Community West Bancshares

03/17/2025 | Press release | Distributed by Public on 03/17/2025 14:27

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis should be read in conjunction with the Company's audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report.
INTRODUCTION
Effective April 1, 2024, Central Valley Community Bancorp, completed its merger transaction with Community West Bancshares. Shortly thereafter, Community West Bank, a wholly owned subsidiary of Community West Bancshares, merged with and into Central Valley Community Bank, a wholly owned subsidiary of Central Valley Community Bancorp, with Central Valley Community Bank being the surviving banking institution. Effective with these mergers, the names of Central Valley Community Bancorp and Central Valley Community Bank were changed to Community West Bancshares and Community West Bank, respectively.
Community West Bancshares (NASDAQ: CWBC) (the Company) was incorporated on February 7, 2000. The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves. The Company currently has one bank subsidiary, Community West Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Company's market area includes Central California from Sacramento, California in the north to Bakersfield, California in the south and west to the Central California Coast.
During 2024, we focused on asset quality, liquidity, and capital adequacy. We also focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry.
As of December 31, 2024, the Bank operated 26 full-service offices. Additionally, the Bank maintains an Agribusiness Center, and an SBA Lending Division.
OVERVIEW
Financial Highlights
The significant highlights for the Company as of or for the period ended December 31, 2024 included the following:
•Net income for 2024 was $7,666,000 compared to $25,536,000 and $26,645,000 for the years ended December 31, 2023 and 2022, respectively.
•Diluted earnings per share (EPS) for the year ended December 31, 2024 was $0.45, compared to $2.17 and $2.27 for the years ended December 31, 2023 and 2022, respectively.
•Total assets at December 31, 2024 were $3.52 billion compared to $2.43 billion at December 31, 2023.
•Net loans increased $1.03 billion or 81%, and total assets increased $1.09 billion or 45% at December 31, 2024 compared to December 31, 2023.
•Total deposits increased 43% to $2.91 billion at December 31, 2024 compared to $2.04 billion at December 31, 2023.
•Total equity was $363 million at December 31, 2024 compared to $207 million at December 31, 2023.
•Total cost of deposits increased to 1.53% for the year ended December 31, 2024 compared to 0.72% for the year ended December 31, 2023.
•Average non-interest bearing demand deposit accounts as a percentage of total average deposits was 38.62% and 45.84% for the years ended December 31, 2024 and December 31, 2023, respectively.
•Net interest margin increased to 3.76% for the year ended December 31, 2024, from 3.58% for the year ended December 31, 2023.
•Return on average equity ("ROE") for 2024 was 2.42% compared to 13.81% and 14.25% for 2023 and 2022, respectively.
•Return on average assets ("ROA") for 2024 was 0.24% compared to 1.04% and 1.09% for 2023 and 2022, respectively.
•There were $6.46 million non-performing assets for the year ended December 31, 2024. Additionally, net loan charge-offs were $463,000 and loans delinquent more than 30 days were $9.84 million, compared to net loan charge-offs of $20,000 and loans delinquent more than 30 days of $3.74 million for the year ended December 31, 2023.
•Capital positions remain strong at December 31, 2024 with a 9.17% Tier 1 Leverage Ratio; a 11.15% Common Equity Tier 1 Ratio; a 11.33% Tier 1 Risk-Based Capital Ratio; and a 13.58% Total Risk-Based Capital Ratio.
Dividend Declared
The Company declared a $0.12 per common share cash dividend, payable on February 21, 2025 to shareholders of record on February 7, 2025.
Key Factors in Evaluating Financial Condition and Operating Performance
In evaluating our financial condition and operating performance, we focus on several key factors including:
•Return to our shareholders;
•Return on average assets and net interest margin;
•Asset quality;
•Asset growth;
•Capital adequacy;
•Operating efficiency; and
•Liquidity.
Return to Our Shareholders
One measure of our return to our shareholders is the return on average equity (ROE), which is a ratio that measures net income divided by average shareholders' equity. Our ROE was 2.42% for the year ended 2024 compared to 13.81% and 14.25% for the years ended 2023 and 2022, respectively.
Our net income for the year ended December 31, 2024 decreased $17,870,000 compared to 2023 and decreased $1,109,000 in 2023 compared to 2022. Contributing to the decrease during 2024, compared to 2023, was due to merger related expenses of $20,491,000, including a one-time provision for the expected credit losses of the acquired portfolio of $10,877,000. During 2023, net income compared to 2022 was primarily impacted by higher non-interest expenses, including $1,191,000 in merger related expenses.
Net interest income increased $27,938,000 primarily due to increased volume and rates from the merger with Community West Bancshares. For 2024, our net interest margin (NIM) increased 18 basis points to 3.76% compared to 3.58% in 2023 as a result of yield and asset mix changes. Net interest income was positively impacted by the accretion of the loan marks on acquired
loans in the amount of $9,849,000 and $325,000 for the twelve months ended December 31, 2024 and 2023, respectively. In addition, net interest income before the provision for credit losses for the twelve months ended December 31, 2024 benefited by approximately $83,000 in nonrecurring income from prepayment penalties and payoff of loans, as compared to $165,000 for the twelve months ended December 31, 2023. Excluding these benefits, net interest income for the twelve months ended December 31, 2024 increased by $18,496,000 compared to the twelve months ended December 31, 2023.
Non-interest income decreased $575,000, or 8.19% in 2024 compared to 2023 primarily due to a $3,292,000 increase in net realized losses on sales and calls of investment securities partially offset by an increase of $1,629,000 in other income, an increase in loan placement fees of $309,000 and a increase in service charge income of $295,000. The increase in other income is primarily attributed to changes in fair value of other equity investments and increase in certain merchant fee activity.
Non-interest expenses increased $39,401,000 or 71.25% to $94,701,000 in 2024 compared to $55,300,000 in 2023. The net increase year over year was driven by the merger, which added seven banking centers and 131 additional full-time equivalent employees on April 1, 2024. The most notable increases were salaries and employee benefits of $17,103,000, merger related expenses of $8,423,000, occupancy expenses of $3,753,000, information technology of $2,324,000 and $1,127,000 in data processing.
The Company recorded an income tax provision of $3,332,000 for the twelve months ended December 31, 2024, compared to $8,304,000 for the twelve months ended December 31, 2023, and $8,496,000 for the twelve months ended December 31, 2022. Basic EPS was $0.45 for 2024 compared to $2.17 and $2.27 for 2023 and 2022, respectively. Diluted EPS was $0.45 for 2024 compared to $2.17 and $2.27 for 2023 and 2022, respectively.
Return on Average Assets and Net Interest Margin
Our ROA is a ratio that measures our performance as a comparable figure with other banks and bank holding companies. Our ROA for the year ended 2024 was 0.24% compared to 1.04% and 1.09% for the years ended December 31, 2023 and 2022, respectively. The 2024 decrease of 80 basis points in ROA is primarily due to the decrease in net income due to merger related expenses, including a one-time provision for the expected credit losses of the acquired portfolio of $10,877,000.
Our net interest margin (fully tax equivalent basis) was 3.76% for the year ended December 31, 2024, compared to 3.58% and 3.52% for the years ended December 31, 2023 and 2022, respectively. The increase in 2024 net interest margin compared to 2023, resulted from the increase in the yield on the Company's loan portfolio and an increase in the balance of average interest earning assets. The effective tax equivalent yield on total earning assets increased 101 basis points. This increase was partially offset by an increase in the cost of total interest-bearing liabilities, which increased 117 basis points to 2.76% for the year ended December 31, 2024. Our cost of total deposits in 2024 and 2023 was 1.53% and 0.72%, respectively, compared to 0.06% for the same period in 2022. Our net interest income before provision for credit losses increased $27,938,000 or 33.89% to $110,367,000 for the year ended 2024 compared to $82,429,000 and $79,566,000 for the years ended 2023 and 2022, respectively.
Asset Quality
For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of classified and nonperforming loans, and is a key element in estimating the future earnings of a company. There were $6.46 million nonperforming assets or nonperforming loans at December 31, 2024. There were no non-performing loans at December 31, 2023. The increase in nonperforming assets was primarily due to nonperforming assets acquired as of April 1, 2024 in connection with the merger. Also during 2024, there were $2.26 million in single family residential mortgages placed on non-accrual.
The Company had no other real estate owned at December 31, 2024, or December 31, 2023. No foreclosed assets were recorded at December 31, 2024 or December 31, 2023. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.
The allowance for credit losses as a percentage of outstanding loan balance was 1.11% as of December 31, 2024 and 1.14% as of December 31, 2023. The ratio of net charge-offs/(recoveries) to average loans was 0.02% as of December 31, 2024 and (0.002)% as of December 31, 2023.
Asset Growth
As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Due to the merger that closed on April 1, 2024, total assets increased 45% during 2024 to $3,521,771,000 as of December 31, 2024 from $2,433,426,000 as of December 31, 2023. Total loans, net of discount increased 80.84% to $2,334,221,000 as of December 31, 2024, compared to $1,290,797,000 at December 31, 2023. Total investment securities decreased $121,229,000 to $785,058,000 as of December 31, 2024 compared to $906,287,000 as of December 31, 2023. Total deposits increased 43% to $2,910,777,000 as of December 31, 2024 compared to $2,041,612,000 as of December 31, 2023.
