Management believes that the existing facilities are adequate for its present and anticipated future use.
The Company is involved in various other litigation matters of a routine nature that are being handled and defended in the ordinary course of the Company’s business. In the opinion of management, based in part on consultation with legal counsel, the resolution of these litigation matters will not have a material impact on the Company’s financial position or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s common stock is traded on the Nasdaq Global Market (“NASDAQ”) under the symbol CWBC. The following table sets forth the high and low sales prices on a per share basis for the Company’s common stock as reported by NASDAQ for the period indicated:
| | | 2022 Quarters | | | 2021 Quarters | |
| | | Fourth | | | Third | | | Second | | | First | | | Fourth | | | Third | | | Second | | | First | |
| Range of stock prices: | | | | | | | | | | | | | | | | | | | | | | | | |
| High | | $ | 14.98 | | | $ | 14.95 | | | $ | 14.31 | | | $ | 15.90 | | | $ | 13.92 | | | $ | 14.62 | | | $ | 13.50 | | | $ | 13.44 | |
| Low | | | 13.91 | | | | 13.52 | | | | 13.36 | | | | 13.40 | | | | 12.75 | | | | 12.11 | | | | 10.76 | | | | 8.75 | |
| Cash Dividends Declared: | | $ | 0.075 | | | $ | 0.075 | | | $ | 0.075 | | | $ | 0.070 | | | $ | 0.070 | | | $ | 0.070 | | | $ | 0.070 | | | $ | 0.060 | |
Holders
As of February 28, 2023, the closing price of our common stock on NASDAQ was $ 15.11 per share. As of that date the Company had 227 holders of record of its common stock. The Company has a greater number of beneficial owners of our common stock who own their shares through brokerage firms and institutional accounts.
Common Stock Dividends
It is the Company’s intention to review its dividend policy on a quarterly basis. As a holding company with limited significant assets other than the capital stock of our subsidiary bank, CWBC’s ability to pay dividends depends primarily on the receipt of dividends from its subsidiary bank, CWB. CWB’s ability to pay dividends to the Company is limited by the National Bank Act. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation – CWBC – Limitations on Dividend Payments.”
Repurchases of Securities
Common
In 2021, the Board of Directors extended the repurchase program for common stock repurchases up to $4.5 million until August 31, 2023. Under this program, as of December 31, 2022, the Company has repurchased 350,189 common stock shares for $3.1 million at an average price of $8.75 per share. During the year ended December 31, 2022, the Company did not repurchase any shares and has $1.4 million available to purchase additional shares under the program.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the securities authorized for issuance as of December 31, 2022:
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| Plans approved by shareholders | | | 605,950 | | | $ | 9.95 | | | | 353,301 | |
| Plans not approved by shareholders | | | — | | | | — | | | | — | |
| Total | | | 605,950 | | | $ | 9.95 | | | | 353,301 | |
For material features of the plans, see Item 8. Financial Statements and Supplementary Data - Note 10 - Stockholders' Equity
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with “Item 8–Financial Statements and Supplementary Data.” This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Forward-Looking Statements,” on page 4 of this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements.
The Company’s financial condition and results of operations are presented for 2022 compared to 2021. Some tables include additional periods to comply with disclosure requirements or to illustrate the trend of financial results for the periods presented in the financial statements. For a discussion of Company’s results of operations for 2021 compared to 2020, financial condition for 2020, and other 2020 information not included herein, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 29, 2022.
Corporate Profile
Community West Bancshares ("CWBC") is a bank holding company headquartered in Goleta, California with consolidated assets of $1.09 billion at December 31, 2022. The Consolidated financial information presented herein reflects CWBC and its subsidiary which is referred to collectively as "the Company." CWBC's wholly owned subsidiary is Community West Bank ("CWB") which includes its wholly owned subsidiary 445 Pine Investments LLC ("445 Pine") which is a limited liability company.
Critical Accounting Estimates
The Company's significant accounting policies conform with generally accepted accounting principles ("GAAP") and are described in Note 1 - Summary of Significant Accounting Policies of the Notes to Financial Statements section of this 2022 Annual Report on Form 10-K. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgement and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions.
The accounting for the allowance for loan losses is among the Company's most critical accounting policies and represents management's judgments regarding incurred losses inherent in the loan portfolio as of the consolidated balance sheet date. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for loan losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for loan losses is included in Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans Held for Investment.
Financial Overview and Highlights
Community West Bancshares is a financial services company headquartered in Goleta, California that provides full-service banking and lending through its wholly owned subsidiary Community West Bank (“CWB”), which has seven California branch banking offices located in Goleta, Oxnard, San Luis Obispo, Santa Barbara, Santa Maria, Ventura, and Paso Robles.
Financial Result Highlights of 2022
The significant financial results of and factors impacting the Company as of and for the year ended December 31, 2022 were:
| • | Net income of $13.4 million, or $1.51 per diluted share for the year ended December 31, 2022, compared to $13.1 million, or $1.50 per diluted share for the year ended December 31, 2021. |
| • | Net interest income was $45.8 million for the year ended December 31, 2022, compared to $42.4 million for the year ended December 31, 2021. |
| • | Net interest margin was 4.21% for 2022, compared to 4.03% for 2021. |
| • | Total deposits were $875.1 million at December 31, 2022 compared to $950.1 million at December 31, 2021. Noninterest bearing deposits were $216.5 million at December 31, 2022 compared to $209.9 million at December 31, 2021. |
| • | Total demand deposits represented 73.7% of total deposits at December 31, 2022, compared to 78.7% at December 31, 2021. |
| • | Total loans (including loans held for sale) were $955.3 million at December 31, 2022, compared to $892.1 million at December 31, 2021. |
| • | Book value per common share increased to $12.80 at December 31, 2022, compared to $11.72 at December 31, 2021. |
| • | Provision (credit) for loan losses was $(195) thousand for the year ended December 31, 2022 compared to a provision (credit) for loan losses of $(181) thousand for the year ended December 31, 2021. Net recoveries during 2022 were $556 thousand compared to $391 thousand in 2021. |
| • | The Bank’s Tier one leverage ratio was 10.34% at December 31, 2022 compared to 8.56% at December 31, 2021. |
| • | Non-accrual loans were $211 thousand at December 31, 2022 compared to $565 thousand at December 31, 2021. |
The impact to the Company from these items, and others of both a positive and negative nature, will be discussed in more detail as they pertain to the Company’s overall comparative performance as of and for the year ended December 31, 2022 throughout the analysis sections of this Form 10-K.
A summary of our results of operations and financial condition and select metrics is included in the following table:
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | (in thousands, except per share amounts) | |
| | | | | | | | | | |
| Net income available to common stockholders | | $ | 13,449 | | | $ | 13,101 | | | $ | 8,245 | |
| Basic earnings per share | | | 1.54 | | | | 1.53 | | | | 0.97 | |
| Diluted earnings per share | | | 1.51 | | | | 1.50 | | | | 0.97 | |
| Total assets | | | 1,091,502 | | | | 1,157,052 | | | | 975,435 | |
| Gross loans (including loans held for sale) | | | 955,342 | | | | 892,083 | | | | 859,209 | |
| Allowance for loan losses | | | 10,765 | | | | 10,404 | | | | 10,194 | |
| Total deposits | | | 875,084 | | | | 950,131 | | | | 766,185 | |
| Net interest margin | | | 4.21 | % | | | 4.03 | % | | | 3.89 | % |
| Return on average assets | | | 1.20 | % | | | 1.21 | % | | | 0.85 | % |
| Return on average stockholders' equity | | | 12.48 | % | | | 13.68 | % | | | 9.70 | % |
| Dividend payout ratio | | | 19.13 | % | | | 17.66 | % | | | 20.04 | % |
| Equity to assets ratio | | | 10.32 | % | | | 8.76 | % | | | 9.12 | % |
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall financial condition of the institution and its results of operations. The Company measures asset quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a percentage of average loans. Net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans. The following table summarizes these asset quality metrics:
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | (in thousands) | |
| Non-accrual loans (net of guaranteed portion) | | $ | 211 | | | $ | 565 | | | $ | 3,665 | |
| Non-accrual loans to total loans (including loans held for sale) | | | 0.02 | % | | | 0.06 | % | | | 0.43 | % |
| Allowance for loan losses to total loans held for investment | | | 1.15 | % | | | 1.20 | % | | | 1.23 | % |
| Allowance for loan losses to nonaccrual loans | | | 5,101.90 | % | | | 1,841.42 | % | | | 263.27 | % |
| Net (recoveries) charge-offs to average loans | | | (0.06 | )% | | | (0.04 | )% | | | (0.03 | )% |
| Impaired loans, net | | $ | 5,873 | | | $ | 8,996 | | | $ | 12,188 | |
| Impaired loans to gross loans held for investment | | | 0.63 | % | | | 1.03 | % | | | 1.47 | % |
Asset and Deposit Growth
The Company’s assets and liabilities are comprised primarily of loans and deposits, respectively. The ability to originate new loans and attract new deposits is fundamental to the Company’s asset growth. Total assets decreased to $1.09 billion at December 31, 2022 from $1.16 billion at December 31, 2021. However, during this same period, gross loans increased by $63.3 million, or 7.1%, to $955.3 million as of December 31, 2022 compared to $892.1 million as of December 31, 2021. Total deposits decreased by 7.9% to $875.1 million as of December 31, 2022 from $950.1 million as of December 31, 2021, however non-interest bearing deposits increased by 3.1% to $216.5 million at December 31, 2022 compared to $209.9 million at December 31, 2021.
