Community West Bank(CWBC) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the company's unaudited financial statements and detailed notes for the reporting periods Item 1. Financial Statements Presents unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific dates | Metric | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------ | | Assets: | | | | Cash and cash equivalents | 112,280 | 60,540 | | Investment securities - available-for-sale | 19,679 | 17,308 | | Investment securities - held-to-maturity | 3,370 | 4,586 | | Loans held for sale | 27,252 | 31,229 | | Loans held for investment, net | 855,777 | 816,154 | | Total assets | 1,063,028 | 975,435 | | Liabilities: | | | | Total deposits | 864,578 | 766,185 | | Other borrowings | 90,000 | 105,000 | | Total liabilities | 967,571 | 886,428 | | Stockholders' Equity: | | | | Total stockholders' equity | 95,457 | 89,007 | | Total liabilities and stockholders' equity | 1,063,028 | 975,435 | Consolidated Income Statements Details the company's revenues, expenses, and net income over specific reporting periods | Metric | Three Months Ended June 30, 2021 ($ thousands) | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Total interest income | 11,651 | 10,777 | 22,706 | 21,752 | | Total interest expense | 965 | 1,996 | 1,978 | 4,508 | | Net interest income | 10,686 | 8,781 | 20,728 | 17,244 | | Provision for loan losses | (41) | 762 | (214) | 1,154 | | Total non-interest income | 872 | 640 | 1,769 | 1,590 | | Total non-interest expenses | 6,669 | 7,003 | 13,529 | 13,732 | | Net income | 3,551 | 1,160 | 6,572 | 2,758 | | Basic earnings per share | 0.42 | 0.14 | 0.77 | 0.33 | | Diluted earnings per share | 0.41 | 0.14 | 0.76 | 0.32 | | Dividends declared per common share | 0.070 | 0.045 | 0.130 | 0.100 | Consolidated Statements of Comprehensive Income Presents net income and other comprehensive income components, reflecting total changes in equity from non-owner sources | Metric | Three Months Ended June 30, 2021 ($ thousands) | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net income | 3,551 | 1,160 | 6,572 | 2,758 | | Unrealized income on securities AFS, net | 160 | 59 | 115 | 25 | | Net other comprehensive income | 160 | 59 | 115 | 25 | | Comprehensive income | 3,711 | 1,219 | 6,687 | 2,783 | Consolidated Statements of Stockholders' Equity Outlines changes in common stock, retained earnings, and accumulated other comprehensive income over time | Metric | June 30, 2021 ($ thousands) | March 31, 2021 ($ thousands) | June 30, 2020 ($ thousands) | March 31, 2020 ($ thousands) | | :--------------------------------------- | :---------------------------- | :--------------------------- | :---------------------------- | :--------------------------- | | Common Stock Amount | 43,780 | 43,227 | 42,766 | 42,671 | | Retained Earnings | 51,527 | 48,574 | 41,380 | 40,602 | | Accumulated Other Comprehensive Income | 150 | (10) | (53) | (112) | | Total Stockholders' Equity | 95,457 | 91,791 | 84,093 | 83,161 | - For the three months ended June 30, 2021, net income was $3,551 thousand, stock-based compensation was $59 thousand, and dividends on common stock were $(598) thousand[16] - For the six months ended June 30, 2021, net income was $6,572 thousand, stock-based compensation was $126 thousand, and dividends on common stock were $(1,108) thousand[16] Consolidated Statements of Cash Flows Reports cash inflows and outflows from operating, investing, and financing activities | Metric | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | | :--------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | 8,925 | 8,219 | | Net cash used in investing activities | (40,215) | (86,857) | | Net cash provided by financing activities | 83,030 | 143,479 | | Net increase cash and cash equivalents | 51,740 | 64,841 | | Cash and cash equivalents at end of period | 112,280 | 147,502 | | Cash paid for interest | 2,128 | 2,134 | | Cash paid for income taxes | 3,367 | — | Notes to Unaudited Consolidated Financial Statements Provides detailed explanations and disclosures supporting the consolidated financial statements 1. Summary of Significant Accounting Policies Outlines the company's accounting policies, including GAAP adherence, COVID-19 impact, loan accounting, and recent pronouncements - The Company, Community West Bancshares (CWBC), is a bank holding company operating through its wholly-owned subsidiary, Community West Bank, N.A. (CWB), providing full-service banking[23] - The COVID-19 pandemic has had adverse effects on the economy, but government programs like the Paycheck Protection Program (PPP) and loan modification guidance under the CARES Act have lessened disruptive effects[29] - As of June 30, 2021, the outstanding balance of deferred loans due to COVID-19 was $0.6 million, representing 0.1% of the total loan portfolio[29][40] - The Company maintains an Allowance for Loan Losses (ALL) based on migration analysis, historical loss rates, and qualitative factors, with specific charge-off policies for different loan categories (Commercial, CRE, SBA, Single Family Real Estate, HELOC, Manufactured Housing, Consumer)[42][52][53][54][55] - A Troubled Debt Restructured (TDR) loan involves concessions due to borrower