Community West Bank(US:CWBC)2023-03-31 21:29Regulatory Environment - The Company is subject to extensive regulation by the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) which impacts its operations and financial performance[216]. - Under Basel III, the minimum capital ratios required are 4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital, and 8.0% Total capital[227]. - The Company must maintain an additional capital conservation buffer of 2.5% of CET1, resulting in effective minimum ratios of 7% CET1, 8.5% Tier 1 capital, and 10.5% total capital to risk-weighted assets[227]. - The Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) modified certain financial reform rules, particularly for institutions with assets under $10 billion[223]. - The Dodd-Frank Act requires publicly traded companies to provide stockholders with a non-binding vote on executive compensation at least every three years[222]. - The Company is required to file periodic reports with the SEC, including annual reports on Form 10-K and quarterly reports on Form 10-Q[41]. - The Federal Deposit Insurance Corporation (FDIC) insures the Bank's deposits up to certain prescribed limits, which affects the Company's operations[216]. - The Company is subject to limitations on loans to affiliates, which are capped at 10% of capital for any one affiliate and 20% for all affiliates combined[232]. - The current administration's commitment to enforce Dodd-Frank provisions may impact the Company's operations and financial condition[225]. - CWB's capital levels are subject to regulatory scrutiny, with higher capital levels required for significant growth or risk exposure[241]. - The FRB's capital guidelines require banks to maintain capital ratios above minimum levels based on their risk profiles[241]. - The Dodd-Frank Act mandates the FDIC to maintain a reserve ratio of 1.35% by 2028, with recent amendments to the assessment plan[259]. Capital and Financial Performance - CWB's total risk-based capital ratio is 12.62%, exceeding the minimum requirement of 8.00% for being "well capitalized"[250]. - The Tier 1 risk-based capital ratio for CWB is 11.46%, above the minimum requirement of 6.00%[250]. - CWB's Common Equity Tier 1 capital ratio stands at 11.46%, surpassing the minimum of 4.50%[250]. - CWB is classified as "well capitalized," allowing it to accept brokered deposits without restrictions[257]. - The allowance for loan losses was $10.8 million as of December 31, 2022, consisting of $0.2 million for specific reserves and $10.6 million for general reserves[303]. - The company’s general reserves for loan losses are based on historical experience and qualitative factors, which require significant management judgment[304]. - The projected change in economic value of equity under a 500 basis point increase scenario was $191,302 thousand as of December 31, 2022, compared to $168,442 thousand for the same scenario in 2021, indicating a 13.5% increase[294][295]. - The company reported a provision for loan losses of $(195,000) in 2022, compared to $(181,000) in 2021, indicating a slight increase in credit quality[319]. - The total recorded investment in past due loans was $2.88 million, with $2.78 million classified as past due and $102 thousand over 90 days past due[406]. - The company reported recoveries of $738 thousand in 2022, compared to $392 thousand in 2021, showing an increase in recoveries[410]. Interest Rate Risk Management - The Company actively manages interest rate risk through asset and liability management, with internal policy limits to minimize risk from rising interest rates[288]. - A simulation model forecasts the impact of interest rate changes on net interest income (NII) and economic value of equity (EVE), with results indicating potential dollar and percentage impacts[289]. - The Company does not currently use derivative instruments for interest rate risk management but may consider them in the future if necessary[288]. - As of December 31, 2022, net interest income was projected to be $42,545 thousand under a 500 basis point increase scenario, reflecting a 10.0% decrease from the base case[291]. - Interest income under a base case scenario was $55,852 thousand as of December 31, 2022, with a projected interest expense of $8,600 thousand, resulting in net interest income of $47,252 thousand[291]. Loan Portfolio and Credit Quality - The company’s commercial real estate loans accounted for approximately 57.1% of total loans as of December 31, 2022, up from 53.9% in 2021[323]. - The average loan-to-value ratio for secured loans was 50.4% as of December 31, 2022, compared to 53.7% in 2021, indicating improved collateral coverage[323]. - The Company maintains an Allowance for Loan Losses (ALL) based on estimates intended to cover probable losses inherent in the loan portfolio, utilizing migration analysis and historical loss rates[341]. - Impaired loans are classified based on the likelihood of collecting scheduled payments, with management considering factors such as payment status and collateral value[339]. - Troubled Debt Restructurings (TDR) involve concessions granted to borrowers due to financial difficulties, primarily through term extensions and rate reductions[340]. - The Company evaluates and assesses impairment on loans classified as substandard or doubtful, establishing specific reserves based on individual loan characteristics[353]. - Charge-offs for commercial, CRE, and SBA loans occur as soon as any portion of the loan balance is deemed uncollectible, with unsecured loans delinquent over 90 days charged off in full[350]. - Consumer loans, excluding real estate mortgages, are charged off or charged down to net recoverable value before becoming 120 days or five payments delinquent[352]. - The ALL calculation incorporates qualitative factors related to non-impaired loans, adjusting based on migration analysis and risk ratings[356]. Financial Results - Total assets decreased to $1,091,502, down 5.67% from $1,157,052 in 2021[310]. - Net interest income increased to $45,810, up 10.76% from $42,374 in 2021[312]. - Net income for 2022 was $13,449, representing a 2.66% increase from $13,101 in 2021[312]. - Total deposits decreased to $875,084, down 7.89% from $950,131 in 2021[310]. - Loans held for investment increased to $934,309, up 7.56% from $868,675 in 2021[310]. - Non-interest expenses rose to $31,272, an increase of 11.00% from $27,995 in 2021[312]. - Basic earnings per share increased to $1.54, up from $1.53 in 2021[312]. - Dividends declared per common share increased to $0.295, up from $0.270 in 2021[312]. - Total stockholders' equity increased to $112,650, up 11.23% from $101,375 in 2021[310]. - Comprehensive income for 2022 was $12,586, a decrease from $13,158 in 2021[314]. Investment Securities - As of December 31, 2022, the total fair value of investment securities was $26,688,000, down from $27,790,000 in 2021[398]. - The Company had no sales of investment securities in 2022, 2021, or 2020[399]. - The Company pledged $21.1 million of securities at carrying value to the Federal Home Loan Bank as collateral for current and future advances as of December 31, 2022[398]. - The amortized cost of U.S. Treasury securities was $9,984,000 with a fair value of $9,970,000 as of December 31, 2022[398]. - The Company is evaluating the impact of reference rate reform on financial reporting, with $4.2 million of securities tied to LIBOR as of December 31, 2021[394]. - The adoption of ASU 2022-02 is not expected to have a material effect on the Company's consolidated operating results or financial condition[396]. - The company reported unrealized losses of $1,128,000 on securities available for sale as of December 31, 2022, with 37 securities in an unrealized loss position[402]. - The total fair value of securities held to maturity was $2,557,000 as of December 31, 2022, compared to $2,815,000 in 2021[400]. Compliance and Governance - CWB has incurred substantial costs due to compliance with the Sarbanes-Oxley Act, impacting financial reporting and audit quality[246]. - The Anti-Money Laundering Act of 2020 represents significant revisions to AML laws, enhancing government oversight and compliance obligations for financial institutions[265]. - FinCEN identified eight priorities for AML compliance, including corruption, cybercrime, and drug trafficking, to be integrated into banks' risk-based BSA compliance programs[266]. - The AML Act expands the applicability of federal AML laws to industries such as cryptocurrency and antiquities, increasing the regulatory burden on these sectors[267]. - The Corporate Transparency Act requires reporting companies to disclose beneficial ownership information to a confidential database by January 1, 2025[272]. - The Company is subject to various federal and state consumer compliance laws, which are increasingly enforced by regulators[281].