RESULTS OF OPERATIONS
The following table sets forth a summary financial overview for the comparable years:
| | | Year Ended December 31, | | | Increase (Decrease) | | | Year Ended December 31, | | | Increase (Decrease) | |
| | | 2022 | | | 2021 | | | | | 2021 | | | 2020 | | | |
| | | (in thousands, except per share amounts) | |
| Consolidated Income Statement Data: | | | | | | | | | | | | | | | | | | |
| Interest income | | $ | 49,138 | | | $ | 46,078 | | | $ | 3,060 | | | $ | 46,078 | | | $ | 43,854 | | | $ | 2,224 | |
| Interest expense | | | 3,328 | | | | 3,704 | | | | (376 | ) | | | 3,704 | | | | 7,265 | | | | (3,561 | ) |
| Net interest income | | | 45,810 | | | | 42,374 | | | | 3,436 | | | | 42,374 | | | | 36,589 | | | | 5,785 | |
| Provision (credit) for loan losses | | | (195 | ) | | | (181 | ) | | | (14 | ) | | | (181 | ) | | | 1,223 | | | | (1,404 | ) |
| Net interest income after provision for loan losses | | | 46,005 | | | | 42,555 | | | | 3,450 | | | | 42,555 | | | | 35,366 | | | | 7,189 | |
| Non-interest income | | | 3,978 | | | | 3,753 | | | | 225 | | | | 3,753 | | | | 3,912 | | | | (159 | ) |
| Non-interest expenses | | | 31,272 | | | | 27,995 | | | | 3,277 | | | | 27,995 | | | | 27,523 | | | | 472 | |
| Income before provision for income taxes | | | 18,711 | | | | 18,313 | | | | 398 | | | | 18,313 | | | | 11,755 | | | | 6,558 | |
| Provision for income taxes | | | 5,262 | | | | 5,212 | | | | 50 | | | | 5,212 | | | | 3,510 | | | | 1,702 | |
| Net income | | $ | 13,449 | | | $ | 13,101 | | | $ | 348 | | | $ | 13,101 | | | $ | 8,245 | | | $ | 4,856 | |
| Earnings per share - basic | | $ | 1.54 | | | $ | 1.53 | | | $ | 0.01 | | | $ | 1.53 | | | $ | 0.97 | | | $ | 0.56 | |
| Earnings per share - diluted | | $ | 1.51 | | | $ | 1.50 | | | $ | 0.01 | | | $ | 1.50 | | | $ | 0.97 | | | $ | 0.53 | |
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the years ended:
| | | December 31, 2022 | | | December 31, 2021 | | | December 31, 2020 | |
| | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | | | Average Balance | | | Interest | | | Average Yield/Cost | |
| Interest-Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning deposits | | $ | 119,524 | | | $ | 1,226 | | | | 1.03 | % | | $ | 139,217 | | | $ | 230 | | | | 0.17 | % | | $ | 80,864 | | | $ | 285 | | | | 0.35 | % |
| Investment securities | | | 47,949 | | | | 1,255 | | | | 2.62 | % | | | 27,011 | | | | 725 | | | | 2.68 | % | | | 28,266 | | | | 621 | | | | 2.20 | % |
| Loans (1) | | | 921,638 | | | | 46,657 | | | | 5.06 | % | | | 884,601 | | | | 45,123 | | | | 5.10 | % | | | 831,863 | | | | 42,948 | | | | 5.16 | % |
| Total earnings assets | | | 1,089,111 | | | | 49,138 | | | | 4.51 | % | | | 1,050,829 | | | | 46,078 | | | | 4.38 | % | | | 940,993 | | | | 43,854 | | | | 4.66 | % |
| Nonearning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 2,169 | | | | | | | | | | | | 2,149 | | | | | | | | | | | | 3,286 | | | | | | | | | |
| Allowance for loan losses | | | (10,906 | ) | | | | | | | | | | | (10,245 | ) | | | | | | | | | | | (9,557 | ) | | | | | | | | |
| Other assets | | | 37,751 | | | | | | | | | | | | 39,826 | | | | | | | | | | | | 37,297 | | | | | | | | | |
| Total assets | | $ | 1,118,125 | | | | | | | | | | | $ | 1,082,559 | | | | | | | | | | | $ | 972,019 | | | | | | | | | |
| Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | $ | 480,472 | | | $ | 1,508 | | | | 0.31 | % | | $ | 467,720 | | | $ | 1,702 | | | | 0.36 | % | | $ | 314,659 | | | $ | 2,111 | | | | 0.67 | % |
| Savings deposits | | | 24,317 | | | | 60 | | | | 0.25 | % | | | 20,749 | | | | 76 | | | | 0.37 | % | | | 17,419 | | | | 105 | | | | 0.60 | % |
| Time deposits | | | 160,788 | | | | 943 | | | | 0.59 | % | | | 182,108 | | | | 1,057 | | | | 0.58 | % | | | 229,110 | | | | 3,267 | | | | 1.43 | % |
| Total interest-bearing deposits | | | 665,577 | | | | 2,511 | | | | 0.38 | % | | | 670,577 | | | | 2,835 | | | | 0.42 | % | | | 561,188 | | | | 5,483 | | | | 0.98 | % |
| FHLB advances and other borrowings | | | 90,795 | | | | 817 | | | | 0.90 | % | | | 94,343 | | | | 869 | | | | 0.92 | % | | | 139,795 | | | | 1,782 | | | | 1.27 | % |
| Total interest-bearing liabilities | | | 756,372 | | | | 3,328 | | | | 0.44 | % | | | 764,920 | | | | 3,704 | | | | 0.48 | % | | | 700,983 | | | | 7,265 | | | | 1.04 | % |
| Noninterest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | | 237,849 | | | | | | | | | | | | 205,820 | | | | | | | | | | | | 169,696 | | | | | | | | | |
| Other liabilities | | | 16,151 | | | | | | | | | | | | 16,049 | | | | | | | | | | | | 16,313 | | | | | | | | | |
| Stockholders' equity | | | 107,753 | | | | | | | | | | | | 95,770 | | | | | | | | | | | | 85,027 | | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 1,118,125 | | | | | | | | | | | $ | 1,082,559 | | | | | | | | | | | $ | 972,019 | | | | | | | | | |
| Net interest income and margin (2) | | | | | | $ | 45,810 | | | | 4.21 | % | | | | | | $ | 42,374 | | | | 4.03 | % | | | | | | $ | 36,589 | | | | 3.89 | % |
| Net interest spread (3) | | | | | | | | | | | 4.07 | % | | | | | | | | | | | 3.90 | % | | | | | | | | | | | 3.62 | % |
| (1) | Includes nonaccrual loans and loans held for sale, and is net of deferred fees, related direct costs, premiums, and discounts, but excludes the allowance for loan losses. Interest income includes net accretion/(amortization) of deferred fees, costs, premiums, and discounts of $0.91 million, $3.35 million, and $1.09 million for the years ended December 31, 2022, 2021, and 2020, respectively. |
| (2) | Net interest margin is computed by dividing net interest income by total average earning assets. |
| (3) | Net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities. |
The table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities. For purposes of this table, nonaccrual loans have been included in the average loan balances.
| | | Year Ended December 31, 2022 versus 2021 | | | Year Ended December 31, 2021 versus 2020 | |
| | | Increase (Decrease) Due to Changes in (1) | | | Increase (Decrease) Due to Changes in (1) | |
| | | Volume | | | Rate | | | Total | | | Volume | | | Rate | | | Total | |
| | | (in thousands) | | | (in thousands) | |
| Interest income: | | | | | | | | | | | | | | | | | | |
| Interest-earning deposits | | $ | (33 | ) | | $ | 1,029 | | | $ | 996 | | | $ | 96 | | | $ | (151 | ) | | $ | (55 | ) |
| Investment securities | | | 559 | | | | (29 | ) | | | 530 | | | | (34 | ) | | | 138 | | | | 104 | |
| Loans | | | 1,901 | | | | (367 | ) | | | 1,534 | | | | 2,677 | | | | (502 | ) | | | 2,175 | |
| Total interest income | | | 2,427 | | | | 633 | | | | 3,060 | | | | 2,739 | | | | (515 | ) | | | 2,224 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing demand deposits | | | 46 | | | | (240 | ) | | | (194 | ) | | | 556 | | | | (965 | ) | | | (409 | ) |
| Savings | | | 13 | | | | (29 | ) | | | (16 | ) | | | 12 | | | | (41 | ) | | | (29 | ) |
| Time deposits | | | (129 | ) | | | 15 | | | | (114 | ) | | | (272 | ) | | | (1,938 | ) | | | (2,210 | ) |
| Total interest-bearing deposits | | | (70 | ) | | | (254 | ) | | | (324 | ) | | | 296 | | | | (2,944 | ) | | | (2,648 | ) |
| FHLB advances and other borrowings | | | (34 | ) | | | (18 | ) | | | (52 | ) | | | (421 | ) | | | (492 | ) | | | (913 | ) |
| Total interest expense | | | (104 | ) | | | (272 | ) | | | (376 | ) | | | (125 | ) | | | (3,436 | ) | | | (3,561 | ) |
| Net increase | | $ | 2,531 | | | $ | 905 | | | $ | 3,436 | | | $ | 2,864 | | | $ | 2,921 | | | $ | 5,785 | |
| (1) | Changes due to both volume and rate have been allocated proportionately between changes in volume and rate. |
Comparison of interest income, interest expense and net interest margin
The Company’s primary source of revenue is interest income. Interest income for the year ended December 31, 2022 was $49.1 million, an increase from $46.1 million for the year ended December 31, 2021. The average yield on interest-earning assets during 2022 was 4.51%, compared to 4.38% during the prior year. The increase in interest income during 2022 compared to 2021 was the result of an increase of $1.0 million in interest income on loans. The increase in interest income on loans was mainly the result of an increase in the average balance of loans outstanding, which increased by $37.0 million during 2022. The increase in interest income was also positively impacted by increases of $1.5 million and $0.5 million in interest income on interest-earning deposits and in investment securities, respectively. The increase in interest income on interest-earning deposits was mainly due to an increase in the rate paid on those balances to 1.03% for 2022 compared to 0.17% in 2021, while the increase in interest income on investment securities was the result of an increase of $20.9 million in the average balance of investment securities balances. The increases in interest income on interest-earning deposits and federal fund sold and on investment securities were largely the result of an increase in the Federal Reserve's target fed funds rate from 0.00%-0.25% at December 31, 2021 to 4.25%-4.50% at December 31, 2022. These increases were partially offset by a decrease of $2.7 million in the accretion of deferred fee income related to PPP loans during 2022, which also negatively impacted the average yield on loans.
Interest expense for the year ended December 31, 2022 decreased compared to the same period in 2021 by $0.4 million to $3.3 million in 2022 compared to $3.7 million in 2021. The decrease during the year was principally the result of the decrease in rates paid on interest-bearing demand deposits of 5 basis points and a $21.3 million decrease in the average balance of time deposits. The average cost of total interest-bearing deposits also decreased to 38 basis points in 2022 compared to 42 basis points in 2021.
The net impact of these changes was to increase net interest margin during 2022 to 4.21% compared to 4.03% for 2021. Net interest income was $45.8 million for the year ended December 31, 2022, which represented a $3.4 million increase from net interest income of $42.4 million for the year ended December 31, 2021.
Provision for loan losses
The provision for loan losses in each period is reflected as a charge (or credit) against earnings in that period. The provision for loan losses (credit) is equal to the amount required to maintain the allowance for loan losses at a level that is adequate to absorb probable losses inherent in the loan portfolio. The provision (credit) for loan losses was ($195,000) in 2022 compared to ($181,000) in 2021. The provision (credit) for loan losses for 2022 resulted primarily from net recoveries of $0.6 million, partially offset by the need for additional allowance as a result of growth of $65.6 million in the gross loan portfolio during the year. The provision (credit) for 2021 was primarily the result of $0.4 million in net recoveries and a change in loan portfolio mix. As a result of improvements in credit quality, decreased historical loss rates, and net recoveries for the year, the ratio of the allowance for loan losses to loans held for investment decreased to 1.15% at December 31, 2022 from 1.20% at December 31, 2021.
The percentage of non-accrual loans (net of government guarantees) to the total loan portfolio has decreased to 0.02% as of December 31, 2022 from 0.06% at December 31, 2021 primarily due to a decrease in nonaccrual manufactured housing loans.
The allowance for loan losses compared to net non-accrual loans has increased to 5,101.90% as of December 31, 2022 from 1,841.42% as of December 31, 2021. Total past due loans were $2.9 million as of December 31, 2022 and $0.7 million as of December 31, 2021, the majority of which represented loans past due less than 60 days at both period ends.
Non-interest Income
The Company earned non-interest income primarily through fees related to services provided to loan and deposit customers. The following tables present a summary of non-interest income for the periods presented:
| | | Year Ended December 31, | | | Increase (Decrease) | | | Year Ended December 31, | | | Increase (Decrease) | |
| | | 2022 | | | 2021 | | | | | 2021 | | | 2020 | | | |
| | | (in thousands) | |
| Other loan fees | | $ | 1,161 | | | $ | 1,349 | | | $ | (188 | ) | | $ | 1,349 | | | $ | 1,546 | | | $ | (197 | ) |
| Gains from loan sales, net | | | 257 | | | | 475 | | | | (218 | ) | | | 475 | | | | 920 | | | | (445 | ) |
| Document processing fees | | | 422 | | | | 512 | | | | (90 | ) | | | 512 | | | | 513 | | | | (1 | ) |
| Service charges | | | 438 | | | | 302 | | | | 136 | | | | 302 | | | | 354 | | | | (52 | ) |
| Other | | | 1,700 | | | | 1,115 | | | | 585 | | | | 1,115 | | | | 579 | | | | 536 | |
| Total non-interest income | | $ | 3,978 | | | $ | 3,753 | | | $ | 225 | | | $ | 3,753 | | | $ | 3,912 | | | $ | (159 | ) |
Total non-interest income increased $0.2 million for 2022 compared to 2021. The increase was primarily due to the recognition of $0.5 million of proceeds from a bank owned life insurance policy and a $1.0 million recapture of expenses from a lawsuit settlement related to a foreclosed asset during the first quarter of 2022, which were included in other income. This increase was partially offset by a decrease in the gain on loan sales due to lower loan sale volume, a decrease in other loan fees as a result of lower fee income from loans sold to Farmer Mac, and a decrease in the valuation of equity securities carried at fair value on a recurring basis of $121 thousand included in other income.
Non-Interest Expenses
The following tables present a summary of non-interest expenses for the periods presented:
| | | Year Ended December 31, | | | Increase (Decrease) | | | Year Ended December 31, | | | Increase (Decrease) | |
| | | 2022 | | | 2021 | | | | | 2021 | | | 2020 | | | |
| | | (in thousands) | |
| Salaries and employee benefits | | $ | 19,637 | | | $ | 18,624 | | | $ | 1,013 | | | $ | 18,624 | | | $ | 18,287 | | | $ | 337 | |
| Occupancy expense, net | | | 4,180 | | | | 3,254 | | | | 926 | | | | 3,254 | | | | 3,036 | | | | 218 | |
| Professional services | | | 2,923 | | | | 1,645 | | | | 1,278 | | | | 1,645 | | | | 1,801 | | | | (156 | ) |
| Advertising and marketing | | | 921 | | | | 734 | | | | 187 | | | | 734 | | | | 673 | | | | 61 | |
| Data processing | | | 1,265 | | | | 1,215 | | | | 50 | | | | 1,215 | | | | 1,055 | | | | 160 | |
| Depreciation | | | 711 | | | | 780 | | | | (69 | ) | | | 780 | | | | 821 | | | | (41 | ) |
| FDIC assessment | | | 577 | | | | 485 | | | | 92 | | | | 485 | | | | 565 | | | | (80 | ) |
| Other | | | 1,058 | | | | 1,258 | | | | (200 | ) | | | 1,258 | | | | 1,285 | | | | (27 | ) |
| Total non-interest expenses | | $ | 31,272 | | | $ | 27,995 | | | $ | 3,277 | | | $ | 27,995 | | | $ | 27,523 | | | $ | 472 | |
Total non-interest expenses for the year ended December 31, 2022 compared to 2021 increased by $3.3 million primarily due to additional salaries and employee benefits, professional services expenses, and occupancy expenses. Salaries and employee benefits increased $1.0 million primarily due to increased costs of employee retention due to wage competition in our target markets. Professional services expenses increased by $1.3 million primarily due to costs incurred related to testing the effectiveness of the Company’s internal control structure and procedures for financial reporting as required for institutions over $1 billion in total assets, and to support strategic and technology initiatives. Occupancy expenses increased due to the outsourcing of additional software and IT services during 2022.