financial difficulties, such as term extensions or rate reductions, and is also considered impaired[38] - The Company is evaluating the impact of ASU-2016-13 (Credit Losses) effective January 1, 2023, and ASU-2020-04 (Reference Rate Reform) which is not anticipated to have a material impact[68][69] 2. Investment Securities Details investment securities, including available-for-sale and held-to-maturity, with fair values, unrealized gains/losses, and maturity Investment Securities at June 30, 2021 ($ thousands) | Type | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | | :--------------------------------------- | :------------- | :--------------------- | :------------------------ | :--------- | | Securities available-for-sale | 19,473 | 216 | (10) | 19,679 | | Securities held-to-maturity | 3,370 | 194 | (1) | 3,563 | | Securities measured at fair value | 66 | 132 | — | 198 | | Total | 22,909 | 542 | (11) | 23,440 | Investment Securities at December 31, 2020 ($ thousands) | Type | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | | :--------------------------------------- | :------------- | :--------------------- | :------------------------ | :--------- | | Securities available-for-sale | 17,266 | 87 | (45) | 17,308 | | Securities held-to-maturity | 4,586 | 269 | (1) | 4,854 | | Securities measured at fair value | 66 | 83 | — | 149 | | Total | 21,918 | 439 | (46) | 22,311 | - As of June 30, 2021, $15.4 million of securities were pledged to the FHLB as collateral, down from $18.9 million at December 31, 2020[71] - Unrealized losses are primarily due to increases in market interest rates, and management believes these impairments are temporary, with no other-than-temporary impairment losses recognized[78] 3. Loans Held For Sale This section details the composition of loans held for sale, primarily consisting of SBA and agricultural loans, and notes the principal balance of these loans serviced for others Loans Held for Sale ($ millions) | Loan Type | June 30, 2021 | December 31, 2020 | | :---------------- | :------------ | :---------------- | | SBA loans | $8.0 | $8.3 | | USDA loans | $19.3 | $22.9 | | Total | $27.3 | $31.2 | - The Company's agricultural lending program includes loans for agricultural land, operational lines, and term loans, supported by USDA, FSA, and USDA Business and Industry loan program guarantees[80] 4. Loans Held For Investment Provides an overview of loans held for investment, including composition, ALL changes, impairment, and nonaccrual/TDR loans Composition of Loans Held for Investment ($ thousands) | Loan Type | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Manufactured housing | 286,552 | 280,284 | | Commercial real estate | 444,127 | 402,148 | | Commercial | 49,243 | 57,933 | | SBA (includes PPP loans) | 73,920 | 73,131 | | HELOC | 3,685 | 3,861 | | Single family real estate | 10,623 | 10,490 | | Consumer | 40 | 133 | | Total gross loans | 868,190 | 827,980 | | Allowance for loan losses | (10,240) | (10,194) | | Deferred fees, net | (2,133) | (1,583) | | Discount on SBA loans | (40) | (49) | | Total loans held for investment, net | 855,777 | 816,154 | Allowance for Loan Losses (ALL) Changes ($ thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance | 10,233 | 9,167 | 10,194 | 8,717 | | Net recoveries | 48 | 79 | 260 | 137 | | Provision (credit) | (41) | 762 | (214) | 1,154 | | Ending balance | 10,240 | 10,008 | 10,240 | 10,008 | Impaired Loans ($ thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Impaired loans with a specific valuation allowance | 4,798 | 5,081 | | Impaired loans without a specific valuation allowance | 6,680 | 7,418 | | Total impaired loans | 11,478 | 12,499 | | Valuation allowance related to impaired loans | 275 | 311 | Nonaccrual Loans by Class ($ thousands) | Loan Type | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Manufactured housing | 97 | 614 | | Commercial real estate (SBA 504 1st trust deed) | 1,386 | 1,469 | | Commercial | — | 1,390 | | SBA | 147 | 275 | | Single family real estate | 276 | 124 | | Total nonaccrual loans | 1,906 | 3,872 | - Nonaccrual loans decreased by 51% from $3.7 million at December 31, 2020, to $1.8 million at June 30, 2021 (net of government guarantees)[100][242] - The Company had one new Troubled Debt Restructured (TDR) loan for the three and six months ended June 30, 2021, with a recorded investment of $167 thousand, resulting from a court-ordered modification due to bankruptcy[104][107] 5. Other Assets Acquired Through Foreclosure This section summarizes the changes in other assets acquired through foreclosure, which primarily consist of properties obtained through or in-lieu-of foreclosure, reported at fair value less estimated costs to sell Changes in Other Assets Acquired Through Foreclosure ($ thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Balance, beginning of period | 2,614 | 2,524 | | Additions | 136 | 106 | | (Loss) gain on sales, net | (178) | 77 | | Balance, end of period | 2,572 | 2,707 | - The balance of foreclosed assets is primarily attributable to a single commercial agricultural relationship[110] 6. Fair Value Measurement Details fair value measurements using a three-level hierarchy, with tables for recurring and