Our loan to deposit ratio at December 31, 2024 was 80.19% compared to 63.22% at December 31, 2023.
Capital Adequacy
At December 31, 2024, we had a total capital to risk-weighted assets ratio of 13.58%, a Tier 1 risk-based capital ratio of 11.33%, common equity Tier 1 ratio of 11.15%, and a leverage ratio of 9.17%. At December 31, 2023, we had a total capital to risk-weighted assets ratio of 16.08%, a Tier 1 risk-based capital ratio of 13.07%, common equity Tier 1 ratio of 12.78%, and a leverage ratio of 9.18%. At December 31, 2024, on a stand-alone basis, the Bank had a total risk-based capital ratio of 14.54%, a Tier 1 risk based capital ratio of 13.54%, common equity Tier 1 ratio of 13.54%, and a leverage ratio of 11.04%. At December 31, 2023, the Bank had a total risk-based capital ratio of 17.74%, Tier 1 risk-based capital of 16.76% and a leverage ratio of 11.75%. Note 13of the audited Consolidated Financial Statements provides more detailed information concerning the Company's capital amounts and ratios.
As of December 31, 2024, the Bank met or exceeded all of their capital requirements inclusive of the capital buffer. The Bank's capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2024.
Operating Efficiency
Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. A lower ratio represents greater efficiency. The Company's efficiency ratio (operating expenses divided by net interest income plus non-interest income) was 81.07% for 2024 compared to 61.82% for 2023 and 57.30% for 2022. The decline in the efficiency ratio in 2024 was due to the merger related expenses. The combination of the Company's net interest income before provision for credit losses, plus non-interest income, increased 30.59% to $116,812,000 in 2024 compared to $89,449,000 in 2023 and $84,620,000 in 2022, while operating expenses increased 71.25% in 2024, 14.06% in 2023, and 1.06% in 2022.
Liquidity
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers' credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors' Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco, or the Federal Reserve. We have available unsecured lines of credit with correspondent banks totaling approximately $110,000,000 and secured borrowing lines of approximately $738,556,000 with the Federal Home Loan Bank. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.
We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, equity securities, and available-for-sale securities) totaling $604,097,000 or 17.15% of total assets at December 31, 2024 and $657,573,000 or 27.02% of total assets as of December 31, 2023.
RESULTS OF OPERATIONS
For the Year Ended
December 31, December 31, December 31,
(In thousands, except share and per-share amounts) 2024 2023 2022
Net interest income before provision for credit losses $ 110,367 $ 82,429 $ 79,566
Provision for credit losses 11,113 309 995
Net interest income after provision for credit losses 99,254 82,120 78,571
Total non-interest income 6,445 7,020 5,054
Total non-interest expenses 94,701 55,300 48,484
Income before provision for income taxes 10,998 33,840 35,141
Provision for income taxes 3,332 8,304 8,496
Net income $ 7,666 $ 25,536 $ 26,645
Net income was $7,666,000 in 2024 compared to $25,536,000 and $26,645,000 in 2023 and 2022, respectively. Basic earnings per share was $0.45, $2.17, and $2.27 for 2024, 2023, and 2022, respectively. Diluted earnings per share was $0.45, $2.17, and $2.27 for 2024, 2023, and 2022, respectively. ROE was 2.42% for 2024 compared to 13.81% for 2023 and 14.25% for 2022. ROA for 2024 was 0.24% compared to 1.04% for 2023 and 1.09% for 2022.
Net income for the year ended December 31, 2024 decreased $17,870,000 compared to 2023 and decreased $1,109,000 in 2023 compared to 2022. Contributing to the decrease during 2024, compared to 2023, were merger related expenses, including a one-time provision for the expected credit losses of the acquired portfolio of $10,877,000. During 2023, net income compared to 2022 was primarily impacted by higher non-interest expenses, including $1,191,000 of merger related expenses.
Statement Regarding use of Non-GAAP Financial Measures
Community West Bancshares's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of the Company's core operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage the Company's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.
Reconciliation of GAAP and Non-GAAP Financial Measures
December 31,
December 31,
(In thousands, except share and per-share amounts) 2024 2023
NET INCOME:
Net income (GAAP) $ 7,666 $ 25,536
Merger and conversion related costs:
Provision for credit losses on non-purchased credit deteriorated loans 10,877 -
Personnel and severance 3,639 -
Professional services 2,240 1,191
Data processing and information technology 2,961 -
Other 774 -
Total merger and conversion related costs, net of taxes 20,491 1,191
Loss on sale of investment securities 4,199 907
Income tax benefit of non-core expenses (7,298) (620)
Comparable net income (non-GAAP) $ 25,058 $ 27,014
DILUTED EARNINGS PER SHARE:
Weighted average diluted shares 17,179,796 11,752,872
Diluted earnings per share (GAAP) $ 0.45 $ 2.17
Comparable diluted earnings per share (non-GAAP) $ 1.46 $ 2.30
RETURN ON AVERAGE ASSETS
Average assets $ 3,190,361 $ 2,460,358
Return on average assets (GAAP) 0.24 % 1.04 %
Comparable return on average assets (non-GAAP) 0.79 % 1.10 %
RETURN ON AVERAGE EQUITY
Average stockholders' equity $ 317,142 $ 184,878
Return on average equity (GAAP) 2.42 % 13.81 %
Comparable return on average equity (non-GAAP) 7.90 % 14.61 %
EFFICIENCY RATIO
Non-interest expense (GAAP) $ 94,701 $ 55,300
Merger-related non-interest expenses (20,491) (1,191)
Non-interest expense (non-GAAP) 74,210 54,109
Net interest income (GAAP) 110,367 82,429
Non-interest income (GAAP) 6,445 7,020
Loss on sale of investment securities 4,199 907
Non-interest income (non-GAAP) $ 10,644 $ 7,927
Efficiency ratio (GAAP) 81.07 % 61.82 %
Comparable efficiency ratio (non-GAAP) 61.33 % 59.88 %
Interest Income and Expense
The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.
The following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.
SCHEDULE OF AVERAGE BALANCES, AVERAGE YIELDS AND RATES
Year Ended December 31, 2024 Year Ended December 31, 2023 Year Ended December 31, 2022
(Dollars in thousands) Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate 		Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate 		Average
Balance 		Interest
Income/
Expense 		Average
Interest
Rate
ASSETS
Interest-earning deposits in other banks
$ 83,251 $ 4,355 5.23 % $ 67,749 $ 3,576 5.28 % $ 48,032 $ 391 0.81 %
Securities
Taxable securities 663,230 20,384 3.07 % 760,140 23,437 3.08 % 862,079 20,011 2.32 %
Non-taxable securities (1) 249,584 6,940 2.78 % 256,196 7,091 2.77 % 270,014 8,454 3.13 %
Total investment securities
912,814 27,324 2.99 % 1,016,336 30,528 3.00 % 1,132,093 28,465 2.51 %
Total securities and interest-earning deposits
996,065 31,679 3.18 % 1,084,085 34,104 3.15 % 1,180,125 28,856 2.45 %
Loans (2) (3) 1,978,386 130,166 6.58 % 1,263,226 69,803 5.53 % 1,133,641 55,907 4.93 %
Total interest-earning assets
2,974,451 $ 161,845 5.44 % 2,347,311 $ 103,907 4.43 % 2,313,766 $ 84,763 3.66 %
Allowance for credit losses
(22,635) (14,312) (10,005)
Nonaccrual loans
2,421 - 278
Cash and due from banks
29,884 27,671 36,491
Bank premises and equipment
20,297 10,465 8,092
Other assets
185,943 89,223 90,772
Total average assets $ 3,190,361 $ 2,460,358 $ 2,439,394
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings and NOW accounts
$ 481,447 $ 1,464 0.30 % $ 473,102 $ 611 0.13 % $ 581,285 $ 232 0.04 %
Money market accounts
759,203 20,284 2.67 % 531,013 8,910 1.68 % 486,823 848 0.17 %
Time certificates of deposit
389,667 18,918 4.85 % 163,220 6,006 3.68 % 81,473 117 0.14 %
Total interest-bearing deposits
1,630,317 40,666 2.49 % 1,167,335 15,527 1.33 % 1,149,581 1,197 0.10 %
Other borrowed funds 178,627 9,355 5.24 % 86,250 4,462 5.17 % 63,752 2,225 3.49 %
Total interest-bearing liabilities
1,808,944 $ 50,021 2.76 % 1,253,585 $ 19,989 1.59 % 1,213,333 $ 3,422 0.28 %
Non-interest bearing demand deposits
1,025,611 987,906 1,006,511
Other liabilities 38,664 33,989 32,532
Shareholders' equity 317,142 184,878 187,018
Total average liabilities and shareholders' equity
$ 3,190,361 $ 2,460,358 $ 2,439,394
Interest income and rate earned on average earning assets
$ 161,845 5.44 % $ 103,907 4.43 % $ 84,763 3.66 %
Interest expense and interest cost related to average interest-bearing liabilities
50,021 2.76 % 19,989 1.59 % 3,422 0.28 %
Net interest income and net interest margin (4)
$ 111,824 3.76 % $ 83,918 3.58 % $ 81,341 3.52 %
(1)Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,457, $1,489, and $1,775 in 2024, 2023, and 2022, respectively.