Income Taxes
The income tax provision for 2022 was $5.3 million compared to $5.2 million in 2021. The effective income tax rate was 28.1% and 28.5% for 2022 and 2021, respectively.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and their respective tax basis, including operating losses and tax credit carryforwards. Net deferred tax assets of $5.1 million at December 31, 2022 are reported in the consolidated balance sheets as a component of other assets.
Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. A valuation allowance is established for deferred tax assets if, based on weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Management evaluates the Company’s deferred tax assets for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
There was no valuation allowance on deferred tax assets at December 31, 2022 and 2021. The Company continues to be profitable, and management believes that the Company will generate sufficient taxable income in future periods to utilize deferred tax assets before they expire.
ASC 740 also prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company undergoes a process to evaluate whether income tax accruals are in accordance with ASC 740 guidance on uncertain tax positions. There were no uncertain tax positions at December 31, 2022 and 2021.
Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 13 - Income Taxes in the consolidated financial statements.
BALANCE SHEET
Total assets decreased $65.6 million to $1.09 billion at December 31, 2022 compared to $1.16 billion at December 31, 2021. The majority of the decrease was related to a decrease in cash and cash equivalents, which decreased by $143.7 million during the year. The decrease in cash and cash equivalents was offset by an increase in loans held for investment of $65.6 million, primarily due to increases in commercial real estate loans (which include land, construction and SBA 504 loans) and manufactured housing loans. Total commercial real estate loans increased by 13.4% to $545.3 million at December 31, 2022 compared to $480.8 million at December 31, 2021, and comprised 57.0% of the total loan held for investment portfolio at December 31, 2022. Manufactured housing loans increased by 6.2% to $315.8 million at December 31, 2022 compared to $297.4 million at December 31, 2021, and represented 33.0% of the total loan portfolio. SBA loans held for investment decreased by $20.2 million during 2022 primarily due to a reduction in outstanding PPP loans.
Total liabilities decreased $76.8 million, or 7.3% to $978.9 million at December 31, 2022 from $1.06 billion at December 31, 2021. The majority of this decrease was due to a reduction in deposit balances, specifically interest-bearing demand deposits. Total deposits decreased by $75.0 million to $875.1 million at December 31, 2022 from $950.1 million at December 31, 2021. Interest-bearing demand deposits were $428.2 million at December 31, 2022, a decrease of $109.3 million from $537.5 million at December 31, 2021. The decrease was a result of both planned and unplanned withdrawals due to competition that put pressure on pricing and client retention. This decrease was offset by increases of $27.9 million and $6.6 million in total certificates of deposits and non-interest bearing demand deposits, respectively during 2022.
Total stockholders’ equity increased to $112.7 million at December 31, 2022 from $101.4 million at December 31, 2021. This increase was primarily from 2022 net income of $13.4 million reduced by common stock dividends declared and paid in 2022 of $2.6 million. The increase was also partially offset by a decrease in accumulated other comprehensive income (loss) of $0.9 million due to the decline in the fair value of investment securities available-for-sale.
The following tables present the Company’s average balances for the dates indicated:
| | | For the Years Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| ASSETS: | | (dollars in thousands) | |
| Cash and due from banks | | $ | 2,169 | | | | 0.2 | % | | $ | 2,149 | | | | 0.2 | % | | $ | 3,286 | | | | 0.3 | % |
| Interest-earning deposits in other institutions | | | 119,524 | | | | 10.7 | % | | | 139,217 | | | | 12.9 | % | | | 80,864 | | | | 8.3 | % |
| Investment securities available-for-sale | | | 40,552 | | | | 3.6 | % | | | 18,878 | | | | 1.7 | % | | | 18,053 | | | | 1.9 | % |
| Investment securities held-to-maturity | | | 2,668 | | | | 0.2 | % | | | 3,443 | | | | 0.3 | % | | | 5,415 | | | | 0.6 | % |
| Investment securities measured at fair value | | | 224 | | | | 0.0 | % | | | 199 | | | | 0.0 | % | | | 135 | | | | 0.0 | % |
| Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") stock | | | 4,505 | | | | 0.4 | % | | | 4,491 | | | | 0.4 | % | | | 4,663 | | | | 0.5 | % |
| Loans held for sale and loans held for investment, net | | | 910,732 | | | | 81.5 | % | | | 874,356 | | | | 80.9 | % | | | 822,306 | | | | 84.6 | % |
| Servicing assets | | | 1,575 | | | | 0.1 | % | | | 1,525 | | | | 0.1 | % | | | 1,047 | | | | 0.1 | % |
| Other assets acquired through foreclosure, net | | | 2,304 | | | | 0.2 | % | | | 2,580 | | | | 0.2.0 | % | | | 2,681 | | | | 0.3.0 | % |
| Premises and equipment, net | | | 6,412 | | | | 0.6 | % | | | 6,870 | | | | 0.6 | % | | | 7,383 | | | | 0.8 | % |
| Other assets | | | 27,460 | | | | 2.5 | % | | | 28,851 | | | | 2.7 | % | | | 26,186 | | | | 2.6 | % |
| TOTAL ASSETS | | $ | 1,118,125 | | | | 100.0 | % | | $ | 1,082,559 | | | | 100.0 | % | | $ | 972,019 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest-bearing demand | | $ | 237,849 | | | | 21.3 | % | | $ | 205,820 | | | | 19.0 | % | | $ | 169,696 | | | | 17.5 | % |
| Interest-bearing demand | | | 480,472 | | | | 43.0 | % | | | 467,720 | | | | 43.3 | % | | | 314,659 | | | | 32.4 | % |
| Savings | | | 24,317 | | | | 2.2 | % | | | 20,749 | | | | 1.9 | % | | | 17,419 | | | | 1.8 | % |
| Time certificates over $250,000 | | | 4,769 | | | | 0.4 | % | | | 13,965 | | | | 1.3 | % | | | 82,583 | | | | 8.5 | % |
| Other time certificates | | | 156,019 | | | | 14.0 | % | | | 168,143 | | | | 15.5 | % | | | 146,527 | | | | 15.0 | % |
| Total deposits | | | 903,426 | | | | 80.9 | % | | | 876,397 | | | | 81.0 | % | | | 730,884 | | | | 75.2 | % |
| FHLB advances and other borrowings | | | 90,795 | | | | 8.1 | % | | | 94,343 | | | | 8.7 | % | | | 139,795 | | | | 14.4 | % |
| Other liabilities | | | 16,151 | | | | 1.4 | % | | | 16,049 | | | | 1.5 | % | | | 16,313 | | | | 1.6 | % |
| Total liabilities | | | 1,010,372 | | | | 90.4 | % | | | 986,789 | | | | 91.2 | % | | | 886,992 | | | | 91.2 | % |
| STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | 45,186 | | | | 4.0 | % | | | 43,627 | | | | 4.0 | % | | | 42,747 | | | | 4.4 | % |
| Retained earnings | | | 62,940 | | | | 5.6 | % | | | 52,059 | | | | 4.8 | % | | | 42,340 | | | | 4.4 | % |
| Accumulated other comprehensive (loss) income | | | (373 | ) | | | 0.0 | % | | | 84 | | | | 0.0 | % | | | (60 | ) | | | 0.0 | % |
| Total stockholders' equity | | | 107,753 | | | | 9.6 | % | | | 95,770 | | | | 8.8 | % | | | 85,027 | | | | 8.8 | % |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 1,118,125 | | | | 100.0 | % | | $ | 1,082,559 | | | | 100.0 | % | | $ | 972,019 | | | | 100.0 | % |
Loans Held for Sale
As of December 31, 2022 and 2021, the Company the Company had approximately $5.2 million and $6.3 million, respectively, of SBA loans included in loans held for sale. The Company’s agricultural lending program includes loans for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment, and livestock. The primary products are supported by guarantees issued from the USDA, FSA, and the USDA Business and Industry loan program. As of December 31, 2022 and 2021, the Company had $15.9 million and $17.1 million of USDA loans included in loans held for sale, respectively.
Loan Portfolio
Market Summary
Total gross loans increased by $63.2 million during 2022 to $956.2 million. The majority of this increase was driven by growth in the commercial real estate and manufactured housing loan portfolios. Total manufactured housing loans increased by $18.5 million and total commercial real estate loans increased by $64.5 million in 2022. SBA loans decreased by $20.2 million as a result of the forgiveness or repayment of PPP loans during 2022.
The table below summarizes the distribution of the Company’s loans (including loans held for sale) at the year-end:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| | | (dollars in thousands) | |
| Manufactured housing | | $ | 315,825 | | | $ | 297,363 | |
| Commercial real estate | | | 545,317 | | | | 480,801 | |
| Commercial | | | 59,070 | | | | 55,287 | |
| SBA | | | 3,482 | | | | 23,659 | |
| HELOC | | | 2,613 | | | | 3,579 | |
| Single family real estate | | | 8,709 | | | | 8,749 | |
| Consumer | | | 107 | | | | 109 | |
| Loans held for sale | | | 21,033 | | | | 23,408 | |
| Total loans | | | 956,156 | | | | 892,955 | |
| Less: | | | | | | | | |
| Allowance for loan losses | | | 10,765 | | | | 10,404 | |
| Deferred fees, net | | | 787 | | | | 838 | |
| Discount on SBA loans | | | 27 | | | | 34 | |
| Total loans, net | | $ | 944,577 | | | $ | 881,679 | |
| Percentage to Total Loans: | | | | | | | | |
| Manufactured housing | | | 33.0 | % | | | 33.3 | % |
| Commercial real estate | | | 57.0 | % | | | 53.9 | % |
| Commercial | | | 6.2 | % | | | 6.2 | % |
| SBA | | | 0.4 | % | | | 2.6 | % |
| HELOC | | | 0.3 | % | | | 0.4 | % |
| Single family real estate | | | 0.9 | % | | | 1.0 | % |
| Consumer | | | 0.0 | % | | | 0.0 | % |
| Loans held for sale | | | 2.2 | % | | | 2.6 | % |
| Total | | | 100.0 | % | | | 100.0 | % |
Commercial Loans
Commercial loans consist of term loans and revolving business lines of credit. Under the terms of the revolving lines of credit, the Company grants a maximum loan amount, which remains available to the business during the loan term. The collateral for these loans typically Uniform Commercial Code (“UCC-1”) lien filings, real estate, and personal guarantees. The Company does not extend material loans of this type in excess of five years.
Commercial Real Estate
Commercial real estate and construction loans are primarily made for the purpose of purchasing, improving or constructing, commercial and industrial properties. This loan category also includes SBA 504 loans and land loans.
Commercial and industrial real estate loans are primarily secured by nonresidential property. Office buildings or other commercial property primarily secure these types of loans. Loan to appraised value ratios on nonresidential real estate loans are generally restricted to 75% of appraised value of the underlying real property if occupied by the owner or owner’s business; otherwise, these loans are generally restricted to 70% of appraised value of the underlying real property.
The Company makes real estate construction loans on commercial properties and single-family dwellings for speculative purposes. These loans are collateralized by first and second trust deeds on real property. Construction loans are generally written with terms of six to eighteen months and usually do not exceed a loan to appraised value of 75%.
SBA 504 loans are made in conjunction with Certified Development Companies. These loans are granted to purchase or construct real estate or acquire machinery and equipment. The loan is structured with a conventional first trust deed provided by a private lender and a second trust deed which is funded through the sale of debentures. The predominant structure is terms of 10% down payment, 50% conventional first loan and 40% debenture. Construction loans of this type must provide additional collateral to reduce the loan-to-value to approximately 75%. Conventional and investor loans are sometimes funded by our secondary-market partners and CWB receives a premium for these transactions.
SBA Loans
SBA loans consist of SBA 7(a), Business and Industry loans (“B&I”), and SBA Paycheck Protection Program (PPP) loans. The SBA 7(a) loan proceeds are used for working capital, machinery and equipment purchases, land and building purposes, leasehold improvements and debt refinancing. At present, the SBA guarantees as much as 85% on loans up to $150,000 and 75% on loans more than $150,000. The SBA’s maximum exposure amount is $3,750,000. The Company may sell a portion of the loans, however, under the SBA 7(a) loan program; the Company is required to retain a minimum of 5% of the principal balance of each loan it sells into the secondary market.
B&I loans are guaranteed by the U.S. Department of Agriculture. The maximum guaranteed amount is 60% to 80% depending on the size of the loan. B&I loans are similar to the SBA 7(a) loans but are made to businesses in designated rural areas. These loans can also be sold into the secondary market.