non-recurring assets and valuation methods - The Company uses a three-level valuation hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs) for fair value measurements[113] Fair Value of Assets Measured on a Recurring Basis at June 30, 2021 ($ thousands) | Asset | Level 1 | Level 2 | Level 3 | Fair Value | | :--------------------------------------- | :------ | :------ | :------ | :--------- | | Investment securities measured at fair value | 198 | — | — | 198 | | Investment securities available-for-sale | — | 19,679 | — | 19,679 | | Interest only strips | — | — | 5 | 5 | | Servicing assets | — | — | 1,525 | 1,525 | | Total | 198 | 19,679 | 1,530 | 21,407 | Fair Value of Assets Measured on a Non-Recurring Basis at June 30, 2021 ($ thousands) | Asset | Level 2 | Level 3 | Total | | :--------------------------------------- | :------ | :------ | :---- | | Impaired loans | 3,736 | — | 3,736 | | Loans held for sale | 30,929 | — | 30,929 | | Foreclosed real estate and repossessed assets | 2,572 | — | 2,572 | | Total | 37,237 | — | 37,237 | - Fair values of investment securities (excluding Farmer Mac stock) are determined using matrix pricing (Level 2)[138] - Impaired loans are measured at collateral fair value (Level 2) or discounted cash flow (Level 3)[141] 7. Other Borrowings This section details the Company's various borrowing arrangements, including Federal Home Loan Bank (FHLB) advances, Federal Reserve Bank (FRB) credit lines, federal funds purchased lines, and a revolving line of credit, along with their outstanding balances, collateral, and available borrowing capacity Other Borrowings ($ millions) | Borrowing Type | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | FHLB advances | $90.0 | $105.0 | | FHLB letters of credit | $26.0 | N/A | | Available FHLB borrowing capacity | $104.2 | $81.4 | | Available FRB borrowing capacity | $110.7 | $102.7 | | Federal funds purchased lines | $0.0 | $0.0 | | Revolving line of credit | $0.0 | $0.0 | - FHLB advances are collateralized by eligible loans and securities, with $15.4 million of securities and $300.9 million of loans pledged at June 30, 2021[147] - The Company had no outstanding FRB advances or PPPLF advances at June 30, 2021, and no outstanding federal funds purchased or revolving line of credit balances[148][149][150] 8. Stockholders' Equity This section outlines changes in stockholders' equity, specifically focusing on other comprehensive income (loss) components and common stock activities, including repurchases and dividends Changes in Other Comprehensive Income (Loss), Net of Tax ($ thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance | (10) | (112) | 35 | (78) | | Other comprehensive income before reclassifications | 160 | 59 | 115 | 25 | | Net current-period other comprehensive income | 160 | 59 | 115 | 25 | | Ending Balance | 150 | (53) | 150 | (53) | - The common stock repurchase program was increased to $4.5 million and extended until August 31, 2021[153] - No shares were repurchased during the six months ended June 30, 2021[153] Common Stock Dividends Paid ($ millions) | Period | 2021 | 2020 | | :--------------------------------------- | :--- | :--- | | Three months ended June 30 | $0.6 | $0.4 | | Six months ended June 30 | $1.1 | $0.8 | 9. Capital Requirement This section details the Company's capital adequacy, including regulatory ratios and compliance with Federal Reserve guidelines. It highlights the adoption of the Community Bank Leverage Ratio (CBLR) framework and the Bank's actual regulatory ratios compared to minimum and well-capitalized requirements - The Company adopted the Community Bank Leverage Ratio (CBLR) framework, effective January 1, 2020, for capital ratio calculation[156] - To qualify, a bank must have less than $10 billion in assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total assets, and trading assets/liabilities of 5% or less of total assets[156] CWB's Regulatory Capital Ratios | Ratio | June 30, 2021 | December 31, 2020 | Minimum Capital Requirements | Well-Capitalized Requirements | | :--------------------------------------- | :------------ | :---------------- | :--------------------------- | :---------------------------- | | Total Capital (To Risk-Weighted Assets) | 12.46% | 12.27% | 8.00% | 10.00% | | Tier 1 Capital (To Risk-Weighted Assets) | 11.21% | 11.02% | 6.00% | 8.00% | | Common Equity Tier 1 (To Risk-Weighted Assets) | 11.21% | 11.02% | 4.50% | 6.50% | | Leverage Ratio/Tier 1 Capital (To Average Assets) | 8.94% | 9.29% | 4.00% | N/A | | Community Banking Leverage Ratio | 8.94% | 9.29% | 8.00% | 9.00% | | Minimum capital requirements including fully-phased in capital conservation buffer | 10.50% | 10.50% | N/A | N/A | - The Bank's CBLR was 8.94% at June 30, 2021, meeting the temporary CBLR minimum of 8.50% to be considered well-capitalized until January 1, 2022[158] 10. Revenue Recognition Discusses Topic 606 adoption for revenue recognition, clarifying its application to non-interest income and recognition methods - The Company adopted ASU No. 2014-09 (Topic 606) for revenue from contracts with customers[160] - Topic 606 does not apply to revenue from financial instruments (loans, securities, servicing rights, financial guarantees, certain