(2)Loan interest income includes loan (costs)fees of $(622) in 2024, $(11) in 2023, and $274 in 2022.
(3)Average loans do not include nonaccrual loans.
(4)Net interest margin is computed by dividing net interest income by total average interest-earning assets.
The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated. The change in interest due to both rate and volume has been allocated to the change in rate.
Changes in Volume/Rate For the Years Ended December 31, 2024 Compared to 2023 For the Years Ended December 31, 2023 Compared to 2022
(In thousands) Volume Rate Net Volume Rate Net
Increase (decrease) due to changes in:
Interest income:
Interest-earning deposits in other banks $ 818 $ (39) $ 779 $ 160 $ 3,025 $ 3,185
Investment securities:
Taxable (2,988) (65) (3,053) (2,366) 5,792 3,426
Non-taxable (1) (183) 32 (151) (432) (931) (1,363)
Total investment securities (3,171) (33) (3,204) (2,798) 4,861 2,063
Loans 39,518 20,845 60,363 6,390 7,506 13,896
Total earning assets (1) 37,165 20,773 57,938 3,752 15,392 19,144
Interest expense:
Deposits:
Savings, NOW and MMA 3,838 8,389 12,227 33 8,408 8,441
Time certificate of deposits 8,332 4,580 12,912 117 5,772 5,889
Total interest-bearing deposits 12,170 12,969 25,139 150 14,180 14,330
Other borrowed funds 4,778 115 4,893 785 1,452 2,237
Total interest bearing liabilities 16,948 13,084 30,032 935 15,632 16,567
Net interest income (1) $ 20,217 $ 7,689 $ 27,906 $ 2,817 $ (240) $ 2,577
(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.
Interest and fee income from loans increased $60,363,000 or 86.48% in 2024 compared to 2023. Interest and fee income from loans increased $13,896,000 or 24.86% in 2023 compared to 2022. The increase in 2024 is attributable to rate increases and an increase of $717,581,000 in average total loans outstanding.
Average total loans, including nonaccrual loans, for 2024 increased $717,581,000 to $1,980,807,000 compared to $1,263,226,000 for 2023 and $1,133,919,000 for 2022. The yield on loans for 2024 was 6.58% compared to 5.53% and 4.93% for 2023 and 2022, respectively. The impact to interest income from the accretion of the loan marks on acquired loans was an increase to $9,849,000 from $325,000 for the years ended December 31, 2024 and 2023, respectively.
Interest income from total investment securities decreased $3,204,000 in the twelve months ended December 31, 2024 to $27,324,000 compared to $30,528,000 for 2022 and $28,465,000 for 2022. The yield on average total investment securities decreased one basis point to 2.99% for the twelve months ended December 31, 2024 compared to 3.00% for 2023 and 2.51% for 2022. Average total amortized cost of investment securities for the twelve months ended December 31, 2024 decreased $103,522,000 or 10.19% to $912,814,000 compared to $1,016,336,000 for 2023 and $1,132,093,000 for 2022.
A significant portion of the investment portfolio is mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At December 31, 2024, we held $302,857,000 or 38.90% of the total market value of the investment portfolio in MBS and CMOs with an average book yield of 2.94%. We invested in CMOs and MBS as part of our overall strategy to increase our net interest margin. CMOs and MBS by their nature are affected by prepayments which are impacted by changes in interest rates. In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten. However, as interest rates have increased, prepayments have declined and the average life of the MBS and CMOs have extended. Premium amortization and discount accretion of these investments affects our net interest income. Management monitors the prepayment trends of these investments and adjusts premium amortization and discount accretion based on several factors. These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market. The calculation of premium amortization and discount accretion is by its nature inexact, and represents management's best estimate of principal pay downs inherent in the total investment portfolio.
The cumulative net-of-tax effect of the change in market value of the available-for-sale investment portfolio as of December 31, 2024 was an unrealized loss of $55,115,000 and is reflected in the Company's equity. At December 31, 2024, the effective duration of the available-for-sale investment portfolio was 4.02 years and the market value reflected a pre-tax unrealized loss of $59,221,000. Management reviews market value declines on individual investment securities to determine whether there is a need to record impairment. For the years ended December 31, 2024, 2023, and 2022, no impairment was recorded. Future deterioration in the market values of our investment securities may require the Company to recognize unrealized losses.
Total interest income in 2024 increased $57,970,000 to $160,388,000 compared to $102,418,000 in 2023 and $82,988,000 in 2022, respectively. The increase in 2024 was the result of the merger, yield changes and asset mix changes. The tax-equivalent yield on interest earning assets increased to 5.44% for the year ended December 31, 2024 from 4.43% for the year ended December 31, 2023. Average interest earning assets increased to $2,974,451,000 for the year ended December 31, 2024 compared to $2,347,311,000 for the year ended December 31, 2023. Average interest-earning deposits in other banks increased $15,502,000 in 2024 compared to 2023. Average yield on these deposits was 5.23% compared to 5.28% on December 31, 2024 and December 31, 2023 respectively. Average investments and interest-earning deposits decreased $88,020,000 and the tax equivalent yield on those assets increased three basis points. Average total loans increased $717,581,000 while the yield on average loans increased 105 basis points.
Interest expense on deposits in 2024 increased $25,139,000 or 161.91% to $40,666,000 compared to $15,527,000 in 2023 and increased $39,469,000 as compared to 2022. The yield on interest-bearing deposits increased to 2.49% for the year ended December 31, 2024, compared to 1.33% for the year ended December 31, 2023. The yield on interest-bearing deposits increased 123 basis points from 0.10% when comparing 2023 to 2022. Average interest-bearing deposits were $1,630,317,000 for 2024 compared to $1,167,335,000 and $1,149,581,000 for 2023 and 2022, respectively.
Average other borrowings were $178,627,000 with an effective rate of 5.24% for 2024 compared to $86,250,000 with an effective rate of 5.17% for 2023. Included in other borrowings are the junior subordinated debentures acquired from Service 1st Bancorp ("Service 1st"), subordinated debt, senior debt, advances on lines of credit, advances from the Federal Home Loan Bank (FHLB), and overnight borrowings. The junior subordinated debentures carry a floating rate based on the three month SOFR plus a margin of 1.60%. The rate was 6.52% for 2024 and 7.26% for 2023. The subordinated debt, issued in 2021, bears a fixed interest rate of 3.130% per year. The senior debt has an interest rate cap of 6.75% which was reached in 2022. The FHLB long-term advances were recorded at fair value as of April 1, 2024 and included a discount of $4.4 million that is being amortized over the remaining life of the advances, which mature in April and June 2025. Additionally, there was one short-term FHLB advance outstanding as of December 31, 2024 with an interest rate of 4.52%.
The cost of all interest-bearing liabilities was 2.76% for 2024, compared to 1.59% and 0.28% for 2023 and 2022, respectively. The cost of total deposits was 1.53% for the year ended December 31, 2024, compared to 0.72% and 0.06% for the years ended December 31, 2023 and 2022, respectively. Average non-interest bearing demand deposits increased $37,705,000 to $1,025,611,000 in 2024 compared to $987,906,000 for 2023 and $1,006,511,000 for 2022. The ratio of average non-interest demand deposits to average total deposits decreased to 38.62% for 2024 compared to 45.84% and 46.68% for 2023 and 2022, respectively.
Net Interest Income before Provision for Credit Losses
Net interest income before provision for credit losses for 2024 increased $27,938,000 or 33.89% to $110,367,000 compared to $82,429,000 for 2023. The increase in 2024 was a result of yield changes, asset mix changes, and an increase in average earning assets, offset by an increase in average interest bearing liabilities. The increase in average earnings assets and liabilities was due to the merger with Community West Bank. The net interest margin (NIM) increased eighteen basis points. Yield on interest earning assets increased 101 basis points. The increase in net interest margin in the period-to-period comparison resulted primarily from the increase in yield and volume of loans partially offset by increase in the yield and volume of interest-bearing liabilities.
Net interest income before provision for credit losses increased $7,012,000 in 2023 compared to 2022, primarily due yield changes and asset mix changes. Average interest-earning assets were $2,974,451,000 for the year ended December 31, 2024 with a NIM of 3.76% compared to $2,347,311,000 with a NIM of 3.58% in 2023, and $2,313,766,000 with a NIM of 3.52% in 2022. For a discussion of the repricing of our assets and liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.
Non-Interest Income
Non-interest income is comprised of customer service charges, gains (losses) on sales and calls of investment securities, income from appreciation in cash surrender value of bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends, and other income. Non-interest income was $6,445,000 in 2024 compared to $7,020,000 and $5,054,000 in 2023 and 2022, respectively. The $575,000 or 8.19% decrease in non-interest income in 2024 was driven by an increase in net realized losses on sales and calls of investment securities, partially offset by an increase in other income, increase in loan placement fees and an increase in service charge income. The $1,966,000 or 39% improvement in non-interest income in 2023 was driven by a decrease in net realized losses on sales and calls of investment securities, an increase in other income, gain on sale of assets, partially offset by a decrease in loan placement fees and service charges.