In April of 2020, under the CARES Act, CWB began offering SBA Paycheck Protection Program (PPP) loans. The loans are forgivable in whole or in part and carry a fixed rate of 1% for a term of two years (loans made before June 5, 2020) or five years (loans made after June 5, 2020), if not forgiven, in whole or in part. Payments are deferred until either the date on which the SBA remits the amount of the forgiveness proceeds to the lender or the date that is 10 months after the day of the covered period if the borrower does not apply for forgiveness within the 10-month period.
Agricultural Loans for Real Estate and Operating Lines
The Company has an agricultural lending program for agricultural land, agricultural operational lines, and agricultural term loans for crops, equipment and livestock. The primary product is supported by guarantees issued from the U.S. Department of Agriculture (“USDA”), Farm Service Agency (“FSA”), and the USDA B&I loan program. The FSA loans typically have a 90% guarantee up to $2,037,000 (amount adjusted annually based on inflation) for up to 40 years, but not always. The Company had $28.3 million of commercial agriculture loans at December 31, 2022, of which $15.9 million had FSA guarantees and were classified as held for sale.
CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) lender under the Farmer Mac I and Farmer Mac II Programs. Under the Farmer Mac I program, loans are sourced by CWB, underwritten, funded and serviced by Farmer Mac. CWB receives an origination fee and an ongoing field servicing fee of 25 basis points to 115 basis points for maintaining the relationship with the borrower and performing certain loan compliance monitoring, and other duties as directed by the Central Servicer.
Manufactured Housing Loans
CWB originates loans secured by manufactured homes located in approved rental, co-operative ownership, condominium and planned unit development mobile home parks in Santa Barbara, Ventura and San Luis Obispo Counties as well as along the California coast from San Diego to San Francisco. The loans are made to borrowers for purchasing or refinancing new or existing manufactured homes. The loans are made under either fixed rate programs for terms of 10 to 20 years or adjustable-rate programs with terms of 25 to 30 years. The adjustable-rate loans generally have an initial fixed rate period of five years and then adjust annually subject to interest rate caps.
HELOC
Home equity lines of credit (“HELOC”) held at the Bank are lines of credit collateralized by residential real estate. Typically, HELOCs are collateralized by a second deed of trust. The combined loan-to-value, first trust deed and second trust deed, are not to exceed 75% on all HELOCs. The Bank is not actively originating new HELOCs.
Other Installment Loans
Installment loans consist of automobile and general-purpose loans made to individuals.
Single Family Real Estate Loans
Until the third quarter of 2015, the Company originated loans that consisted of first and second mortgage loans secured by trust deeds on one-to-four family homes. These loans were made to borrowers for purposes such as purchasing a home, refinancing an existing home, interest rate reduction or home improvement.
Loan Maturities and Sensitivity to Interest Rates
The following table sets forth the amount of loans (including loans held for sale) outstanding by type of loan as of December 31, 2022 that were contractually due in one year or less, more than one year and less than five years, and more than five years based on remaining scheduled repayments of principal. Lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less. The tables also present an analysis of the rate structure for loans within the same maturity time periods. Actual cash flows from these loans may differ materially from contractual maturities due to prepayment, refinancing or other factors.
| | | Due in One Year or Less | | | Due After One Year to Five Years | | | Due After Five to 15 Years | | | Due After 15 Years | | | Total | |
| | | | | | (in thousands) | |
| Manufactured housing | | | | | | | | | | | | | | | |
| Floating rate | | $ | 6,910 | | | $ | 32,134 | | | $ | 104,923 | | | $ | 61,027 | | | $ | 204,994 | |
| Fixed rate | | | 6,463 | | | | 27,293 | | | | 62,415 | | | | 14,660 | | | | 110,831 | |
| Commercial real estate | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 42,497 | | | | 90,322 | | | | 202,680 | | | | 734 | | | | 336,233 | |
| Fixed rate | | | 7,448 | | | | 57,032 | | | | 144,604 | | | | — | | | | 209,084 | |
| Commercial | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 16,644 | | | | 21,643 | | | | 9,193 | | | | 12,815 | | | | 60,295 | |
| Fixed rate | | | 3,958 | | | | 8,339 | | | | 2,337 | | | | — | | | | 14,634 | |
| SBA | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 1,020 | | | | 3,011 | | | | 3,752 | | | | 873 | | | | 8,656 | |
| Fixed rate | | | — | | | | — | | | | — | | | | — | | | | — | |
| HELOC | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 57 | | | | 2,556 | | | | — | | | | — | | | | 2,613 | |
| Fixed rate | | | — | | | | — | | | | — | | | | — | | | | — | |
| Single family real estate | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | 289 | | | | 1,546 | | | | 4,295 | | | | 613 | | | | 6,743 | |
| Fixed rate | | | 156 | | | | 700 | | | | 1,047 | | | | 63 | | | | 1,966 | |
| Consumer | | | | | | | | | | | | | | | | | | | | |
| Floating rate | | | — | | | | — | | | | — | | | | — | | | | — | |
| Fixed rate | | | 59 | | | | — | | | | — | | | | 48 | | | | 107 | |
| Total | | $ | 85,501 | | | $ | 244,576 | | | $ | 535,246 | | | $ | 90,833 | | | $ | 956,156 | |
Note that net deferred loan fees and discounts on SBA loans totaling $(0.8) million were not included in the above loan balances.
At December 31, 2022, total loans consisted of 64.8% with floating rates and 35.2% with fixed rates. Variable rate manufactured housing loans, which generally have an initial fixed rate period for the first five years, are included in floating rate loans.
The following table presents loans due after one year as of December 31, 2022:
| | | Fixed Rate | | | Variable Rate | | | Total | |
| | | (in thousands) | |
| | | | | | | | | | |
| Manufactured housing | | $ | 104,368 | | | $ | 198,084 | | | $ | 302,452 | |
| Commercial real estate | | | 201,636 | | | | 293,736 | | | | 495,372 | |
| Commercial | | | 10,676 | | | | 43,651 | | | | 54,327 | |
| SBA | | | — | | | | 7,636 | | | | 7,636 | |
| HELOC | | | — | | | | 2,556 | | | | 2,556 | |
| Single family real estate | | | 1,810 | | | | 6,454 | | | | 8,264 | |
| Consumer | | | 48 | | | | — | | | | 48 | |
| Total | | $ | 318,538 | | | $ | 552,117 | | | $ | 870,655 | |
High Risk Industries Impacted By COVID-19
The industries most heavily impacted include retail, healthcare, hospitality, schools, and energy. The Company’s management team has evaluated the loans related to the affected industries and at December 31, 2022, the Bank’s loans to these industries were $220.1 million, which is 23.0% of our $955.3 million loan portfolio.
Importantly, of the selected industry loans, only a de minimis amount are on non-accrual status. Also, of the selected industries loans, $7.1 million, or 3.2%, are considered to be classified. Lastly, the Bank has not made payment accommodations to any of these loan borrowers as of December 31, 2022.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors concentrations within selected categories such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas. As of December 31, 2022 and 2021, manufactured housing loans comprised 33.0% and 33.3%, of total loans, respectively. As of December 31, 2022 and 2021, commercial real estate loans accounted for approximately 57.0% and 53.9% of total loans, respectively. Approximately 24.5% and 27.8% of these commercial real estate loans were owner occupied at December 31, 2022 and 2021, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 50.4% and 53.7% at December 31, 2022 and 2021, respectively. The Company was within established policy limits at December 31, 2022 and 2021.
Interest Reserves
Interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and land development loan. The Company’s practice is to monitor the construction, sales and/or leasing progress to determine the feasibility of ongoing construction and development projects. If, at any time during the life of the loan, the project is determined not to be viable, the Company discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and/or legal action as deemed appropriate. At December 31, 2022, the Company had 14 loans with an outstanding balance of $38.4 million with available interest reserves of $4.2 million. Total construction and land loans are approximately 5.2% and 3.7% of the Company’s loan portfolio at December 31, 2022 and 2021, respectively.
Impaired loans
A loan is considered impaired when, based on current information, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and/or interest payments. Loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considers the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company uses the fair value of collateral method to measure impairment. All other loans are measured for impairment based on the present value of future cash flows. Impairment is measured on a loan-by-loan basis for all impaired loans in the portfolio.
A loan is considered a troubled debt restructured loan (“TDR”) when concessions have been made to the borrower and the borrower is in financial difficulty. These concessions include but are not limited to term extensions, rate reductions and principal reductions. Forgiveness of principal is rarely granted and modifications for all classes of loans are predominantly term extensions. TDR loans are also considered impaired.
The recorded investment in loans that are considered impaired is as follows:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| | | (in thousands) | |
| Impaired loans with specific valuation allowances | | $ | 3,443 | | | $ | 4,487 | |
| Impaired loans without specific valuation allowances | | | 2,614 | | | | 4,749 | |
| Specific valuation allowance related to impaired loans | | | (184 | ) | | | (240 | ) |
| Impaired loans, net | | $ | 5,873 | | | $ | 8,996 | |
| | | | | | | | | |
| Average investment in impaired loans | | $ | 6,958 | | | $ | 10,858 | |
The following schedule summarizes impaired loans and the related allowance for loan losses allocated to those impaired loans by loan class as of the periods indicated:
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real
Estate | | | Consumer | | | Total Loans | |
| Impaired Loans as of December 31, 2022: | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 2,918 | | | $ | 209
| | | $ | 67
| | | $ | 41 | | | $ | — | | | $ | 208 | | | $ | — | | | $ | 3,443 | |
| Impaired loans with no allowance recorded | | | 1,166 | | | | — | | | | 1,297 | | | | — | | | | — | | | | 151 | | | | — | | | | 2,614 | |
| Total loans individually evaluated for impairment | | | 4,084 | | | | 209 | | | | 1,364 | | | | 41 | | | | — | | | | 359 | | | | — | | | | 6,057 | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | | 157 | | | | 18 | | | | — | | | | 1 | | | | — | | | | 8 | | | | — | | | | 184 | |
| Impaired loans with no allowance recorded | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 157 | | | | 18 | | | | — | | | | 1 | | | | — | | | | 8 | | | | — | | | | 184 | |
| Total impaired loans, net | | $ | 3,927 | | | $ | 191 | | | $ | 1,364 | | | $ | 40 | | | $ | — | | | $ | 351 | | | $ | — | | | $ | 5,873 | |
None of the impaired loans shown above are government guaranteed.
| | | Manufactured Housing | | | Commercial Real Estate | | | Commercial | | | SBA | | | HELOC | | | Single Family Real Estate | | | Consumer | | | Total Loans | |
| Impaired Loans as of December 31, 2021: | | (in thousands) | |
| Recorded Investment: | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | $ | 3,563 | | | $ | 220 | | | $ | 85 | | | $ | 194 | | | $ | — | | | $ | 425 | | | $ | — | | | $ | 4,487 | |
| Impaired loans with no allowance recorded | | | 1,358 | | | | 1,402 | | | | 1,505 | | | | 226 | | | | — | | | | 258 | | | | — | | | | 4,749 | |
| Total loans individually evaluated for impairment | | | 4,921 | | | | 1,622 | | | | 1,590 | | | | 420 | | | | — | | | | 683 | | | | — | | | | 9,236 | |
| Related Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired loans with an allowance recorded | | | 210 | | | | 17 | | | | — | | | | 1 | | | | — | | | | 12 | | | | — | | | | 240 | |
| Impaired loans with no allowance recorded | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total loans individually evaluated for impairment | | | 210 | | | | 17 | | | | — | | | | 1 | | | | — | | | | 12 | | | | — | | | | 240 | |
| Total impaired loans, net | | $ | 4,711 | | | $ | 1,605 | | | $ | 1,590 | | | $ | 419 | | | $ | — | | | $ | 671 | | | $ | — | | | $ | 8,996 | |
Included in the above amounts are $0.3 million of impaired loans that are government guaranteed.
Total impaired loans decreased by $3.2 million at December 31, 2022 compared to December 31, 2021. Impaired commercial real estate loans decreased by $1.4 million, impaired manufactured housing loans decreased by $0.8 million, impaired SBA loans decreased by $0.4 million, impaired single family loans decreased by $0.3 million, and impaired commercial loans decreased by $0.2 million. The reduction in impaired loans was mainly due to payoffs or paydowns of impaired loan balances of $3.0 million during the year ended December 31, 2022.