credit card fees)[161] - Non-interest income streams in-scope of Topic 606 include service charges on deposit accounts (recognized over service period or at point of transaction) and exchange fees/other service charges (recognized when services are rendered or upon completion)[162][163] Non-Interest Income Segregated by Topic 606 Scope ($ thousands) | Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | In-scope of Topic 606 | 176 | 82 | 332 | 241 | | Out-of-scope of Topic 606 | 696 | 558 | 1,437 | 1,349 | | Total | 872 | 640 | 1,769 | 1,590 | - The Company does not typically enter into long-term revenue contracts and did not have significant contract balances or capitalized contract acquisition costs as of June 30, 2021, and December 31, 2020[165][166] 11. Leases This section details the Company's adoption of Topic 842 for leases, primarily operating leases for office space. It provides lease cost information, weighted average lease terms, and discount rates, along with future minimum operating lease payments - The Company adopted Topic 842 for leases, primarily operating leases for office space with terms between 2 and 10 years[169] - As of June 30, 2021, right-of-use assets were $5.5 million and lease liabilities were $5.6 million[169] Lease Cost and Other Information ($ thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | 1,018 | 1,109 | | Weighted average remaining lease term - operating leases | 8.45 years | 9.42 years | | Weighted average discount rate - operating leases | 3.24% | 3.25% | Future Minimum Operating Lease Payments ($ thousands) | Year | June 30, 2021 | | :--------------------------------------- | :------------ | | 2021 | 496 | | 2022 | 887 | | 2023 | 813 | | 2024 | 821 | | 2025 | 768 | | Thereafter | 2,586 | | Total future minimum lease payments | 6,371 | | Less remaining imputed interest | 820 | | Total lease liabilities | 5,551 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of financial condition, operations, liquidity, capital, and interest rate sensitivity, including COVID-19 impacts Forward Looking Statements This section outlines the Company's forward-looking statements, emphasizing inherent risks and uncertainties, and disclaims any obligation to update them unless legally required - The report contains forward-looking statements subject to risks and uncertainties, including general economic conditions, COVID-19 impacts, changes in loan portfolio and credit quality, legislative/regulatory changes, interest rate fluctuations, and technological changes[173][174] - The Company disclaims any obligation to update forward-looking statements, except as required by law[173] Financial Overview and Highlights This section provides a financial overview and highlights key performance indicators, including the impact of the COVID-19 pandemic and government support programs - Community West Bancshares (CWBC) is a bank holding company headquartered in Goleta, California, with seven branch banking offices[177] - The COVID-19 pandemic led to government support programs like the CARES Act and PPP[178] - The Company funded $50.0 million in second-round PPP loans and received $21.8 million in payoffs on first-round PPP loans during the six months ended June 30, 2021[179] - Total outstanding PPP loans were $71.1 million[180] - The Company facilitated $123.7 million in SBA PPP loans, which are eligible for a zero percent risk weight for capital purposes and exclusion from average assets for the leverage ratio if pledged to the FRB's PPPLF program[182] - As of June 30, 2021, loans to heavily impacted industries (retail, healthcare, hospitality, schools, energy) totaled $166.0 million, representing 18.6% of the $893.3 million loan portfolio[183] Financial Result Highlights for Q2 2021 | Metric | 2Q21 | 2Q20 | YoY Change | | :--------------------------------------- | :----- | :----- | :--------- | | Net income ($ millions) | $3.6 | $1.2 | +$2.4 | | Diluted EPS | $0.41 | $0.14 | +$0.27 | | Net interest income ($ millions) | $10.7 | $8.8 | +$1.9 | | Provision (credit) for loan losses ($ thousands) | $(41) | $762 | $(803) | | Net interest margin | 4.24% | 3.72% | +0.52% | | Total demand deposits ($ millions) | $651.9 | $504.1 | +$147.8 | | Total loans ($ millions) | $893.3 | $856.0 | +$37.3 | | Book value per common share | $11.11 | $9.93 | +$1.18 | | Net non-accrual loans ($ millions) | $1.8 | $2.6 | $(0.8) | | Allowance for loan losses to total loans held for investment | 1.18% | 1.29% (excl. PPP) | -0.11% | | CBLR | 8.94% | 8.94% | 0.00% | Critical Accounting Policies This section discusses critical accounting policies, such as loan loss provisions and investment securities, which involve significant management estimates and judgments - Critical accounting policies, including provision and allowance for loan losses and investment securities, involve significant estimates and judgments by management, as discussed in the Company's Annual Report on Form 10-K[188] Results of Operations Analyzes the company's financial performance, including interest income, expenses, and non-interest components Interest Rates and Dif erentials This section analyzes interest income, interest expense, and net interest margin, detailing average yields and