Customer service charges increased $295,000 to $1,798,000 in 2024 compared to $1,503,000 in 2023. The increase in service charge fees in 2024 was due to the merger and increased customer base. Service charges were $2,014,000 in 2022. The decrease in our 2023 fees compared to 2022 was the result of lower NSF and analysis service charges.
During the year ended December 31, 2024, we realized net losses on sales and calls of investment securities of $4,199,000, compared to net losses of $907,000 and $1,730,000 in 2023 and 2022, respectively. The net losses in all years were the results of partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. Realized losses recorded in 2024 and 2023 were the result of strategic decisions to reduce the overall impact of the Company's investment portfolio and fund loan growth. See Note 3to the audited Consolidated Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life insurance (BOLI) totaled $1,325,000 in 2024 compared to $1,035,000 and $985,000 in 2023 and 2022, respectively. The Bank's salary continuation and deferred compensation plans and the related BOLI are used as retention tools for directors and key executives of the Bank.
Interchange fees totaled $2,078,000 in 2024 compared to $1,780,000 and $1,847,000 in 2023 and 2022, respectively.
The Company earns loan placement fees from the brokerage of single-family residential mortgage loans provided for the convenience of our customers. Loan placement fees increased $309,000 in 2024 to $893,000 compared to $584,000 in 2023 and $899,000 in 2022.
The Bank holds stock from the Federal Home Loan Bank in relationship with its borrowing capacity and generally receives quarterly dividends. As of December 31, 2024 and 2023, we held FHLB stock totaling $10,978,000 and $7,136,000, respectively. Dividends in 2024 increased to $796,000 compared to $498,000 in 2023 and $367,000 in 2022.
Other income increased to $3,747,000 in 2024 compared to $2,125,000 and $657,000 in 2023 and 2022, respectively. The increase in other income is primarily attributed to changes in fair value of other equity investments and increase in certain merchant fee activity.
Non-Interest Expenses
Salaries and employee benefits, occupancy and equipment, regulatory assessments, acquisition and integration-related expenses, data processing expenses, ATM/Debit card expenses, license and maintenance contract expenses, information technology, and professional services (consisting of audit, accounting, consulting and legal fees) are the major categories of non-interest expenses. Non-interest expenses increased $39,401,000 or 71.25% to $94,701,000 in 2024 compared to $55,300,000 in 2023, and $48,484,000 in 2022.
Our efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangibles, other real estate owned, and repossessed asset expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains or losses on sale and calls of investments) was 81.07% for 2024 compared to 61.82% for 2023 and 57.30% for 2022. The increase in the efficiency ratio in 2024 compared to 2023 was due to the increase in non-interest expense, primarily due to merger related expenses.
Salaries and employee benefits increased $17,103,000 or 54.53% to $48,470,000 in 2024 compared to $31,367,000 in 2023 and $28,917,000 in 2022. Full time equivalents were 346 for the year ended December 31, 2024 compared to 246 for the year ended December 31, 2023. The increase in salaries and employee benefits in 2024 compared to 2023 was from the increased headcount from the merger as well as increases in salary to reflect current market conditions.
For the years ended December 31, 2024, 2023, and 2022, the compensation cost recognized for equity-based compensation was $879,000, $858,000 and $776,000, respectively. As of December 31, 2024, there was $1,097,000 of total unrecognized compensation cost related to non-vested equity-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted average period of 2.15 years. See Notes 1 and 14to the audited Consolidated Financial Statements for more detail. The Company issued 390,462 options to purchase common stock to previous option holders of Community West Bancshares as part of the merger. No options to purchase shares of the Company's common stock were issued during the years ending December 31, 2023 and 2022. Restricted common stock awards of 72,360, 69,692, and 56,089 shares were awarded in 2024, 2023, and 2022, respectively.
Occupancy and equipment expense increased $3,753,000 or 65.54% to $9,479,000 in 2024 compared to $5,726,000 in 2023 and $5,131,000 in 2022. The Company made no changes in its depreciation expense methodology. The Company operated 26 full-service offices at December 31, 2024 and 19 full-service offices at December 31, 2023. During 2024, the Company acquired seven banking centers through the merger and opened one new banking center.
Regulatory assessments were $1,837,000 in 2024 compared to $1,312,000 and $851,000 in 2023 and 2022, respectively. The assessment base for calculating the amount owed is based on the formula of average assets minus average tangible equity.
Information technology expense increased $2,324,000 to $5,940,000 for the year ended December 31, 2024 compared to $3,616,000 and $3,344,000 in 2023 and 2022, respectively. Data processing expenses were $3,748,000 in 2024 compared to $2,621,000 in 2023 and $2,245,000 in 2022. Professional services increased $591,000 in 2024 compared to 2023 due to higher audit fees, legal expenses and consulting fees.
The following table shows significant components of other non-interest expense for the periods indicated:
For the Twelve Months
Ended December 31,
(Dollars in thousands) 2024 2023 2022
Telephone expenses $ 787 $ 439 $ 376
Donations, including Community Reinvestment Act (CRA) donations 701 326 225
Business development and entertainment 618 210 122
Travel expense 537 162 114
Armored car and courier service 507 266 257
Meetings and meals 382 184 144
Operating losses 375 214 253
Stationery and supplies 331 153 155
Internet banking expense 319 158 134
General insurance 278 255 211
Alarm and security service expense 267 146 121
Education and training 263 220 191
Remote deposit capture 218 163 123
Association expense 145 121 133
Risk management expense 99 142 99
Service charge fee expense 85 101 99
Other 1,622 1,110 816
Total other non-interest expense $ 7,534 $ 4,370 $ 3,573
Provision for Income Taxes
Our effective income tax rate was 30.3% for 2024 compared to 24.5% for 2023 and 24.2% for 2022. The increase in the effective tax rate during 2024 was due to non-deductible merger expenses, non-deductible salary expenses, increased meals and entertainment expenses, and tax return true-ups. The Company reported an income tax provision of $3,332,000, $8,304,000, and $8,496,000 for the years ended December 31, 2024, 2023, and 2022, respectively.
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company's actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that the deferred tax assets will not be realized. The determination of the realization of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax-planning strategies, and assessments of current and future economic and business conditions.
The Company had net deferred tax assets of $46,421,000 and $38,456,000 at December 31, 2024 and 2023, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at December 31, 2024 and 2023 will be fully realized in future years.
FINANCIAL CONDITION
Summary of Changes in Consolidated Balance Sheets
Total assets were $3,521,771,000 as of December 31, 2024, compared to $2,433,426,000 as of December 31, 2023, an increase of 44.7% or $1,088,345,000. Total loans, net of discount and origination costs, were $2,334,221,000 as of December 31, 2024, compared to $1,290,797,000 as of December 31, 2023, an increase of $1,043,424,000 or 80.8%. The total investment portfolio decreased 13.38% or $121,229,000 to $785,058,000. Total deposits increased 42.6% or $869,165,000 to $2,910,777,000 as of December 31, 2024, compared to $2,041,612,000 as of December 31, 2023. Shareholders' equity increased $155,621,000 or 75% to $362,685,000 as of December 31, 2024, compared to $207,064,000 as of December 31, 2023. The increase in shareholders' equity was driven by the issuance of common stock of $143,712,000 in relation to the merger with Community West Bancshares, the decrease in net unrealized losses on the investment portfolio, net of estimated taxes, in accumulated other comprehensive income (AOCI), supported by the retention of earnings, net of dividends paid. Accrued interest payable and other liabilities were $44,978,000 as of December 31, 2024, compared to $35,006,000 as of December 31, 2023, an increase of $9,972,000.
Fair Value
The Company measures the fair value of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario. Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value. Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
See Note 17of the Notes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
Investments
The following table reflects the balances for each category of securities at year end (in thousands):
Amortized Cost at December 31,
Available-for-Sale Securities 2024 2023 2022
U.S. Treasury securities $ 9,994 $ 9,990 $ 9,990
U.S. Government agencies 70 102 107
Obligations of states and political subdivisions 183,766 198,070 201,638
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 76,732 88,874 117,292
Private label mortgage and asset backed securities 265,302 372,610 411,441
Corporate debt securities 470 - -
Total Available-for-Sale Securities $ 536,334 $ 669,646 $ 740,468
Amortized Cost at December 31,
Held-to-Maturity Securities 2024 2023 2022
Obligations of states and political subdivisions $ 192,156 $ 192,070 $ 192,004
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations 11,095 10,758 10,430
Private label mortgage and asset backed securities 53,066 54,579 56,691
Corporate debt securities 46,198 46,086 45,982
Total Held-to-Maturity Securities $ 302,515 $ 303,493 $ 305,107
Our investment portfolio consists of U.S. Government sponsored entities and agencies collateralized by mortgage backed obligations and obligations of states and political subdivision securities and are classified at the date of acquisition as available-for-sale or held-to-maturity. As of December 31, 2024, investment securities with a fair value of $430,714,000, or 54.86% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes. Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee. They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.