The following schedule reflects recorded investment in certain types of loans at the dates indicated:
| | | For the Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | (in thousands) | |
| Total nonaccrual loans | | $ | 211 | | | $ | 565 | | | $ | 3,872 | |
| Government guaranteed portion of loans included above | | | — | | | | — | | | | (207 | ) |
| Total nonaccrual loans without government guarantees | | $ | 211 | | | $ | 565 | | | $ | 3,665 | |
| | | | | | | | | | | | | |
| Allowance for loan losses to total nonaccrual loans | | | 5,102 | % | | | 1,841 | % | | | 263 | % |
| Nonaccrual loans to total loans outstanding | | | 0.02 | % | | | 0.06 | % | | | 0.43 | % |
| | | | | | | | | | | | | |
| TDR loans, gross | | $ | 5,996 | | | $ | 8,565 | | | $ | 11,141 | |
| Loans 30 through 89 days past due with interest accruing | | $ | 2,880 | | | $ | 704 | | | $ | 1,889 | |
| Allowance for loan losses to gross loans held for investment | | | 1.15 | % | | | 1.20 | % | | | 1.23 | % |
| Allowance for loan losses to impaired loans | | | 177.73 | % | | | 112.65 | % | | | 81.56 | % |
| Interest income recognized on impaired loans | | $ | 501 | | | $ | 660 | | | $ | 758 | |
| Interest income that would have been recorded under the original terms of nonaccrual loans | | $ | 38 | | | $ | 154 | | | $ | 254 | |
The accrual of interest is discontinued when substantial doubt exists as to collectability of the loan; generally, at the time the loan is 90 days delinquent. Any unpaid but accrued interest is reversed at that time. Thereafter, interest income is usually no longer recognized on the loan. Interest income may be recognized on impaired loans to the extent they are not past due by 90 days. Interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table summarizes the composition of nonaccrual loans:
| | | At December 31, 2022 | | | At December 31, 2021 | |
| | | Nonaccrual Balance | | | % | | | Percent of Total Loans | | | Nonaccrual Balance | | | % | | | Percent of Total Loans | |
| | | (dollars in thousands) | |
| Manufactured housing | | $ | 61 | | | | 28.91 | % | | | 0.01 | % | | $ | 306 | | | | 54.16 | % | | | 0.03 | % |
| SBA | | | — | | | | 0.00 | % | | | 0.00 | % | | | 1 | | | | 0.18 | % | | | 0.00 | % |
| Single family real estate | | | 150 | | | | 71.09 | % | | | 0.01 | % | | | 258 | | | | 45.66 | % | | | 0.03 | % |
| Total nonaccrual loans | | $ | 211 | | | | 100.00 | % | | | 0.02 | % | | $ | 565 | | | | 100.00 | % | | | 0.06 | % |
Total nonaccrual balances decreased $0.4 million to $0.2 million at December 31, 2022, from $0.6 million at December 31, 2021. None of the nonaccrual loans were guaranteed by the U.S. government or its agencies at December 31, 2022 or 2021. The percentage of nonaccrual loans to the total loan portfolio has decreased to 0.02% as of December 31, 2022 from 0.06% at December 31, 2021.
CWB or the SBA repurchases the guaranteed portion of SBA loans from investors when those loans become past due 120 days. After the foreclosure and collection process is complete, the SBA reimburses CWB for this principal balance. Therefore, although these balances do not earn interest during this period, they generally do not result in a loss of principal to CWB.
Net Loan (Recoveries) Charge-offs
The following table reflects net (recoveries) charge-offs by portfolio type for the periods indicated.
| | | December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | |
| | | (dollars in thousands) | |
| Net charge-offs (recoveries): | | | | | | | | | |
| Manufactured housing | | $ | (139 | ) | | $ | (218 | ) | | $ | (27 | ) |
| Commercial real estate | | | (80 | ) | | | (80 | ) | | | (80 | ) |
| Commercial | | | (190 | ) | | | (40 | ) | | | (133 | ) |
| SBA | | | (134 | ) | | | (47 | ) | | | (7 | ) |
| HELOC | | | (12 | ) | | | (6 | ) | | | (6 | ) |
| Single family real estate | | | — | | | | (1 | ) | | | (1 | ) |
| Consumer | | | (1 | ) | | | 1 | | | | — | |
| Total net (recoveries) charge-offs | | $ | (556 | ) | | $ | (391 | ) | | $ | (254 | ) |
| | | | | | | | | | | | | |
| Average loan balance | | | | | | | | | | | | |
| Manufactured housing | | $ | 305,318 | | | $ | 288,039 | | | $ | 267,851 | |
| Commercial real estate | | | 520,240 | | | | 438,792 | | | | 394,417 | |
| Commercial | | | 69,994 | | | | 71,866 | | | | 91,602 | |
| SBA | | | 13,331 | | | | 73,672 | | | | 63,955 | |
| HELOC | | | 3,686 | | | | 2,137 | | | | 2,880 | |
| Single family real estate | | | 8,935 | | | | 9,996 | | | | 11,069 | |
| Consumer | | | 134 | | | | 99 | | | | 89 | |
| Total average loan balance | | $ | 921,638 | | | $ | 884,601 | | | $ | 831,863 | |
| | | | | | | | | | | | | |
| Net charge-offs annualized percentage | | | | | | | | | | | | |
| Manufactured housing | | | (0.05 | )% | | | (0.08 | )% | | | (0.01 | )% |
| Commercial real estate | | | (0.02 | )% | | | (0.02 | )% | | | (0.02 | )% |
| Commercial | | | (0.27 | )% | | | (0.06 | )% | | | (0.15 | )% |
| SBA | | | (1.01 | )% | | | (0.06 | )% | | | (0.01 | )% |
| HELOC | | | (0.33 | )% | | | (0.28 | )% | | | (0.21 | )% |
| Single family real estate | | | 0.00 | % | | | (0.01 | )% | | | (0.01 | )% |
| Consumer | | | (0.75 | )% | | | 1.01 | % | | | 0.00 | % |
| Total net (recoveries) charge-offs to average loans | | | (0.06 | )% | | | (0.04 | )% | | | (0.03 | )% |
At December 31, 2022, the allowance for loan losses was $10.8 million or 1.15% of gross loans compared to $10.4 million or 1.20% of gross loans at December 31, 2021.
The following table summarizes the allocation of allowance for loan losses by loan type. However, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| | | Amount | | | % of Loans in Each Category to Gross Loans | | | Amount | | | % of Loans in Each Category to Gross Loans | |
| Manufactured housing | | $ | 3,879 | | | | 33.8 | % | | $ | 2,606 | | | | 34.2 | % |
| Commercial real estate | | | 5,980 | | | | 58.4 | % | | | 6,729 | | | | 55.3 | % |
| Commercial | | | 747 | | | | 6.2 | % | | | 923 | | | | 6.4 | % |
| SBA | | | 21 | | | | 0.4 | % | | | 22 | | | | 2.7 | % |
| HELOC | | | 27 | | | | 0.3 | % | | | 18 | | | | 0.4 | % |
| Single family real estate | | | 107 | | | | 0.9 | % | | | 105 | | | | 1.0 | % |
| Consumer | | | 4 | | | | 0.0 | % | | | 1 | | | | 0.0 | % |
| Total | | $ | 10,765 | | | | 100.0 | % | | $ | 10,404 | | | | 100.0 | % |
The total allowance for loan losses increased by $0.4 million to $10.8 million at December 31, 2022 compared to the prior year. In addition, the Company had net recoveries of $0.6 million in 2022 compared to net recoveries of $0.4 million in 2021.
Investment Securities
Investment securities are classified at the time of acquisition as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Securities classified as held-to-maturity are debt securities that management has both the intent and ability to hold to maturity, regardless of changes in market conditions, liquidity needs, or general economic conditions. These types of securities are carried at amortized cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Investment securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income (loss) in stockholders’ equity. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments.
The investment securities portfolio of the Company is utilized as collateral for borrowings, required collateral for public deposits, and to manage liquidity, capital, and interest rate risk.
The weighted average yields of investment securities by maturity period were as follows at December 31, 2022:
| | | December 31, 2022 | |
| | | Less than One Year | | | One to Five Years | | | Five to Ten Years | | | Over Ten Years | | | Total | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | (dollars in thousands) | |
| U.S. government agency notes | | $ | — | | | | — | | | $ | — | | | | — | | | $ | 519 | | | | 3.59 | % | | $ | 3,588 | | | | 4.40 | % | | $ | 4,107 | | | | 4.30 | % |
| U.S. government agency CMO | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,296 | | | | 4.63 | % | | | 4,296 | | | | 4.63 | % |
| U.S. Treasury securities | | | 9,970 | | | | 2.06 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,970 | | | | 2.06 | % |
| Corporate debt securities | | | — | | | | — | | | | — | | | | — | | | | 8,315 | | | | 3.74 | % | | | — | | | | — | | | | 8,315 | | | | 3.74 | % |
| Total | | $ | 9,970 | | | | 2.06 | % | | $ | — | | | | — | | | $ | 8,834 | | | | 3.73 | % | | $ | 7,884 | | | | 4.53 | % | | $ | 26,688 | | | | 3.34 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government agency MBS | | $ | — | | | | — | | | $ | — | | | | — | | | $ | 746 | | | | 3.60 | % | | $ | 1,811 | | | | 3.68 | % | | $ | 2,557 | | | | 3.66 | % |
| Total | | $ | — | | | | — | | | $ | — | | | | — | | | $ | 746 | | | | 3.60 | % | | $ | 1,811 | | | | 3.68 | % | | $ | 2,557 | | | | 3.66 | % |
Expected maturities may differ from contractual maturities because borrowers or issuers have the right to call or prepay certain investment securities. Changes in interest rates may also impact prepayment or call options.
The Company does not own any subprime mortgage-backed securities (“MBS”) in its investment portfolio. Gross unrealized losses at December 31, 2022 are primarily caused by interest rate fluctuations, credit spread widening, and reduced liquidity in applicable markets. The Company has reviewed all securities on which there was an unrealized loss in accordance with its accounting policy for other than temporary impaired (“OTTI”) described in Note 2 - Investment Securities and determined no impairment was required. At December 31, 2022, the Company had the intent and the ability to retain its investments for a period of time sufficient to allow for any anticipated recovery in fair value.
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
| | | December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | (in thousands) | |
| Balance, beginning of period | | $ | 2,518 | | | $ | 2,614 | | | $ | 2,524 | |
| Additions | | | — | | | | 136 | | | | 106 | |
| Proceeds from dispositions | | | (384 | ) | | | — | | | | — | |
| Gains (losses) on sales, net | | | 116 | | | | (232 | ) | | | (16 | ) |
| Balance, end of period | | $ | 2,250 | | | $ | 2,518 | | | $ | 2,614 | |
Other assets acquired through foreclosure consist primarily of properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets (primarily manufactured housing) are classified as other assets acquired through foreclosure and are reported at fair value at the time of foreclosure less estimated costs to sell. Costs relating to development or improvement of the assets are capitalized and costs related to holding the assets are charged to expense. At December 31, 2022 and 2021, the Company had $0.3 million and $0.3 million valuation allowance on foreclosed assets, respectively.
Deposits
The average balances by deposit type as of the dates presented below:
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | | | Average Balance | | | Percent of Total | |
| | | (dollars in thousands) | |
| Non-interest-bearing demand deposits | | $ | 237,849 | | | | 26.3 | % | | $ | 205,820 | | | | 23.5 | % | | $ | 169,696 | | | | 23.2 | % |
| Interest-bearing demand deposits | | | 480,472 | | | | 53.2 | % | | | 467,720 | | | | 53.3 | % | | | 314,659 | | | | 43.1 | % |
| Savings | | | 24,317 | | | | 2.7 | % | | | 20,749 | | | | 2.4 | % | | | 17,419 | | | | 2.4 | % |
| Time deposits over $250,000 | | | 4,769 | | | | 0.5 | % | | | 13,965 | | | | 1.6 | % | | | 25,599 | | | | 3.5 | % |
| Other time deposits | | | 156,019 | | | | 17.3 | % | | | 168,143 | | | | 19.2 | % | | | 203,511 | | | | 27.8 | % |
| Total deposits | | $ | 903,426 | | | | 100.0 | % | | $ | 876,397 | | | | 100.0 | % | | $ | 730,884 | | | | 100.0 | % |
Total deposits decreased to $875.1 million at December 31, 2022 from $950.1 million at December 31, 2021, a decrease of $75.0 million. Non-interest-bearing demand deposits increased by $6.6 million to $216.5 million at December 31, 2022, compared to $209.9 million December 31, 2021. Interest-bearing demand deposits decreased by $109.3 million to $428.2 million at December 31, 2022 compared to $537.5 million at December 31, 2021. Total demand deposits decreased by $102.7 million at December 31, 2022 compared to December 31, 2021, primarily due to net outflows of money market deposits as a result of the higher interest rate environment. Certificates of deposits increased by $27.9 million to $206.9 million at December 31, 2022 compared to $179.1 million at December 31, 2021. The increase in certificate of deposit balances related to increased balances from wholesale funding. Deposits have been the primary source of funding the Company’s asset growth. In addition, the Bank is a member of Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep ("ICS") services. Both CDARS and ICS provide a mechanism for obtaining FDIC insurance for large deposits. At December 31, 2022 and 2021, the Company had $51.1 million and $6.5 million, respectively of CDARS deposits. At December 31, 2022 and 2021, the Company had $69.2 million and $93.3 million, respectively of ICS deposits.
Uninsured Deposits
Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regimes and any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regimes.