rates, and quantifying volume and rate changes Average Yields and Rates (Three Months Ended June 30) | Metric | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Average yield on total earning assets | 4.63% | 4.57% | | Average rate on total interest-bearing liabilities | 0.53% | 1.14% | | Net interest margin | 4.24% | 3.72% | | Net interest spread | 4.10% | 3.43% | Average Yields and Rates (Six Months Ended June 30) | Metric | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Average yield on total earning assets | 4.62% | 4.84% | | Average rate on total interest-bearing liabilities | 0.55% | 1.32% | | Net interest margin | 4.22% | 3.84% | | Net interest spread | 4.07% | 3.52% | - Net interest income increased by $1.9 million for the three months ended June 30, 2021, and by $3.5 million for the six months ended June 30, 2021, primarily due to a decrease in interest expense from lower rates paid on deposits and repricing of FHLB advances[194][205] - The annualized average cost of interest-bearing liabilities decreased by 61 basis points to 0.53% for the three months ended June 30, 2021, compared to 1.14% in the same period of 2020[196][205] Provision for Loan Losses Details the provision for loan losses, highlighting a significant decrease due to positive loan rating migrations and recoveries Provision for Loan Losses ($ thousands) | Period | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Three months ended June 30 | $(41) | $762 | | Six months ended June 30 | $(214) | $1,154 | - The decrease in provision for loan losses was primarily due to positive loan rating migrations and loan loss recoveries[207] - The allowance for loan losses was 1.18% of loans held for investment at June 30, 2021, and 1.29% when excluding SBA PPP loans (100% government guaranteed)[207] - The percentage of net nonaccrual loans to total loan portfolio decreased to 0.20% at June 30, 2021, from 0.43% at December 31, 2020[210] - The allowance for loan losses compared to net nonaccrual loans increased to 570% at June 30, 2021, from 263% at December 31, 2020[211] Non-Interest Income This section summarizes the Company's non-interest income, primarily derived from fees for loan and deposit services. It highlights an increase in total non-interest income due to reallocation of interchange fees and increased loan originations and sales Non-Interest Income ($ thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Other loan fees | 310 | 239 | 623 | 525 | | Gains from loan sales, net | 130 | 97 | 248 | 287 | | Document processing fees | 138 | 108 | 244 | 232 | | Service charges | 74 | 62 | 141 | 196 | | Other | 220 | 134 | 513 | 350 | | Total non-interest income | 872 | 640 | 1,769 | 1,590 | - Total non-interest income increased by $0.2 million for the three months ended June 30, 2021, compared to the same period in 2020[213] - The increase was driven by reallocation of interchange fees from deposit transaction activity, increased manufactured home loan originations, and higher gains from Farmer Mac loan sales[213] Non-Interest Expenses This section summarizes the Company's non-interest expenses, noting a slight decrease for the current periods. The decrease is attributed to reduced salaries, professional services, and advertising, partially offset by increased data processing and an asset impairment expense Non-Interest Expenses ($ thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Salaries and employee benefits | 4,379 | 4,574 | 8,944 | 8,972 | | Occupancy, net | 780 | 776 | 1,559 | 1,534 | | Professional services | 430 | 559 | 770 | 942 | | Data processing | 332 | 260 | 672 | 543 | | Depreciation | 198 | 206 | 403 | 414 | | FDIC assessment | 121 | 133 | 212 | 277 | | Advertising and marketing | 164 | 265 | 347 | 418 | | Stock based compensation | 58 | 95 | 126 | 180 | | Other | 207 | 135 | 496 | 452 | | Total non-interest expense | 6,669 | 7,003 | 13,529 | 13,732 | - Total non-interest expenses decreased by $0.3 million and $0.2 million for the three and six months ended June 30, 2021, respectively, primarily due to decreased salaries and employee benefits, professional services (legal, director travel/training), and advertising/marketing[215] - These decreases were partially offset by an increase in data processing expenses (due to reallocation of deposit interchange fee income) and an asset impairment expense related to an OREO property[215] Income Taxes This section provides details on the Company's income tax provision and effective tax rates. It also discusses the recognition of deferred tax assets and liabilities, the assessment for valuation allowances, and the impact of the CARES Act Income Tax Provision ($ millions) | Period | 2021 | 2020 | | :--------------------------------------- | :----- | :----- | | Three months ended June 30 | $1.4 | $0.5 | | Six months ended June 30 | $2.6 | $1.2 | - The combined state and federal effective income tax rates for the six months ended June 30, 2021 and 2020 were 28.4% and 30.1%, respectively[216] - Net deferred tax assets were $4.1 million at June 30, 2021, and $4.0 million at December 31, 2020[217] - No valuation allowance was established on deferred tax assets for either period[220] - The Company evaluated the CARES Act