The total investment portfolio decreased 13.38% or $121,229,000 to $785,058,000 at December 31, 2024, from $906,287,000 at December 31, 2023. The market value of the portfolio reflected an unrealized loss of $59,221,000 at December 31, 2024, compared to an unrealized loss of $72,450,000 at December 31, 2023.
Losses recognized in 2024, 2023, and 2022 were incurred in order to reposition the investment securities portfolio based on the current rate environment. As market interest rates or risks associated with a security's issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company's current risk profile is appropriate and beneficial to the Company.
The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses as interest rates rise. We have been managing the portfolio with an objective of optimizing risk and return in various interest rate scenarios. We do not attempt to predict future interest rates, but we analyze the cash flows of our investment portfolio in different interest rate scenarios in connection with the rest of our balance sheet to design an investment portfolio that optimizes performance.
The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed. There were no impairment losses recorded during the years ended December 31, 2024, 2023, or 2022.
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2024 are summarized in the following table.
(Dollars in thousands) In one year or less After one through five
years 		After five through ten years After ten years Total
Available-for-Sale Securities Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Debt securities(1)
U.S. Treasury securities $ - - % $ 9,994 1.27 % $ - - % $ - - % $ 9,994 1.27 %
U.S. Government agencies
- - - - - - 70 3.95 % 70 3.95 %
Obligations of states and political subdivisions (2)
- - 5,667 1.49 % 33,585 2.01 % 144,514 2.03 % 183,766 2.01 %
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
- - 12 1.27 % 6,392 2.06 % 70,328 4.70 % 76,732 4.11 %
Private label residential mortgage and asset backed securities
19,938 6.81 % 3,079 2.59 % 4,974 3.15 % 237,311 2.19 % 265,302 2.56 %
Corporate Debt Securities $ - - 470 6.36 % $ 470 6.36 %
$ 19,938 6.81 % $ 18,752 1.56 % $ 45,421 2.19 % $ 452,223 2.53 % $ 536,334 2.63 %
(Dollars in thousands) In one year or less After one through five
years 		After five through ten years After ten years Total
Held-to-Maturity Securities Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Debt securities(1)
Obligations of states and political subdivisions (2)
$ - - % $ 24,536 3.40 % $ 60,369 3.43 % $ 107,251 3.20 % $ 192,156 3.30 %
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
- - - - - - 11,095 3.10 % 11,095 3.10 %
Private label residential mortgage and asset backed securities
- - - - - - 53,066 3.84 % 53,066 3.84 %
Corporate Debt Securities - - 4,000 9.09 % 42,198 4.64 % - - 46,198 5.30 %
$ - - % $ 28,536 4.20 % $ 102,567 3.16 % $ 171,412 3.39 % $ 302,515 3.65 %
(1)Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2)Not computed on a tax equivalent basis.
Loans
Total loans, net of discount and deferred costs, increased $1,043,424,000 or 80.8% to $2,334,221,000 as of December 31, 2024, compared to $1,290,797,000 as of December 31, 2023.
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2024, 2023, 2022, 2021, and 2020.
2024 2023 2022 2021 2020
Loan Type (Dollars in thousands) Amount % of Gross Loans Amount % of Total Loans Amount % of Total
Loans 		Amount % of Total Loans Amount % of Total Loans
Commercial:
Commercial and industrial $ 143,422 6.1 % $ 105,466 8.2 % $ 141,197 11.3 % $ 136,600 13.2 % $ 273,431 24.7 %
Agricultural production 37,323 1.6 % 33,556 2.6 % 37,007 2.9 % 40,860 3.9 % 21,971 2.0 %
Total commercial 180,745 7.7 % 139,022 10.8 % 178,204 14.2 % 177,460 17.1 % 295,402 26.7 %
Real estate:
Construction & other land loans 67,869 2.9 % 33,472 2.6 % 109,175 8.7 % 61,586 5.9 % 55,419 5.0 %
Commercial real estate - owner occupied 323,188 13.9 % 215,146 16.7 % 194,663 15.5 % 212,234 20.4 % 208,843 18.9 %
Commercial real estate - non-owner occupied 913,165 39.2 % 539,522 41.9 % 464,809 37.0 % 369,529 35.6 % 338,888 30.7 %
Farmland 139,815 6.0 % 120,674 9.4 % 119,648 9.5 % 98,481 9.5 % 84,258 7.6 %
Multi-family residential 133,595 5.7 % 61,307 4.8 % 24,586 2.0 % 26,084 2.5 % 28,718 2.6 %
1-4 family - close-ended 123,445 5.3 % 96,558 7.5 % 93,510 7.5 % 33,377 3.2 % 34,245 3.1 %
1-4 family - revolving 35,421 1.5 % 27,648 2.1 % 30,071 2.4 % 22,246 2.1 % 21,393 1.9 %
Total real estate 1,736,498 74.5 % 1,094,327 84.9 % 1,036,462 82.6 % 823,537 79.3 % 771,764 69.8 %
Consumer:
Manufactured housing 322,263 13.8 % - - % - - % - - % - - %
Other installment 92,839 4.0 % 55,606 4.3 % 40,252 3.2 % 37,243 3.6 % 37,793 3.4 %
Total consumer 415,102 17.8 % 55,606 4.3 % 40,252 3.2 % 37,243 3.6 % 37,793 3.4 %
Total loans, net of discount 2,332,345 100.0 % 1,288,955 100.0 % 1,254,918 100.0 % 1,038,240 100.0 % 1,104,959 100.0 %
Net deferred origination fees 1,876 1,842 1,386 871 (2,612)
Loans, net of discount and deferred origination fees 2,334,221 1,290,797 1,256,304 1,039,111 1,102,347
Allowance for credit losses (25,803) (14,653) (10,848) (9,600) (12,915)
Total loans, net (1) $ 2,308,418 $ 1,276,144 $ 1,245,456 $ 1,029,511 $ 1,089,432
(1) Includes nonaccrual loans of: $ 6,461 $ - $ - $ 946 $ 3,278
At December 31, 2024, loans acquired in the CWB, FLB, SVB, and VCB acquisitions had a balance of $1,054,668,000, of which $39,237,000 were commercial loans, $654,181,000 were real estate loans, and $361,250,000 were consumer loans. At December 31, 2023, the acquired loans had a balance of $58,983,000, of which $1,633,000 were commercial loans, $53,591,000 were real estate loans, and $3,759,000 were consumer loans.
At December 31, 2024, in management's judgment, a concentration of loans existed in real estate-related loans, representing 74.3% of total loans. This level of concentration is consistent with a concentration of 84.8% at December 31, 2023. The reduction in the concentration of real-estate related loans was primarily due to the merger which added more diversification of loan types through the acquired manufactured housing portfolio, which is a non-real estate consumer product. We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels. Although we believe the loans within this real estate concentration have no more than the normal risk of collectability, a substantial decline in the performance of the economy in general or a decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In order to mitigate these risks, the Board reviews and approves concentration limits proposed by management. Exceptions to limitations of concentrations are reported to the Board of Directors at least quarterly. Additionally, the Company maintains policy guidelines for maximum loan to value ratios to mitigate the risk of general declines in real estate values. The Company performs regular risk assessments, portfolio monitoring of loans, and stress tests as part of its risk management policies to identify any negative trends within the portfolio. Within the commercial real estate portfolio, there is diversification of collateral type and geography throughout our footprint. The Company did not engage in any sub-prime mortgage lending activities during the years ended December 31, 2024 and 2023.
The following table presents the commercial real estate owner and non-owner occupied loan balances, associated percentage of commercial real estate concentrations of those sub-categories by collateral type as of the dates indicated.
December 31, 2024 December 31, 2023
(In thousands) Loan Balance % of Commercial Real Estate Loan Balance % of Commercial Real Estate
Commercial real estate - owner occupied
Office $ 59,952 18.55 % 52,952 24.61 %
Industrial & warehouse 86,873 26.88 % 58,472 27.18 %
Retail 35,042 10.84 % 13,185 6.13 %
Gas Stations 60,503 18.72 % 28,072 13.05 %
Restaurants 15,534 4.81 % 16,917 7.86 %
Other 65,284 20.20 % 45,548 21.17 %
Total $ 323,188 100.00 % 215,146 100.00 %
Commercial real estate - non-owner occupied
Office $ 253,883 27.80 % 187,613 34.77 %
Industrial & warehouse 153,192 16.78 % 82,550 15.30 %
Retail 188,464 20.64 % 109,144 20.23 %
Hospitality 163,961 17.96 % 69,670 12.91 %
Other 153,665 16.83 % 90,545 16.79 %
Total $ 913,165 100.00 % 539,522 100.00 %
Loan Maturities
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2024.