The following table presents time certificate of deposits over the FDIC insurance limits by maturities:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| | | Over $ 250,000 | | | Over $ 250,000 | |
| | | | |
| Less than three months | | $ | 1,295 | | | $ | 4,703 | |
| Three to six months | | | 930 | | | | 5,882 | |
| Six to twelve months | | | 1,251 | | | | 2,941 | |
| Over twelve months | | | 2,217 | | | | 586 | |
| Total | | $ | 5,693 | | | $ | 14,112 | |
The Company estimates its total uninsured deposits to be $332.1 million and $415.4 million as of December 31, 2022 and 2021, respectively.
The Company’s deposits may fluctuate as a result of local and national economic conditions. Management does not believe that deposit levels are influenced by seasonal factors.
The Company utilizes brokered deposits in accordance with strategic and liquidity planning.
Other Borrowings
The following table sets forth certain information regarding FHLB advances and other borrowings.
| | | December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| FHLB and FRB PPPLF Advances | | (in thousands) | |
| Maximum month-end balance | | $ | 110,000 | | | $ | 105,000 | | | $ | 200,103 | |
| Balance at year end | | $ | 90,000 | | | $ | 90,000 | | | $ | 105,000 | |
| Average balance | | $ | 90,795 | | | $ | 94,343 | | | $ | 132,855 | |
| Other Borrowings | | | | | | | | | | | | |
| Maximum month-end balance | | $ | — | | | $ | — | | | $ | 10,000 | |
| Balance at year end | | $ | — | | | $ | — | | | $ | — | |
| Average balance | | $ | — | | | $ | — | | | $ | 6,940 | |
| Total borrowed funds | | $ | 90,000 | | | $ | 90,000 | | | $ | 105,000 | |
| Weighted average interest rate at end of year | | | 0.86 | % | | | 0.86 | % | | | 1.03 | % |
| Weighted average interest rate during the year | | | 0.90 | % | | | 1.04 | % | | | 1.27 | % |
FHLB and FRB Advances
The Company utilizes borrowed funds to support liquidity needs. The Company’s borrowing capacity at FHLB and FRB is determined based on collateral pledged, generally consisting of securities and loans. At December 31, 2022, no advances were outstanding from the FRB.
The Company also had $39.0 million of letters of credit with the FHLB at December 31, 2022 to secure public funds. The Company, through the Bank, has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. As of December 31, 2022, the Company had pledged $21.1 million of securities and $232.6 million of loans to the FHLB as collateral. At December 31, 2022, the Company had $41.6 million available for additional borrowing.
The Company has established a credit line with the FRB. Advances are collateralized in the aggregate by eligible loans. As of December 31, 2022, there were $248.6 million of loans pledged as collateral to the FRB. There were no outstanding FRB advances as of December 31, 2022. Available borrowing capacity was $78.9 million as of December 31, 2022.
Line of Credit
In September of 2021, the Company entered into an unsecured line of credit agreement for up to $5.0 million at Prime + 0.25%. The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65 to 1, a minimum Tier 1 leverage ratio of 7.0%, a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The line of credit matured in September 2022 and the Company renewed the line of credit for an additional one-year term and increased the amount available to $10.0 million with no other changes to the financial terms or covenants. As of December 31, 2022 and 2021, there were no outstanding balances on the revolving line of credit.
Federal Funds Purchased Lines
The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. There were no amounts outstanding on these lines as of December 31, 2022.
Preferred Stock
There are no shares of the Company's preferred stock outstanding as of December 31, 2022 and 2021.
Liquidity and Capital Resources
Capital Resources
The federal banking agencies have adopted risk-based capital adequacy guidelines that are used to assess the adequacy of capital in supervising bank holding companies and banks. In July 2013, the federal banking agencies approved the final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning January 1, 2015, and ending January 1, 2019. The Final Rules implement the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amended the regulatory risk-based capital rules applicable to the Company. Basel III redefined the regulatory capital elements and minimum capital ratios, introduced regulatory capital buffers above those minimums, revised rules for calculating risk-weighted assets and added a new component of Tier 1 capital called Common Equity Tier 1, which includes common equity and retained earnings and excludes preferred equity.
In November 2019, the federal banking agencies jointly issued a final rule, which provides for an additional optional, simplified measure of capital adequacy, the community bank leverage ratio framework. The final rule was effective January 1, 2020. Under this framework, the bank would choose the option of using the community bank leverage ratio (CBLR). In order to qualify, a community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. A CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rules. The Company chose the CBLR option for calculation of its capital ratio in the first quarter of 2020. As of the fourth quarter 2021, the Company rescinded its CBLR election.
The following table illustrates the Bank’s regulatory ratios and the current adequacy guidelines as of December 31, 2022 and 2021. The fully phased in guidelines are also summarized.
| | | Total Capital (To Risk- Weighted Assets) | | | Tier 1 Capital (To Risk- Weighted Assets) | | | Common Equity Tier 1 (To Risk- Weighted Assets) | | | Leverage Ratio/Tier 1 Capital (To Average Assets) | |
| December 31, 2022 | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 12.56 | % | | | 11.44 | % | | | 11.44 | % | | | 10.34 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % |
| Minimum capital requirements including fully phased in capital conservation buffer | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | | |
| CWB's actual regulatory ratios | | | 12.19 | % | | | 11.02 | % | | | 11.02 | % | | | 8.56 | % |
| Minimum capital requirements | | | 8.00 | % | | | 6.00 | % | | | 4.50 | % | | | 4.00 | % |
| Well-capitalized requirements | | | 10.00 | % | | | 8.00 | % | | | 6.50 | % | | | 5.00 | % |
| Minimum capital requirements including fully phased in capital conservation buffer | | | 10.50 | % | | | 8.50 | % | | | 7.00 | % | | | N/A | |
Liquidity
Liquidity for a bank is the ongoing ability to fund asset growth and business operations, to accommodate liability maturities and deposit withdrawals and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events.
The ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors, creditors and regulators. CWB's available liquidity is represented by cash, amounts due from banks, and non-pledged marketable securities. CWB manages its liquidity risk through operating, investing, and financing activities. In order to ensure funds are available when necessary, on at least a quarterly basis, CWB projects the amount of funds that will be required. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. The Company has federal funds borrowing lines at correspondent banks totaling $20.0 million. In addition, loans and securities are pledged to the FHLB providing $41.6 million in available borrowing capacity as of December 31, 2022. Loans pledged to the FRB discount window provided $78.9 million in borrowing capacity at December 31, 2022. As of December 31, 2022, there were no outstanding borrowings from the FRB.
The Bank has established policies as well as analytical tools to manage liquidity. Proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds, such as high levels of deposit withdrawals or increased loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits. Ultimately, public confidence is gained through profitable operations, sound credit quality and a strong capital position. CWB’s liquidity management is viewed from a long-term and short-term perspective, as well as from an asset and liability perspective. Management monitors liquidity through regular reviews of maturity profiles, funding sources and loan and deposit forecasts to minimize funding risk. The Bank has asset/liability committees (“ALCO”) at the Board and Bank management level to review asset/liability management and liquidity issues.
The Company, through CWB, has a blanket lien credit line with the FHLB. FHLB advances are collateralized in the aggregate by the Company’s eligible loans and securities. Total FHLB advances were $90.0 million and $90.0 million at December 31, 2022 and 2021, respectively, borrowed at fixed rates. At December 31, 2022, CWB had pledged to FHLB, securities of $21.1 million at carrying value and loans of $232.6 million. At December 31, 2021, the Company had pledged to FHLB, securities of $13.2 million at carrying value and loans of $286.6 million, and had $44.5 million available for additional borrowing.
In September of 2021, the Company entered into an unsecured line of credit agreement for up to $5.0 million at Prime + 0.25%. The Company must maintain a compensating deposit with the lender of $1.0 million. In addition, the Company must maintain a minimum debt service coverage ratio of 1.65, a minimum Tier 1 leverage ratio of 7.0% a minimum total risked based capital ratio of 10.0% and a maximum net non-accrual ratio of not more than 3%. The line of credit matured in September 2022 and the Company renewed the line of credit for an additional one-year term and increased the amount available to $10.0 million with no other changes to the financial terms or covenants. At December 31, 2022 and 2021, the line of credit balance was zero.
The Company has not experienced disintermediation and does not believe this is a likely occurrence, although there is significant competition for core deposits. The liquidity ratio of the Bank was 10.4%, and 21.7% at December 31, 2022 and 2021, respectively. The Bank’s liquidity ratio fluctuates in conjunction with loan funding demands. The liquidity ratio consists of the sum of cash and due from banks, deposits in other financial institutions, available for sale investments, and loans held for sale divided by total assets.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources for its liquidity. CWBC’s routine funding requirements primarily consisted of certain operating expenses, common stock dividends and interest payments on the other borrowings. CWBC obtains funding to meet its obligations from dividends collected from CWB and fees charged for services provided to CWB and has the capability to issue equity and debt securities. Federal banking laws and regulatory requirements regulate the amount of dividends that may be paid by a banking subsidiary without prior approval. During 2022, CWBC declared dividends of $2.6 million. On January 27, 2023, the Company's Board of Directors declared a $0.08 per share dividend payable February 28, 2023, to stockholders of record on February 10, 2023. The Company anticipates that it will continue to pay quarterly cash dividends in the future, although there can be no assurance that payment of such dividends will continue or that they will not be reduced.
Our material cash requirements may include funding existing loan commitments, funding equity investments, withdrawal/maturity of existing deposits, repayment of borrowings, operating lease payments, and expenditures necessary to maintain current operations.
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and principal payments due on our contractual obligations excluding accrued interest:
| | | December 31, 2022 | |
| | | Less than 1 year | | | More than 1 year | | | Total | |
| | | (dollars in thousands) | |
| Time deposit maturities | | $ | 115,033 | | | $ | 91,894 | | | $ | 206,927 | |
| FHLB advances | | | — | | | | 90,000 | | | | 90,000 | |
| Operating lease obligations | | | 1,014 | | | | 4,888 | | | | 5,902 | |
| Total | | $ | 116,047 | | | $ | 186,782 | | | $ | 302,829 | |
In the ordinary course of business, we enter into various transactions to meet the financing needs of our customers, which, in accordance with generally accepted accounting principles, are not included in our consolidated balance sheets. These transactions include off-balance sheet commitments, including commitments to extend credit and standby letters of credit. The following table presents a summary of the Company's commitments to extend credit by expiration period:
| | | At December 31, 2021 | |
| | | Less than 1 year | | | More than 1 year | | | Total | |
| | | (dollars in thousands) | |
| Loan commitments to extend credit | | $ | 76,498 | | | $ | 19,813 | | | $ | 3,700 | |
| Standby letters of credit | | | - | | | | - | | | | - | |
| Total | | $ | 76,498 | | | $ | 19,813 | | | $ | 3,700 | |
Interest Rate Risk
The Company is exposed to different types of interest rate risks. These risks include lag, repricing, basis and prepayment risk.
Lag risk results from the inherent timing difference between the repricing of the Company’s adjustable-rate assets and liabilities. For instance, certain loans tied to the prime rate index may only reprice on a quarterly basis. This lag can produce some short-term volatility, particularly in times of numerous prime rate changes.
Repricing risk is caused by the mismatch in the maturities or repricing periods between interest-earning assets and interest-bearing liabilities. If CWB was perfectly matched, the net interest margin would expand during rising rate periods and contract during falling rate periods. This happens because loans tend to reprice more quickly than funding sources.
Basis risk is due to item pricing tied to different indices which tend to react differently. CWB’s variable products are mainly priced off the treasury and prime rates.
Prepayment risk results from borrowers paying down or paying off their loans prior to maturity. Prepayments on fixed-rate products increase in falling interest rate environments and decrease in rising interest rate environments. A majority of CWB’s loans have adjustable rates and are reset based on changes in the treasury and prime rates.
The Company’s ability to originate, purchase and sell loans is also significantly impacted by changes in interest rates. In addition, increases in interest rates may reduce the amount of loan and commitment fees received by CWB.
Management of Interest Rate Risk
To mitigate the impact of changes in market interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the amounts and maturities are actively managed. Short-term, adjustable-rate assets are generally retained as they have similar repricing characteristics as funding sources. CWB can sell a portion of its FSA and SBA loan originations. While the Company has some interest rate exposure in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. The Company has not used derivative instruments to help manage risk but will consider such instruments in the future if the perceived need should arise.
For further discussion regarding the impact to the Company of interest rate changes, see Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Litigation
See Part 1. Item 3: Legal Proceedings of this Form 10-K.
SUPERVISION AND REGULATION
Introduction
CWBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, regulated, and examined by the Board of Governors of the Federal Reserve System (the “FRB”). In addition to the regulation of the Company by the FRB, CWB is subject to extensive regulation and periodic examination, principally by the Office of the Comptroller of the Currency (“OCC”). The Federal Deposit Insurance Corporation (“FDIC”) insures the Bank’s deposits up to certain prescribed limits. The Company is also subject to jurisdiction of the Securities and Exchange Commission ("SEC") and to the disclosure and regulatory requirements of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), and through the listing of the common stock on the NASDAQ Capital Select Market, the Company is subject to the rules of NASDAQ.