provisions and does not anticipate a material effect on its financial position[222] Balance Sheet Analysis Analyzes key balance sheet accounts, including assets, liabilities, and stockholders' equity, and their period-over-period changes Selected Balance Sheet Accounts This section provides a summary of key balance sheet accounts, highlighting changes in assets, liabilities, and stockholders' equity from December 31, 2020, to June 30, 2021 Selected Balance Sheet Accounts ($ thousands) | Account | June 30, 2021 | December 31, 2020 | Increase (Decrease) | Percent Change | | :--------------------------------------- | :------------ | :---------------- | :------------------ | :------------- | | Cash and cash equivalents | 112,280 | 60,540 | 51,740 | 85.5% | | Investment securities available-for-sale | 19,679 | 17,308 | 2,371 | 13.7% | | Investment securities held-to-maturity | 3,370 | 4,586 | (1,216) | (26.5)% | | Loans - held for sale | 27,252 | 31,229 | (3,977) | (12.7)% | | Loans - held for investment, net | 855,777 | 816,154 | 39,623 | 4.9% | | Total assets | 1,063,028 | 975,435 | 87,593 | 9.0% | | Total deposits | 864,578 | 766,185 | 98,393 | 12.8% | | Other borrowings | 90,000 | 105,000 | (15,000) | (14.3)% | | Total stockholder's equity | 95,457 | 89,007 | 6,450 | 7.2% | - Total assets increased by $87.6 million to $1.1 billion, driven by increases in cash and cash equivalents ($51.7 million) and net loans ($35.6 million), primarily from SBA PPP loan fundings and growth in commercial real estate and manufactured housing portfolios[224] - Total liabilities increased by $81.1 million, mainly due to a $98.4 million increase in deposits (non-interest-bearing, interest-bearing demand, and certificates of deposit), partially offset by a $15.0 million decrease in other borrowings[225] - Total stockholders' equity increased by $6.5 million to $95.5 million, with a book value per common share of $11.11 at June 30, 2021[226] Concentrations of Lending Activities This section discusses the Company's lending concentrations, primarily in the Central Coast of California, with significant exposure to manufactured housing and commercial real estate markets - The Company's lending activities are concentrated in the Central Coast of California, with significant exposure to manufactured housing and commercial real estate markets[230] Loan Portfolio Concentrations | Loan Type | June 30, 2021 (% of total loans) | December 31, 2020 (% of total loans) | | :--------------------------------------- | :------------------------------- | :------------------------------- | | Manufactured housing | 32.1% | 31.6% | | Commercial real estate (incl. SBA 504, land, construction) | 49.7% | 45.3% | | Owner-occupied commercial real estate | 29.1% | 28.9% | - The Company exceeded two concentration lending limits due to rapid growth in SBA PPP loans but anticipates returning to established limits as forgiveness processes proceed[230] Asset Quality Assesses asset quality using metrics like nonaccrual loans and net charge-offs, detailing TDR loans and impairment criteria Asset Quality Metrics | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Nonaccrual loans (net of government guaranteed portion) ($ thousands) | $1,797 | $3,665 | | Troubled debt restructured loans, gross ($ thousands) | $11,001 | $11,141 | | Nonaccrual loans (net of government guaranteed portion) to gross loans | 0.20% | 0.43% | | Net charge-offs (recoveries) (annualized) to average loans | 0.00% | (0.03)% | | Allowance for loan losses to nonaccrual loans (net of government guaranteed portion) | 600% | 263% | | Allowance for loan losses to gross loans | 1.18% | 1.23% | - A loan is considered impaired when it is probable that the Company will be unable to collect scheduled payments, based on payment status, collateral value, and collection probability[233] - TDR loans are also considered impaired, involving concessions due to borrower financial difficulties, predominantly term extensions[234] Impaired Loans This section provides a summary of impaired loans and specific reserves by loan class, noting a decrease in total impaired loans and the impact of COVID-19 related loan modifications Impaired Loans by Class at June 30, 2021 ($ thousands) | Loan Class | Impaired loans with an allowance recorded | Impaired loans with no allowance recorded | Total loans individually evaluated for impairment | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | :------------------------------------------------ | | Manufactured Housing | 4,043 | 1,286 | 5,329 | | Commercial Real Estate | 225 | 1,386 | 1,611 | | Commercial | 93 | 1,619 | 1,712 | | SBA | — | 397 | 397 | | HELOC | — | — | — | | Single Family Real Estate | 437 | 1,992 | 2,429 | | Consumer | — | — | — | | Total | 4,798 | 6,680 | 11,478 | - Total impaired loans decreased by $1.0 million in Q2 2021 compared to December 31, 2020, primarily due to a $1.4 million decrease in manufactured housing impaired loans, partially offset by increases in commercial, SBA, and single-family real estate loans[240] - As of June 30, 2021, one loan remained on deferral for $0.6 million under the COVID-19 loan modification program, which exempts qualified modifications from TDR classification[238] Allowance