(In thousands) One Year or
Less 		After One
Through Five
Years 		After Five
Through Fifteen
Years 		After Fifteen Years Total
Loan Maturities:
Commercial and agricultural $ 64,355 $ 81,510 $ 33,065 $ 1,815 $ 180,745
Real estate construction and other land loans 52,554 14,972 215,000 128 67,869
Other real estate 62,496 418,706 942,246 245,181 1,668,629
Manufactured Housing 254,000 2,113 31,884 288,012 322,263
Other Installment 1,489 4,905 86,225 220 92,839
Total loans, net of discount $ 181,148 $ 522,206 $ 1,093,635 $ 535,356 $ 2,332,345
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates $ 32,757 $ 301,694 $ 444,000 $ 198,927 $ 977,378
Loans with floating interest rates (1) 148,391 220,512 649,635 336,429 1,354,967
Total loans, net of discount $ 181,148 $ 522,206 $ 1,093,635 $ 535,356 $ 2,332,345
(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective loan agreement
$ 48,546 $ 77,787 $ 407,484 $ 203,455 $ 737,272
Nonperforming Assets
Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is maintained on a cost recovery method because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows.
Our consolidated financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans. Interest income from nonaccrual loans is recorded only if collection of principal in full is not in doubt and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest income is reversed and charged against income when the payment of interest or principal is 90 days or more past due. Loans in the nonaccrual category are treated as nonaccrual loans even though we may ultimately recover all or a portion of the interest due. These loans return to accrual status when the loan becomes contractually current, future collectability of amounts due is reasonably assured, and a minimum of six months of satisfactory principal repayment performance has occurred. See Note 4of the Company's audited Consolidated Financial Statements in Item 8of this Annual Report.
At December 31, 2024, there were $6.46 million nonperforming assets. There were no non-performing assets as of December 31, 2023. Total nonperforming assets at December 31, 2024, included $6.46 million nonaccrual loans, no OREO, and no repossessed assets. See Note 4of the Company's audited Consolidated Financial Statements in Item 8of this Annual Report concerning our recorded investment in loans for which impairment has been recognized.
A summary of nonaccrual, restructured, and past due loans at December 31, 2024, 2023, 2022, 2021, and 2020 is set forth below. The Company had no loans past due more than 90 days and still accruing interest at December 31, 2024 and 2023. Management is not aware of any potential problem loans, which were current and accruing at December 31, 2024, where serious doubt existed as to the ability of the borrower to comply with the present repayment terms. Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.
Composition of Nonaccrual, Past Due and Restructured Loans
(As of December 31, Dollars in thousands) 2024 2023 2022 2021 2020
Nonaccrual loans:
Commercial:
Commercial and industrial $ 120 $ - $ - $ 312 752
Agricultural production - - - - 634 -
Real estate:
Construction and other land loans 2,398 - - - 1,556
Commercial real estate - owner occupied 2,335 - - - 370
Commercial real estate - non-owner occupied 378 - - - 512
Farmland - - - - -
1-4 family - - - - -
Consumer:
Manufactured housing 1,215 - - - -
Consumer and installment 15 - - - 88
Restructured loans (non-accruing):
Equity loans and line of credit - - - - -
Total nonaccrual 6,461 - - 946 3,278
Accruing loans past due 90 days or more - - - - -
Total nonperforming loans $ 6,461 $ - $ - $ 946 $ 3,278
Interest foregone
$ 234 $ - $ 132 $ 99 $ 177
Ratio of nonaccrual/nonperforming loans to total loans 0.28 % - % - % 0.09 % 0.30 %
Ratio of allowance for credit losses to nonaccrual/nonperforming loans 399.37 % NM NM 539.28 % 30.10 %
OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. OREO is carried at the lesser of cost or fair market value less selling costs. As of December 31, 2024 and 2023, the Bank had no OREO properties. The Company held no repossessed assets at December 31, 2024 and 2023, which would be included in other assets on the consolidated balance sheets.
Allowance for Credit Losses
We have established a methodology for determining the adequacy of the allowance for credit losses made up of collective and individually evaluated loans. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances for individually evaluated loans. The allowance for credit losses is an estimate of expected credit losses in the Company's loan portfolio.
The measurement of the allowance for credit losses on collectively evaluated loans is based on modeled expectations of lifetime expected credit losses utilizing national and local peer group historical losses, weighting of economic scenarios, and other relevant factors. The Company incorporates forward-looking information using macroeconomic scenarios, which include variables that are considered key drivers of credit losses within the portfolio. The Company uses a probability-weighted, multiple scenario forecast approach. These scenarios may consist of a base forecast representing the most likely scenario, or baseline, combined with downside and upside scenarios reflecting possibly worsening or improving economic conditions.
In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and recoveries, and reduced by net loan charge-offs. Loans are charged off when they are deemed to be
uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are received.
The allowance for credit losses is maintained to cover lifetime expected credit losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit/Compliance Committee. They delegate the authority to the Chief Credit Officer (CCO) to determine the loss reserve ratio for each type of asset and to review, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, economic scenarios, amount of government guarantees, concentration in loan types and other relevant factors.
Management adheres to an internal asset review system designed to provide for timely recognition of problem assets and adequate valuation allowances of collateral dependent loans. The Company's asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories. The Company uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets. In general, all credit facilities exceeding 90 days of delinquency require classification and are placed on nonaccrual.
The following table summarizes the Company's loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for the periods indicated:
(Dollars in thousands) 2024 2023 2022 2021 2020
Gross loans outstanding at December 31, $ 2,332,345 $ 1,288,955 $ 1,254,918 $ 1,038,240 $ 1,104,959
Average loans outstanding during the year $ 1,978,386 $ 1,263,226 $ 1,133,919 $ 1,069,653 $ 1,055,712
Allowance for credit losses:
Balance at beginning of year $ 14,653 $ 10,848 $ 9,600 $ 12,915 $ 9,130
Impact of adoption of ASU 2016-13 - 3,910 - - -
Allowance for PCD loans 821 - - - -
Loans charged off:
Commercial (170) (636) (27) (46) (121)
Agricultural production (507) - - - -
Real estate construction and other land loans - - - - -
Consumer (132) (53) (151) (221) (108)
Total loans charged off (809) (689) (178) (267) (229)
Recoveries of loans previously charged off:
Commercial 64 609 367 701 612
Commercial real estate 60 - - 319 -
1-4 family real estate 72 15 - - -
Consumer 150 45 59 232 127
Total recoveries 346 669 426 1,252 739
Net (charge-offs) recoveries (463) (20) 248 985 510
Provision (credit) for credit losses 10,792 (85) 1,000 (4,300) 3,275
Balance at end of year $ 25,803 $ 14,653 $ 10,848 $ 9,600 $ 12,915
Allowance for credit losses as a percentage of outstanding loan balance 1.11 % 1.14 % 0.86 % 0.92 % 1.17 %
Net (charge-offs) recoveries to average loans outstanding (0.02) % - % 0.02 % 0.09 % 0.05 %
Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our losses. Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.
The allowance for credit losses is reviewed at least quarterly by the Company's Board of Directors' Audit/Compliance Committee. Reserves are allocated to loan portfolio segments using percentages which are based on both historical risk
elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors. We have adopted the specific reserve approach to allocate reserves to each individually analyzed asset for the purpose of estimating potential loss exposure. Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process. Additions are also required when, in management's judgment, the reserve does not properly reflect the potential loss exposure.
The allocation of the allowance for credit losses is set forth below:
2024 2023 2022 2021 2020
Loan Type
(Dollars in thousands) 		Amount Percent
of Loans to Total Loans 		Amount Percent
of Loans to Total Loans 		Amount Percent
of Loans to Total Loans 		Amount Percent
of Loans to Total Loans 		Amount Percent
of Loans to Total Loans
Commercial:
Commercial and industrial $ 1,363 6.10 % $ 948 8.20 % $ 1,585 11.20 % $ 1,689 13.10 % $ 1,757 24.80 %
Agricultural production 389 1.60 % 527 2.60 % 229 2.90 % 320 3.90 % 255 2.10 %
Real estate:
Construction & other land loans 2,060 2.90 % 848 2.60 % 1,678 8.70 % 812 5.90 % 1,204 5.00 %
Commercial real estate - owner occupied 3,253 13.80 % 1,945 16.70 % 814 15.50 % 1,355 20.40 % 2,128 18.90 %
Commercial real estate - non-owner occupied 10,014 39.10 % 5,574 41.80 % 4,388 37.00 % 3,805 35.60 % 4,781 30.70 %
Farmland 1,393 6.00 % 1,254 9.30 % 863 9.50 % 697 9.50 % 838 7.60 %
Multi-family residential 1,486 5.70 % 642 4.70 % 60 2.00 % 72 2.50 % 223 2.30 %
1-4 family - close-ended 1,625 5.30 % 1,444 7.50 % 465 7.40 % 138 3.20 % 248 3.10 %
1-4 family - revolving 686 1.50 % 520 2.20 % 142 2.40 % 118 2.10 % 209 1.90 %
Consumer:
Manufactured housing 2,147 13.80 % - - % - - % - - % - - %
Other installment 1,387 4.20 % 951 4.41 % 284 3.40 % 314 3.80 % 641 3.60 %
Unallocated reserves - - % - - % 340 - % 280 - % 631 - %
Total allowance for credit losses $ 25,803 100.00 % $ 14,653 100.00 % $ 10,848 100.00 % $ 9,600 100.00 % $ 12,915 100.00 %
Loans are charged to the allowance for credit losses when the loans are deemed uncollectible. It is the policy of management to make additions to the allowance so that it remains adequate to cover all expected lifetime loan losses that exist in the portfolio at that time.