Banking is a complex, highly regulated industry. The primary goals of the rules and regulations are to maintain a safe and sound banking system, protect depositors and the FDIC’s insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company can be affected not only by Management decisions and general economic conditions, but also by the requirements of applicable state and federal statues, regulations and the policies of various governmental regulatory authorities.
From time to time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting or expanding the scope of permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations of banks and bank holding companies are frequently made in Congress and by various bank and other regulatory agencies. Future changes in the laws, regulations or polices that impact CWBC and CWB cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.
Securities Registration and Listing
CWBC’s common stock is registered with the SEC under the Exchange Act and, therefore, is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act as well as the Securities Act both administered by the SEC. CWBC is required to file annual, quarterly and other current reports with the SEC. The SEC maintains an Internet site, http://www.sec.gov, at which CWBC’s filings with the SEC may be accessed. CWBC’s SEC filings are also available on its website at www.communitywest.com.
CWBC’s common stock is listed on the NASDAQ Capital Market and trade under the symbol “CWBC.” As a company listed on the NASDAQ Capital Market, CWBC is subject to NASDAQ standards for listed companies. CWBC is also subject to certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”), the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and other federal and state laws and regulations that govern financial presentations, corporate governance requirements for board audit and compensation committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act was enacted in 2010 and effectuated a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council to identify systemic risks in the financial system and oversee and coordinate the actions of the U.S. financial regulatory agencies.
The Dodd-Frank Act and the regulations promulgated thereunder require, among other things, that: (i) the consolidated capital requirements of depository holding companies must be not less stringent than those applied to depository institutions; (ii) the reserve ratio of the Deposit Insurance Fund was raised to 1.35%; (iii) publicly traded companies, such as CWBC, must provide their stockholders with a non-binding vote on executive compensation at least every three years and on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders; (iv) the deposit insurance amounts for banks, savings institutions, and credit unions be permanently increased to $250,000 per qualified depositor; (v) authority was given to the federal banking regulators to prohibit extensive compensation to executives of depository institutions and their holding companies with assets in excess of $1.0 billion; (vi) Section 23A of the Federal Reserve Act was broadened and prohibits a depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and if representing more than 10% of capital, is approved by the disinterested directors; (vii) interstate branching rights were expanded; and (viii) bank entities, under the (“Volker Rule”), were prohibited from conducting certain investment activities that are considered proprietary trading with their own accounts.
2018 Regulatory Reform - The EGRRCPA
In 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCPA maintained most of the regulatory structure established by the Dodd-Frank Act, it amended certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as CWB, and for large banks with assets of more than $50 billion.
The EGRRCPA, among other matters, expanded the definition of qualified mortgages which may be held by a financial institution and simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8-10%. Any qualifying depository institution or its holding company that exceeds the “Community Bank Leverage Ratio” will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the ratio will be considered to be "well capitalized" under the prompt corrective action rules. The EGRRCPA also expanded the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the EGRRCPA includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
The current administration has expressed a commitment to reemphasize restrictions on financial institutions and the enforcement of the protective measures included in the Dodd-Frank Act. At this time, the Company cannot predict which provisions will be enforced and what effect, if any, such action may have upon the results of operations and financial condition of the Company and the Bank.
Financial Institutions Capital Rules
The Basel III accord was developed by the Basel Committee on Banking Supervision to strengthen regulation, supervision, and risk management and avoid disruptions in financial markets. The Basel III standards, among other things: (i) implemented increased capital levels for CWBC and CWB; (ii) introduced a new capital measure of common equity Tier 1 capital known as "CET1" and related regulatory capital ratio of CET1 to risk-weighted assets; (iii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iv) mandated that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (v) expanded the scope of the deductions from and adjustments to capital. Under Basel III, for most banking organizations the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to Basel III specific requirements.
Under Basel III, the minimum capital ratios are as follows: (i) 4.5% CET1 to risk-weighted assets; (ii) 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; (iii) 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and (iv) 4% Tier 1 capital to average consolidated assets as reported on regulatory financial statements (known as the “leverage ratio”). The Basel III capital conservation buffer is designed to absorb losses and protect the financial institution during periods of economic difficulties. Banking institutions with a ratio of CET1 to risk-weighted assets, Tier 1 to risk-weighted assets, or total capital to risk-weighted assets above the minimum but below the capital conservation buffer face limitations on their ability to pay dividends, repurchase shares, or pay discretionary bonuses based on the amount of the shortfall and the institution’s "eligible retained income." Under the capital conservation buffer, CWBC and CWB are required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of: (i) CET1 to risk-weighted assets of at least 7%; (ii) Tier 1 capital to risk-weighted assets of at least 8.5%; and (iii) total capital to risk-weighted assets of at least 10.5%.
Basel III provides for a number of deductions from and adjustments to CET1. These include the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Basel III provides a standardized approach for risk weightings that expands the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset classes.
CWBC
General. As a bank holding company, CWBC is registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), and is subject to regulation by the FRB. According to FRB Policy, CWBC is expected to act as a source of financial strength for CWB, to commit resources to support it in circumstances where CWBC might not otherwise do so. Under the BHCA, CWBC is subject to periodic examination by the FRB. CWBC is also required to file periodic reports of its operations and any additional information regarding its activities and those of its subsidiaries as may be required by the FRB.
Bank Holding Company Liquidity. CWBC is a legal entity, separate and distinct from CWB. CWBC has the ability to raise capital on its own behalf or borrow from external sources, CWBC may also obtain additional funds from dividends paid by, and fees charged for services provided to, CWB. However, regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC.
Transactions with Affiliates and Insiders. CWBC and any subsidiaries it may purchase or organize are deemed to be affiliates of CWB within the meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans by CWB to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of CWB’s capital, in the case of any one affiliate, and is limited to 20% of CWB’s capital, in the case of all affiliates. In addition, transactions between CWB and other affiliates must be on terms and conditions that are consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. CWBC and CWB are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s executive officers, directors, and principal shareholders; any company controlled by any such executive officer, director, or shareholder; or any political or campaign committee controlled by such executive officer, director, or principal shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits, require prior full board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders, must not involve more than the normal risk of repayment or present other unfavorable features, and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities. Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” CWBC, therefore, is permitted to engage in a variety of banking-related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities, and merchant banking. CWBC has not elected to qualify for these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, CWB may not extend credit, lease or sell property, furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:
| • | the customer must obtain or provide some additional credit, property, or services from or to CWB other than a loan, discount, deposit, or trust services; |
| • | the customer must obtain or provide some additional credit, property, or service from or to CWBC or any subsidiaries; or |
| • | the customer must not obtain some other credit, property, or services from competitors, except reasonable requirements to assure soundness of credit extended. |
Capital Adequacy. Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “Supervision and Regulation – CWB – Regulatory Capital Guidelines,” assign various risk percentages to different categories of assets and capital is measured as a percentage of risk assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments. California Corporations Code Section 500 allows CWBC to pay a dividend to its shareholders only to the extent that CWBC has retained earnings and, after the dividend, CWBC’s:
| • | assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and |
| • | current assets would be at least equal to current liabilities. |
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
The Sarbanes-Oxley Act of 2002 (“SOX”). SOX provides a permanent framework that improves the quality of independent audits and accounting services, improves the quality of financial reporting, strengthens the independence of accounting firms, and increases the responsibility of management for corporate disclosures and financial statements.
SOX provisions are significant to all companies that have a class of securities registered under Section 12 of the Exchange Act or are otherwise reporting to the SEC (or the appropriate federal banking agency) pursuant to Section 15(d) of the Exchange Act, including CWBC. In addition to SEC rulemaking to implement SOX, NASDAQ has adopted corporate governance rules intended to allow shareholders to more easily and effectively monitor the performance of companies and directors.
As a result of SOX, and its regulations, CWBC has incurred substantial cost to interpret and ensure compliance with the law and its regulations including, without limitation, increased expenditures by CWBC in auditors’ fees, attorneys’ fees, outside advisors' fees, and increased errors and omissions insurance premium costs. Future changes in the laws, regulations, or policies that impact CWBC cannot necessarily be predicted and may have a material effect on the business and earnings of CWBC.
CWB
General. CWB, as a national banking association which is a member of the Federal Reserve System, is subject to regulation, supervision and regular examination by the OCC and FDIC. CWB’s deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of CWB's business and establish a comprehensive framework governing its operations.
Regulatory Capital Guidelines. The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting from 0% to 150%.
The following table sets forth the regulatory capital for CWB and CWBC (on a consolidated basis) at December 31, 2022.
| | | Adequately Capitalized | | | Well Capitalized | | | Capital Conservation Buffer Fully Phased-In | | | CWB | | | CWBC (consolidated) | |
| | | | | | | | | | | | | | | | |
| Total risk-based capital | | | 8.00 | % | | | 10.00 | % | | | 10.50 | % | | | 12.56 | % | | | 12.62 | % |
| Tier 1 risk-based capital ratio | | | 6.00 | % | | | 8.00 | % | | | 8.50 | % | | | 11.44 | % | | | 11.46 | % |
| Common Equity Tier 1 | | | 4.50 | % | | | 6.50 | % | | | 7.00 | % | | | 11.44 | % | | | 11.46 | % |
| Tier 1 leverage capital ratio | | | 4.00 | % | | | 5.00 | % | | | N/A | | | | 10.34 | % | | | 8.90 | % |
Prompt Corrective Action Authority. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
| • | “well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 8% or more, has a common equity tier 1 capital ratio of 6.5% or more, has a leverage capital ratio of 5% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; |
| • | “adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more, a common equity tier 1 capital ratio of 4.5% or more, and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized;” |
| • | “undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 6%, a common equity tier 1 capital that is less than 4.5%, or a leverage capital ratio that is less than 4% (3% under certain circumstances); |
| • | “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a leverage capital ratio that is less than 3%; and |
| • | “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%. |
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by their holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital levels to be categorized as “well capitalized” will be deemed to be “adequately capitalized” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal, and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
The OCC, as the primary regulator for national banks, also has a broad range of enforcement measures, from cease-and-desist powers and the imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Limitations on Dividend Payments. CWB is a national bank, governed by the National Bank Act and the rules and regulations of the OCC. National banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent the approval of the OCC, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. A dividend in excess of that amount constitutes a reduction in permanent capital and requires the prior approval of the OCC and the approval of two-thirds of the bank’s shareholders.
Brokered Deposit Restrictions. Well-capitalized banks are not subject to limitations on brokered deposits, while an adequately capitalized bank is able to accept, renew, or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized banks are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2022, CWB is deemed to be “well capitalized” and, therefore, is eligible to accept brokered deposits.
FDIC Insurance and Insurance Assessments. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.
The Dodd-Frank Act required the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund to 1.35% of insured deposits by September 30, 2020, and broadened the base for FDIC insurance assessments so that assessments are based on average consolidated total assets, less average tangible equity capital of a financial institution rather than on its insured deposits. The Deposit Insurance Fund reserve ratio actually reached 1.36% on September 30, 2018, ahead of the September 30, 2020, deadline, but then fell below the 1.35% level to 1.30% due to extraordinary growth in insured deposits and, accordingly, the FDIC adopted a restoration plan. Under that plan, the FDIC is providing updates at least semi-annually. The semi-annual update as of March 31, 2022, showed a decline of four basis points in the reserve ratio to 1.23%. As a result, in June 2022, the FDIC adopted an amendment to the restoration plan resulting in a uniform increase in the base deposit insurance assessment of two basis points beginning with the first quarter of 2023 to meet the 1.35% level by 2028. With the recent bank failures, the FDIC may consider a further amendment to the deposit insurance assessment to meet the required level.
The FDIC may terminate its insurance of deposits if it finds that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. Based on their administration by Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e. g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC.
Failure of CWB to maintain and implement an adequate OFAC program, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution. CWB has augmented its systems and procedures to accomplish this. CWB believes that the ongoing cost of compliance with OFAC programs is not likely to be material to CWB.
Anti-Money Laundering. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations requires CWB to take steps to prevent the use of it or its systems from facilitating the flow of illegal or illicit money and to file suspicious activity reports. Those requirements include ensuring effective Board and management oversight, establishing policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training, and establishing a comprehensive internal audit of BSA compliance activities. The USA Patriot Act of 2001 (“Patriot Act”) significantly expanded the anti-money laundering (“AML”) and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties, and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures, and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing.
CWB must provide BSA/AML training to employees, designate a BSA compliance officer, and annually audit the BSA/AML program to assess its effectiveness. The federal regulatory agencies continue to issue regulations and new guidance with respect to the application and requirements of BSA and AML.
The Anti-Money Laundering Act of 2020 (the “AML Act”) was enacted effective January 1, 2021, and presents the most comprehensive revisions and enhancements to anti-money laundering and counter terrorism laws since the Currency and Foreign Transactions Reporting Act of 1970 and the USA PATRIOT Act of 2001 (the “BSA”). The impact of the new legislation will not be fully known until required regulations are adopted and implemented, but the AML Act represents significant changes and reaffirms and broadens the government’s oversight and commitment to addressing the illicit activities and financing of terrorism.