For Loan Losses This section provides a detailed allocation of the allowance for loan losses (ALL) by loan type and summarizes the changes in ALL, including provisions, recoveries, and charge-offs Allowance for Loan Losses by Loan Type (Six Months Ended June 30, 2021, $ thousands) | Loan Type | Beginning Balance | Provisions (credit) | Recoveries | Net (charge-offs) recoveries | Ending Balance | | :--------------------------------------- | :---------------- | :------------------ | :--------- | :--------------------------- | :------------- | | Manufactured housing | 2,612 | (133) | 151 | 151 | 2,630 | | Commercial real estate | 5,950 | 338 | 40 | 40 | 6,328 | | Commercial | 1,379 | (379) | 20 | 20 | 1,020 | | SBA | 118 | (49) | 45 | 45 | 114 | | HELOC | 25 | (3) | 3 | 3 | 25 | | Single family real estate | 108 | 13 | 1 | 1 | 122 | | Consumer | 2 | (1) | — | — | 1 | | Total | 10,194 | (214) | 260 | 260 | 10,240 | - The ALL increased slightly from $10,194 thousand at the beginning of the six-month period to $10,240 thousand at June 30, 2021, driven by net recoveries of $260 thousand and a provision credit of $214 thousand[244] Potential Problem Loans This section presents information on potential problem loans, defined as loans graded 'watch' or worse but still performing, categorized by loan class Potential Problem Loans at June 30, 2021 ($ thousands) | Loan Class | Number of Loans | Loan Balance | Percent of Total Loans | | :--------------------------------------- | :-------------- | :----------- | :--------------------- | | Manufactured housing | 6 | $434 | 0.05% | | Commercial real estate | 21 | $18,981 | 2.15% | | Commercial | 7 | $3,048 | 0.35% | | SBA | 3 | $143 | 0.02% | | Single family real estate | 1 | $5 | 0.00% | | Total | 38 | $22,611 | 2.57% | - Of the $22.6 million in potential problem loans at June 30, 2021, $1.7 million are guaranteed by government agencies[246] - Total potential problem loans decreased from $28.8 million (49 loans) at December 31, 2020, to $22.6 million (38 loans) at June 30, 2021[246][247] Investment Securities This section describes the classification and management of investment securities, which are used for collateral, liquidity, capital, and interest rate risk management, and provides their carrying values - Investment securities are classified as held-to-maturity (amortized cost) or available-for-sale (fair value, unrealized gains/losses in OCI) based on asset/liability management strategies, liquidity, profitability, and regulatory requirements[248] Carrying Value of Investment Securities ($ thousands) | Security Type | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | U.S. government agency notes | $5,994 | $6,472 | | U.S. government agency mortgage-backed securities ("MBS") | $3,370 | $4,586 | | U.S. government agency collateralized mortgage obligations ("CMO") | $6,041 | $7,785 | | Other securities | $7,644 | $3,051 | | Equity securities: Farmer Mac class A stock | $198 | $149 | | Total | $23,247 | $22,043 | Other Assets Acquired Through Foreclosure This section summarizes the changes in other assets acquired through foreclosure, which are primarily properties obtained through or in-lieu-of foreclosure, reported at fair value less estimated costs to sell Changes in Other Assets Acquired Through Foreclosure ($ thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Balance, beginning of period | 2,614 | 2,524 | | Additions | 136 | 106 | | (Loss) gain on sales, net | (178) | 77 | | Balance, end of period | 2,572 | 2,707 | - The majority of the balance relates to one property of $2.5 million[252] - The Company had a $0.2 million valuation allowance on foreclosed assets at June 30, 2021[252] Deposits This section provides an overview of the Company's deposit balances and their changes, highlighting the primary sources of funding for asset growth and the use of CDARS and ICS for FDIC insurance on large deposits Deposit Balances ($ thousands) | Deposit Type | June 30, 2021 | December 31, 2020 | Increase (Decrease) | Percent Change | | :--------------------------------------- | :------------ | :---------------- | :------------------ | :------------- | | Non-interest-bearing demand deposits | 202,293 | 181,837 | 20,456 | 11.2% | | Interest-bearing demand deposits | 449,649 | 398,101 | 51,548 | 12.9% | | Savings | 19,700 | 18,736 | 964 | 5.1% | | Certificates of deposit ($250,000 or more) | 19,791 | 30,536 | (10,745) | (35.2)% | | Other certificates of deposit | 173,145 | 136,975 | 36,170 | 26.4% | | Total deposits | 864,578 | 766,185 | 98,393 | 12.8% | - Total deposits increased by $98.4 million to $864.6 million, primarily from increases in non-interest-bearing and interest-bearing demand deposits, partially offset by maturing time deposits[253] - The Company utilizes CDARS and ICS for FDIC insurance on large deposits, totaling $101.7 million at June 30, 2021[253] Liquidity and Capital Resources Discusses liquidity management strategies and capital resources, emphasizing capital strength, regulatory ratios, and funding - Liquidity management involves forecasting funding requirements and maintaining sufficient capacity through operating, investing, and financing activities, supported by asset and