As of December 31, 2024, the allowance for credit losses (ACL) was $25,803,000, compared to $14,653,000 at December 31, 2023, a net increase of $11,150,000. The net increase of $11,150,000 in the ACL was primarily attributed to the one-time provision for credit losses on acquired loans related to the merger with Community West Bancshares. This provision resulted in an increase to the ACL effective April 1, 2024 of $10,877,000. Net charge-offs totaled $463,000 for the twelve months ended December 31, 2024.
The balance of classified loans and loans graded special mention totaled $44,294,000 and $17,384,000 at December 31, 2024 and $20,301,000 and $9,000,000 at December 31, 2023, respectively. The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $413,973,000 as of December 31, 2024, compared to $276,270,000 as of December 31, 2023. At December 31, 2024 and 2023, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $1,055,000 and $839,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes. While related to credit losses, this allocation is not a part of ACL and is considered separately as a liability for accounting and regulatory reporting purposes. Risks and uncertainties exist in all lending transactions and our management and Directors' Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.
The ACL as a percentage of total loans was 1.11% at December 31, 2024, and 1.14% at December 31, 2023. Total loans include CWBC, FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions of $1.05 billion at December 31, 2024 and $59.0 million at December 31, 2023.
Assumptions regarding the collateral value of various under-performing loans may affect the level and allocation of the allowance for credit losses in future periods. The allowance may also be affected by trends in the amount of charge-offs experienced or expected trends within different loan portfolios. However, the total reserve rates on collectively evaluated loan pools include quantitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses at the date of the financial statements. Based on the above considerations and given recent changes in historical charge-off rates included in the ACL modeling and the changes in other factors, management determined that the ACL was appropriate as of December 31, 2024.
There were $6.46 million non-performing loans as of December 31, 2024 or December 31, 2023. The Company had no other real estate owned at December 31, 2024 or December 31, 2023. No foreclosed assets were recorded at December 31, 2024 or December 31, 2023. Management believes the ACL at December 31, 2024 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.
Goodwill and Intangible Assets
Business combinations involving the Bank's acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2024 was $96,828,000 consisting of $43,051,000, $13,466,000, $10,394,000, $6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of CWBC, FLB, SVB, VCB, Service 1st, and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company's ability to generate net earnings after the acquisitions and is not deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. A significant decline in net earnings, among other factors, could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment.
Management performed an annual impairment test in the third quarter of 2024 utilizing various qualitative factors. Management believes these factors are sufficient and comprehensive and as such, no further factors need to be assessed at this time. Based on management's analysis performed, no impairment was required.
Goodwill is also assessed for impairment between annual tests if a triggering event occurs or circumstances change that may cause the fair value of a reporting unit to decline below its carrying amount. Management considers the entire Company to be one reporting unit. No such events or circumstances arose during for the twelve months ended December 31, 2024. Changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material adverse impact on the Company's operating results.
Intangible assets were represented by the estimated fair value of the core deposit relationships acquired in the 2024 acquisition of CWBC of $10,019,000. Core deposit intangibles were being amortized using the straight-line method over an estimated life of ten years from the date of acquisition. The carrying value of intangible assets at December 31, 2024 was $9,268,000, net of $751,000 in accumulated amortization expense. There were no intangible assets as of December 31, 2023. Management evaluates the remaining useful life to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on prior evaluations, no changes to the remaining useful life was required. Amortization expense recognized was $751,000 for 2024, $68,000 for 2023 and $454,000 for 2022.
Deposits and Borrowings
The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. All of a depositor's accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
Total deposits increased $869,165,000 or 43% to $2,910,777,000 as of December 31, 2024, compared to $2,041,612,000 as of December 31, 2023. Interest-bearing deposits increased $839,882,000 or 77.0% to $1,929,953,000 as of December 31, 2024, compared to $1,090,071,000 as of December 31, 2023. Non-interest bearing deposits increased $29,283,000 or 3.1% to $980,824,000 as of December 31, 2024, compared to $951,541,000 as of December 31, 2023. The Company's deposit balances for the twelve months ended December 31, 2024 increased primarily from the merger. Average non-interest bearing deposits to average total deposits was 38.62% for the twelve months ended December 31, 2024 compared to 45.84% for the same period in 2023. Based on FDIC deposit market share information published as of June 2024, our total market share of deposits in Fresno,
Madera, San Joaquin, and Tulare counties was 4.10% in 2024 compared to 4.15% in 2023. Our total market share of deposits in San Luis Obispo, Santa Barbara, and Ventura counties was 1.61% in 2024. Our total market share of deposits in Merced County was 1.66% as of June 2024. Our total market share in the other counties as of June 2024 and 2023 we operate in (Kern, Placer, Sacramento, and Stanislaus) was less than 1.00%.
The composition of the deposits and average interest rates paid at December 31, 2024 and December 31, 2023 is summarized in the table below.
(Dollars in thousands) December 31,
2024 		% of Total
Deposits 		Effective
Rate 		December 31,
2023 		% of Total
Deposits 		Effective
Rate
NOW accounts $ 470,548 16.2 % 0.28 % $ 251,334 12.3 % 0.13 %
MMA accounts 843,145 29.0 % 2.67 % 497,043 24.4 % 1.68 %
Time deposits 443,284 15.2 % 4.85 % 162,085 7.9 % 3.68 %
Savings deposits 172,976 5.9 % 0.49 % 179,609 8.8 % 0.12 %
Total interest-bearing 1,929,953 66.3 % 2.49 % 1,090,071 53.4 % 1.33 %
Non-interest bearing 980,824 33.7 % 951,541 46.6 %
Total deposits $ 2,910,777 100.0 % $ 2,041,612 100.0 %
We have no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess of 10% of average total deposits for the years ended December 31, 2024, 2023, and 2022.
2024 2023 2022
(Dollars in thousands) Balance Rate Balance Rate Balance Rate
Savings and NOW accounts $ 481,447 0.30 % $ 473,102 0.26 % $ 581,285 0.03 %
Money market accounts $ 759,203 2.67 % $ 531,013 1.68 % $ 486,823 0.15 %
Non-interest bearing demand $ 1,025,611 - $ 987,906 - $ 1,006,511 -
Total deposits $ 2,655,928 1.53 % $ 2,155,241 0.72 % $ 2,156,092 0.05 %
The following table sets forth the maturity of time certificates of deposit and other time deposits of $250,000 or more at December 31, 2024.
(In thousands)
Three months or less $ 13,820
Over 3 through 6 months 16,142
Over 6 through 12 months 14,822
Over 12 months 8,580
$ 53,364
As of December 31, 2024, the Company had $329,761,000 in brokered time deposits compared to $93,134,000 as of December 31, 2023. The increase in brokered time deposits was due to the brokered time deposits held by Community West Bank, which we acquired in April 2024.
As of December 31, 2024 and December 31, 2023, uninsured deposits totaled $1,029,929,000 and $821,756,000, respectively.
As of December 31, 2024, the Company had $135 million in Federal Home Loan Bank (FHLB) of San Francisco advances, of which $90 million was issued pursuant to the merger and recorded at fair value as of April 1, 2024. There were $35 million in short-term FHLB advances and $45 million in short-term advances from the Federal Reserve's Bank Term Funding Program (BTFP) as of December 31, 2023. We maintain a line of credit with the FHLB collateralized by government securities and loans. Refer to Liquiditysection below for further discussion of FHLB advances. The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 at December 31, 2024 and 2023, at interest rates which vary with market conditions. As of December 31, 2024 and 2023, the Company had no overnight borrowings outstanding under these credit facilities.
The Company's uninsured balances with correspondent banks totaled $14,263,000 and $3,813,000 at December 31, 2024 and 2023, respectively.
Capital Resources
Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. Historically, the primary sources of capital for the Company have been internally generated capital through retained earnings and the issuance of common and preferred stock.
The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.
Our shareholders' equity was $362,685,000 as of December 31, 2024, compared to $207,064,000 as of December 31, 2023. The increase in shareholders' equity is the result of issuance of common stock of $143,712,000 in relation to the merger with Community West Bancshares, comprehensive income of $10,919,000, from the decrease in the unrealized loss recorded on the Company's investment portfolio, the increase in retained earnings from our net income of $7,666,000, the effect of share-based compensation expense of $879,000, proceeds from stock options exercised of $465,000, and stock issued under our employee stock purchase plan of $248,000. These increases were partially offset by the payment of common stock cash dividends of $8,230,000 and repurchase of common stock of $38,000.
During 2024, the Bank declared and paid cash dividends to the Company in the amount of $14,000,000 in connection with the cash dividends to the Company's shareholders, and expenditures paid by the Company, approved by the Company's Board of Directors. The Company declared and paid a total of $8,230,000 or $0.48 per common share cash dividend to shareholders of record during the year ended December 31, 2024. During the year ended December 31, 2024, the Company repurchased and retired common stock in the amount of $38,000 in connection with amounts withheld for the vesting of equity awards for tax obligations.