Many of the provisions of the AML Act deal with the operations of the federal agencies primarily responsible for addressing terrorism financing and the safeguarding of the national security of the United States, such as the U.S. Treasury and its Financial Crimes Enforcement Network (“FinCEN”), including the requirement for FinCEN to engage anti-money laundering and terrorist financing investigations experts and the requirement to facilitate information sharing with other federal and state and even foreign law enforcement agencies. On June 30, 2021, FinCEN issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism to encourage banks to incorporate the priorities into their risk-based BSA compliance programs. The priorities identified were: (i) corruption; (ii) cybercrime and cyber security; (iii) terrorist financing; (iv) fraud; (v) transnational crime organizations; (vi) drug trafficking; (vii) human trafficking; and (viii) proliferation financing through support networks.
The AML Act also expands the reach of federal anti-money laundering laws by extending their applicability to a broader range of industries, such as entities involved in futures, precious metals, precious stones and jewels, antiquities, and cryptocurrency. On September 24, 2021, FinCEN issued proposed rules to include a person engaged in the trade of antiquities under the definition of “financial institution” subjecting such person to regulations prescribed by the Secretary of the Treasury.
The AML Act aims to balance the burdens imposed by reporting on financial institutions and the benefits derived by Federal law enforcement agencies. The AML Act requires a review of currency transaction and suspicious activity reports submitted by financial institutions to determine to what extent the reporting can be streamlined and made more useful. Included is the obligation to review the dollar thresholds for reporting currency transactions and to establish automated processes for filing simple, non-complex categories of reports. It calls for greater integration between financial institution systems and the electronic filing system to allow for automatic population of report fields and the submission of transaction data.
Other provisions of the AML Act enhance enforcement. One section provides protection for financial institutions keeping open a customer’s account or transaction at the request of a federal law enforcement agency or at the request of a state or local agency with the concurrence of FinCEN. Other sections increase civil penalties for financial institutions and persons violating the recordkeeping and reporting obligations. Persons found to have committed repeated “egregious violations” may be barred from serving on boards of directors of financial institutions and fined in an amount that is equal to the profit gained by such person by reason of such violation. If that person is a partner, director, officer or employee of a financial institution, that person may be ordered to repay any bonus paid to that person, irrespective of the amount of the bonus or how it was calculated.
New criminal penalties have been created for concealing from or misrepresenting to a financial institution any material facts concerning: (i) the ownership or control of assets involved in a monetary transaction involving a senior foreign political figure in amounts exceeding $1 million; or (ii) the source of funds in a monetary transaction involving an entity found to be a primary money laundering concern. Other enforcement enhancement provisions in the AML Act authorize the Treasury to pay whistleblower awards leading to fines or forfeitures of at least $50,000 up to the lower of $150,000 or 25% of the fine or forfeiture and allows for the payment to whistleblowers of up to 30% of the fine or forfeiture.
One of the most significant portions of the AML Act is the Corporate Transparency Act (“CTA”), which will require the reporting of certain information regarding “beneficial owners” of “reporting companies” to a confidential database to be established by FinCEN. Reporting companies are defined as any corporation, limited liability company, or other entity formed in the U.S. under the laws of a state or Indian Tribe or registered as a foreign entity to do business in the U.S., other than those specifically excluded, such as: (i) companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934; (ii) banks, bank holding companies, and credit unions; (iii) money transmitters, registered broker‑dealers, registered investment advisors, and investment companies; (iv) public utilities and insurance companies; (v) 503(c)(3) entities; (vi) entities that employ more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5.0 million in the prior year, and have an operating presence in the U.S.; and (vii) certain “inactive” entities.
A beneficial owner is any individual who directly or indirectly exercises substantial control over an entity or owns or controls 25% or more of the ownership interest of an entity. The reporting company will be required to provide FinCEN with the legal name, date of birth, current resident or business address, and an acceptable identification number of the beneficial owner. In September 2022, FinCEN issued a final rule to implement the beneficial ownership information reporting which will require most corporations, limited liability companies, and other entities created or doing business in the U.S. before January 1, 2024, to report on their beneficial owners by January 1, 2025.
Under the CTA, the Treasury is to minimize the burden on reporting companies and ensure the information deposited in the database is maintained in the strictest confidence and made available for inspection or disclosure by FinCEN only for the purposes set forth in the AML Act and only to: (i) federal agencies engaged in national security, intelligence, or law enforcement; (ii) state, local, or Tribal law enforcement agencies, subject to authorization by a court of competent jurisdiction; (iii) financial institutions subject to customer due diligence requirements with the consent of the reporting company; (iv) requests by a federal or other appropriate regulatory agency; (v) certain Treasury officials for tax administration purposes; and (vi) authorized federal agencies on behalf of a properly recognized foreign authority. On January 25, 2022, FinCEN issued proposed regulations for a pilot program to permit financial institutions to share suspicious activity information with their foreign branches, subsidiaries and affiliates to combat illicit finance risks under the AML Act.
The foregoing is only a summary of selected provisions of the AML Act. Given that regulations implementing the new AML Act are being proposed but have not yet been adopted or implemented, the Company cannot determine at this time the effect, if any, the AML Act will have on CWBC’s or CWB’s future results of operations or financial condition.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial institution's record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations.
In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators recommending changes to the CRA’s regulations to reduce their complexity and associated burden on banks. In 2019 and 2020, the federal banking regulators proposed for public comment rules to modernize the agencies’ regulations under the CRA. In July 2021, the FRB, FDIC, and the OCC issued an interagency statement committing to joint agency action on CRA. In December 2021, the OCC adopted a final rule that rescinded its 2020 Community Reinvestment Act Rule and replaced it with a rule based largely on the prior CRA regulations issued jointly by the federal banking regulators in 1995 and subsequently amended. The OCC indicated that this action was intended to assist and promote the interagency process by reestablishing generally uniform rules that apply to all insured depository institutions.
CWB had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Safeguarding of Customer Information and Privacy. The bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. CWB has adopted an information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, are prohibited from disclosing such information. CWB has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of CWB.
In November 2021, the federal bank regulatory agencies issued a joint rule to improve the sharing of information about cyber incidents involving U.S. banks. The rule requires a banking organization to notify its primary federal regulator (and its service providers) as soon as possible (and no later than 36 hours after determination) after it experiences a significant computer-security incident. The compliance date of this rule was May 1, 2022.
Consumer Compliance and Fair Lending Laws. CWB is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax Compliance Act, CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act. The enforcement of Fair Lending laws has been an increasing area of focus for regulators, including the FDIC and the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Act.
In addition, federal law and certain state laws (including California) currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws (including California) companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems, and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees, and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.
Other Aspects of Banking Law. CWB is also subject to federal statutory and regulatory provisions covering, among other things, security procedures, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject bank holding companies and banks to increased supervision and disclosure, compliance costs, and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, resulting in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, BSA compliance, as well as other safety and soundness concerns.
It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which CWB’s businesses would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in CWB’s operations and increased compliance costs.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
The Company's primary market risk is interest rate risk (“IRR”). To minimize the volatility of net interest income at risk (“NII”) and the impact on economic value of equity (“EVE”), the Company manages its exposure to changes in interest rates through asset and liability management activities within guidelines established by the Board’s Asset Liability Committee (“ALCO”). ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies, including IRR exposure.
To mitigate the impact of changes in interest rates on the Company’s interest-earning assets and interest-bearing liabilities, the Company actively manages the amounts and maturities. While the Company has some assets and liabilities in excess of five years, it has internal policy limits designed to minimize risk should interest rates rise. Currently, the Company does not use derivative instruments to help manage risk but will consider such instruments in the future if the perceived need should arise.
The Company uses a simulation model, combined with downloaded detailed information from various application programs, and assumptions regarding interest rates, lending and deposit trends and other key factors to forecast/simulate the effects of both higher and lower interest rates. The results detailed below indicate the impact, in dollars and percentages, on NII and EVE of an increase and decrease in interest rates compared to a flat interest rate scenario. The model assumes that the rate change shock occurs immediately.
The following table presents the impact of that analysis in dollars and percentages at December 31, 2022.
| | | Sensitivity of Net Interest Income | |
| | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 300 | | | Down 200 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | |
| Interest income | | $ | 46,911 | | | $ | 50,112 | | | $ | 53,046 | | | $ | 55,852 | | | $ | 58,342 | | | $ | 61,024 | | | $ | 63,687 | | | $ | 66,343 | | | $ | 64,147 | |
| Interest expense | | | 4,002 | | | | 5,525 | | | | 7,055 | | | | 8,600 | | | | 11,588 | | | | 14,577 | | | | 17,565 | | | | 20,553 | | | | 21,602 | |
| Net interest income | | $ | 42,909 | | | $ | 44,587 | | | $ | 45,991 | | | $ | 47,252 | | | $ | 46,754 | | | $ | 46,447 | | | $ | 46,122 | | | $ | 45,790 | | | $ | 42,545 | |
| % change | | | (9.2 | )% | | | (5.6 | )% | | | (2.7 | )% | | | | | | | (1.1 | )% | | | (1.7 | )% | | | (2.4 | )% | | | (3.1 | )% | | | (10.0 | )% |
At December 31, 2021, the following table presents the impact of that analysis in dollars and percentages:
| | | Sensitivity of Net Interest Income | |
| | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | |
| Interest income | | $ | 43,537 | | | $ | 44,317 | | | $ | 48,378 | | | $ | 52,374 | | | $ | 56,312 | | | $ | 60,223 | | | $ | 64,147 | |
| Interest expense | | | 2,705 | | | | 2,838 | | | | 6,591 | | | | 10,344 | | | | 14,096 | | | | 17,849 | | | | 21,602 | |
| Net interest income | | $ | 40,832 | | | $ | 41,479 | | | $ | 41,787 | | | $ | 42,030 | | | $ | 42,216 | | | $ | 42,374 | | | $ | 42,545 | |
| % change | | | (1.6 | )% | | | | | | | 0.7 | % | | | 1.3 | % | | | 1.8 | % | | | 2.2 | % | | | 2.6 | % |
As of December 31, 2022 , the Fed Funds target rate was a range of 4.25% to 4.50% and the prime rate was 7.50%. As of December 31, 2021, the Fed Funds target rate was a range of 0.00% to 0.25% and the prime rate was 3.25%.
Economic Value of Equity. We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities, and off-balance sheet items, defined as economic value of equity, using a simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease (shock) in market interest rates.
At December 31, 2022 and 2021, our economic value of equity exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. The following tables show projected change in economic value of equity for this set of rate shocks.
| | | Economic Value of Equity | |
| | | As of December 31, 2022 | |
| | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 300 | | | Down 200 | | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | |
| Assets | | $ | 1,130,386 | | | $ | 1,112,276 | | | $ | 1,088,217 | | | $ | 1,064,756 | | | $ | 1,038,587 | | | $ | 1,012,244 | | | $ | 985,932 | | | $ | 960,955 | | | $ | 937,615 | |
| Liabilities | | | 940,198 | | | | 905,486 | | | | 872,742 | | | | 841,887 | | | | 819,738 | | | | 798,767 | | | | 778,903 | | | | 760,083 | | | | 746,313 | |
| Net present value | | $ | 190,188 | | | $ | 206,790 | | | $ | 215,475 | | | $ | 222,869 | | | $ | 218,849 | | | $ | 213,477 | | | $ | 207,029 | | | $ | 200,872 | | | $ | 191,302 | |
| % change | | | (14.7 | )% | | | (7.2 | )% | | | (3.3 | )% | | | | | | | (1.8 | )% | | | (4.2 | )% | | | (7.1 | )% | | | (9.9 | )% | | | (14.2 | )% |
| | | Economic Value of Equity | |
| | | As of December 31, 2021 | |
| | | Interest Rate Scenario (change in basis point from Base) | |
| | | Down 100 | | | Base | | | Up 100 | | | Up 200 | | | Up 300 | | | Up 400 | | | Up 500 | |
| | | (dollars in thousands) | |
| Assets | | $ | 1,207,530 | | | $ | 1,176,520 | | | $ | 1,153,486 | | | $ | 1,129,670 | | | $ | 1,105,275 | | | $ | 1,081,304 | | | $ | 1,058,075 | |
| Liabilities | | | 1,061,422 | | | | 1,018,843 | | | | 989,950 | | | | 962,681 | | | | 936,934 | | | | 912,614 | | | | 889,633 | |
| Net present value | | $ | 146,108 | | | $ | 157,677 | | | $ | 163,536 | | | $ | 166,989 | | | $ | 168,341 | | | $ | 168,690 | | | $ | 168,442 | |
| % change | | | (7.3 | )% | | | | | | | 3.7 | % | | | 5.9 | % | | | 6.8 | % | | | 7.0 | % | | | 6.8 | % |
For further discussion of interest rate risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity Management - Interest Rate Risk.”
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and supplementary data included in this Form 10-K begin on page 50 immediately following the index to consolidated financial statements page to this Form 10-K.