liability management committees (ALCO)[256][257][258][259] - The Company's liquidity ratio was 15.0% at June 30, 2021, up from 11.2% at December 31, 2020, reflecting the sum of cash, deposits in other financial institutions, available-for-sale investments, federal funds sold, and loans held for sale, divided by total assets[263] - Maintaining capital strength is a long-term objective, necessary for growth, asset value protection, and depositor funds safeguarding[265] - The Company has 60,000,000 authorized common shares, with 8,589,166 issued at June 30, 2021[265] CWB's Regulatory Capital Ratios | Ratio | June 30, 2021 | December 31, 2020 | Minimum Capital Requirements | Well-Capitalized Requirements | | :--------------------------------------- | :------------ | :---------------- | :--------------------------- | :---------------------------- | | Total Capital (To Risk-Weighted Assets) | 12.46% | 12.27% | 8.00% | 10.00% | | Tier 1 Capital (To Risk-Weighted Assets) | 11.21% | 11.02% | 6.00% | 8.00% | | Common Equity Tier 1 (To Risk-Weighted Assets) | 11.21% | 11.02% | 4.50% | 6.50% | | Leverage Ratio/Tier 1 Capital (To Average Assets) | 8.94% | 9.29% | 4.00% | N/A | | Community Banking Leverage Ratio | 8.94% | 9.29% | 8.00% | 9.00% | Supervision and Regulation This section highlights that banking is a highly regulated industry, with the Company subject to various federal and state laws and regulatory agencies. It notes that changes in laws or regulations can significantly impact the Company's business and earnings - The Company operates in a complex, highly regulated industry, governed by federal and state laws and agencies like the Federal Reserve System, OCC, and FDIC[272] - Regulations cover permissible business scope, investments, reserves, capital levels, collateral, branching, mergers, and dividends[273] - Future changes in laws, regulations, or policies may materially affect the Company's business and earnings[274] Item 3. Quantitative and Qualitative Disclosures About Market Risk Addresses market risk exposure, particularly interest rate risk, and the COVID-19 pandemic's impact on cash flows and deposits - There has been no material change in market risk disclosures since the Company's Annual Report on Form 10-K[276] - The ultimate impact of the COVID-19 pandemic on market risk remains uncertain, affecting repricing cash flows, prepayment projections for loans and mortgage-backed securities, and customer deposit flows[276] - The Company continues to monitor customer and economic indicators to develop more precise market risk assumptions, expecting continued volatility in economic markets[276] Item 4. Controls and Procedures Confirms management's evaluation of effective disclosure controls and procedures, with no material changes in internal control - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2021[277] - Disclosure controls provide reasonable assurance but are subject to inherent limitations, such as human judgment and errors[278] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2021[279] PART II. OTHER INFORMATION Presents other required information not covered in the financial statements or management's discussion and analysis Item 1. Legal Proceedings This section states that the Company is involved in routine litigation matters, but management believes their resolution will not have a material impact on the Company's financial position or results of operations - The Company is involved in various routine litigation matters, which are not expected to have a material impact on its financial position or results of operations[281] Item 1A. Risk Factors This section refers to the risk factors detailed in the Company's Annual Report on Form 10-K, stating that there have been no material changes to these risks - There has been no material change in the Company's risk factors as previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020[282] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that the Company made no repurchases of its common stock during the quarter ended June 30, 2021, with approximately $1.4 million remaining under the repurchase program - The Company made no repurchases of its common stock during the quarter ended June 30, 2021[283] - Approximately $1.4 million may yet be purchased under the Company's repurchase program[283] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - There were no defaults upon senior securities[283] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[283] Item 5. Other Information This section states that there is no other information to report - There is no other information to report[283] Item 6. Exhibits This section lists all exhibits filed with the report, including certifications from the CEO and CFO, and various Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1*) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[284][287] Signatures This section contains the signature of the authorized officer, Susan C. Thompson, Executive Vice President and Chief Financial Officer, confirming the due filing of the report - The report is signed by Susan C. Thompson, Executive Vice President and Chief Financial Officer, on behalf of Community West Bancshares, dated August 6, 2021[285][286]