The Company declared and paid a total of $5,657,000 or $0.48 per common share cash dividend to shareholders of record during the year ended December 31, 2023. During the year ended December 31, 2023, the Company repurchased and retired common stock in the amount of $1,000.
During 2022, the Company made a capital contribution to the Bank in the amount of $38,000,000 in connection with the senior and subordinated debt proceeds approved by the Company's Board of Directors. The Company declared and paid a total of $5,638,000 or $0.48 per common share cash dividend to shareholders of record during the year ended December 31, 2022. During the year ended December 31, 2022, the Company repurchased and retired common stock in the amount of $6,814,000.
The following table sets forth certain financial ratios for the years ended December 31, 2024, 2023, and 2022.
2024 2023 2022
Net income:
To average assets 0.24 % 1.04 % 1.09 %
To average shareholders' equity 2.42 % 13.81 % 14.25 %
Dividends declared per share to net income per share 118.81 % 22.21 % 21.14 %
Average shareholders' equity to average assets 9.94 % 7.51 % 7.67 %
Management considers capital requirements as part of its strategic planning process. The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance. Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.
The Board of Governors, the FDIC and other federal banking agencies have issued risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items.
The following table presents the Company's regulatory capital ratios as of December 31, 2024 and December 31, 2023:
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
December 31, 2024 Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $ 316,343 9.17 % 138,018 4.00 %
Common Equity Tier 1 Ratio (CET 1) $ 311,343 11.15 % 125,632 4.50 %
Tier 1 Risk-Based Capital Ratio $ 316,343 11.33 % 167,510 6.00 %
Total Risk-Based Capital Ratio $ 379,091 13.58 % 223,346 8.00 %
December 31, 2023
Tier 1 Leverage Ratio $ 222,567 9.18 % 98,048 4.00 %
Common Equity Tier 1 Ratio (CET 1) $ 217,567 12.78 % 75,561 4.50 %
Tier 1 Risk-Based Capital Ratio $ 222,567 13.07 % 100,748 6.00 %
Total Risk-Based Capital Ratio $ 273,699 16.08 % 134,330 8.00 %
The following table presents the Bank's regulatory capital ratios as of December 31, 2024 and December 31, 2023:
(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1)
Minimum requirement for "Well-Capitalized"
Institution
December 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Tier 1 Leverage Ratio $ 377,411 11.04 % $ 138,031 4.00 % $ 165,267 5.00 %
Common Equity Tier 1 Ratio (CET 1) $ 377,411 13.54 % $ 125,474 7.00 % $ 178,264 6.50 %
Tier 1 Risk-Based Capital Ratio $ 377,411 13.54 % $ 167,299 8.50 % $ 219,402 8.00 %
Total Risk-Based Capital Ratio $ 405,425 14.54 % $ 223,065 10.50 % $ 274,252 10.00 %
December 31, 2023
Tier 1 Leverage Ratio $ 285,099 11.75 % $ 97,016 4.00 % $ 121,271 5.00 %
Common Equity Tier 1 Ratio (CET 1) $ 285,099 16.76 % $ 76,526 7.00 % $ 110,538 6.50 %
Tier 1 Risk-Based Capital Ratio $ 285,099 16.76 % $ 102,035 8.50 % $ 136,047 8.00 %
Total Risk-Based Capital Ratio $ 301,642 17.74 % $ 136,047 10.50 % $ 170,058 10.00 %
(1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%.
The Company succeeded to all of the rights and obligations of the Service 1st Capital Trust I, a Delaware business trust, in connection with the acquisition of Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company's Tier 1 capital on a pro forma basis. At December 31, 2024, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company's option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three-month SOFR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st's junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on any January 7, April 7, July 7, or October 7 on or after October 7, 2012 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods. Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7
or October 7 of each year, the rate will be adjusted to equal the three month SOFR plus 1.60%. As of December 31, 2024, the rate was 6.52%. Interest expense recognized by the Company for the years ended December 31, 2024, 2023, and 2022 was $367,000, $360,000 and $188,000, respectively.
On November 12, 2021, the Company completed a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes ("Subordinated Debt") due December 1, 2031. The Subordinated Debt initially bears a fixed interest rate of 3.130% per year. Commencing on December 1, 2026, the interest rate on the Subordinated Debt will reset each quarter at a floating interest rate equal to the then-current three month term SOFR plus 210 basis points. The Company may at its option redeem in whole or in part the Subordinated Debt on or after November 12, 2026 without a premium. The Subordinated Debt is treated as Tier 2 Capital for regulatory purposes.
On September 15, 2022, the Company entered into a $30 million loan agreement with Bell Bank. Initially, payments of interest only are payable in 12 quarterly payments commencing December 31, 2022. As of December 31, 2024 the rate had reached its interest rate cap of 6.75%. Commencing December 31, 2025, 27 equal quarterly principal and interest payments are payable based on the outstanding balance of the loan on August 30, 2025 and an amortization of 48 quarters. A final payment of outstanding principal and accrued interest is due at maturity on September 30, 2032. Variable interest is payable at the Prime Rate (published by the Wall Street Journal) less 50 basis points. The loan is secured by the assets of the Company and a pledge of the outstanding common stock of Community West Bank, the Company's banking subsidiary. The Company may prepay the loan without penalty with one exception. If the loan is prepaid prior to August 30, 2025 with funds received from a financing source other than Bell Bank, the Company will incur a 2% prepayment penalty. The loan contains customary representations, covenants, and events of default.
LIQUIDITY
Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers' credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors' Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flows for off-balance sheet commitments.
Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities. As of December 31, 2024, the Company had unpledged securities totaling $354,344,000 available as a secondary source of liquidity and total cash and cash equivalents of $120,398,000. Cash and cash equivalents at December 31, 2024 increased 124% compared to December 31, 2023. Primary uses of funds include withdrawal of and interest payments on deposits, origination and purchases of loans, purchases of investment securities, and payment of operating expenses.
To augment our liquidity, we have established Federal funds lines with various correspondent banks. At December 31, 2024, our available borrowing capacity includes approximately $110,000,000 in Federal funds lines with our correspondent banks and $576,556,000 in unused FHLB advances. At December 31, 2024, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.
The following table reflects the Company's credit lines, balances outstanding, and pledged collateral at December 31, 2024 and 2023:
Credit Lines (In thousands) December 31, 2024 December 31, 2023
Unsecured Credit Lines
Credit limit $ 110,000 $ 110,000
Balance outstanding $ - $ -
Federal Home Loan Bank
Credit limit $ 738,556 $ 342,483
Balance outstanding, net of discount $ 133,442 $ 35,000
Collateral pledged $ 1,236,732 $ 612,702
Fair value of collateral $ 1,083,041 $ 500,972
Federal Reserve Bank Term Loan Funding Program
Credit limit $ - $ 46,174
Balance outstanding $ - $ 45,000
Collateral pledged $ - $ 53,650
Fair value of collateral $ - $ 47,603
Federal Reserve Bank
Credit limit $ 3,669 $ 4,448
Balance outstanding $ - $ -
Collateral pledged $ 4,406 $ 4,894
Fair value of collateral $ 3,828 $ 4,374
The liquidity of our parent company, Community West Bancshares, is primarily dependent on the payment of cash dividends by its subsidiary, Community West Bank, subject to limitations imposed by state and federal regulations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with the accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.
We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate. For a further description of our accounting policies, see Note 1 - Summary of Significant Accounting Policies in the financial statements included in this Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Allowance for Credit Losses
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). In addition, credit losses recognized on available-for-sale debt securities will be presented as an allowance as opposed to a write-down, based on management's intent to sell the security or the likelihood the Company will be required to sell the security before recovery of the amortized cost basis. Our accounting for estimated loan losses is discussed and disclosed primarily in Note 1and 4to the consolidated financial statements under the heading "Allowance for Credit Losses".
In determining the ACL for loans, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. The Company utilized a reasonable and supportable forecast period obtained the forecast data from Moody's Analytics. Individual loan credit quality indicators, including historical credit losses, have been statistically correlated with various econometrics. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Increases in external risk factors due to more pessimistic business and economic conditions could potentially increase estimated losses on existing loan balances within the ACL. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy and changes in interest rates.
Business Combinations
Business combinations are recorded using the acquisition method. We assign the value of the consideration transferred to acquire a business to the tangible assets, identifiable intangible assets acquired, and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.
The Company assesses the fair value of assets, including intangible assets, using a variety of methods, and each asset is measured at fair value from the perspective of a market participant. The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant's use of the asset. Some of the most significant assumptions used include the discount rate, forward-looking financial information, and estimated customer attrition rates. A change in one of these assumptions could have material changes on the value of the intangible assets and goodwill which will impact the amortization expense in future periods and the goodwill impairment evaluation.
INFLATION
The impact of inflation on a financial institution differs significantly from that exerted on other industries primarily because the assets and liabilities of financial institutions consist largely of monetary items. However, financial institutions are affected by inflation in part through non-interest expenses, such as salaries and occupancy expenses, and to some extent by changes in interest rates.
At December 31, 2024, we are aware that inflation may have an adverse impact on our consolidated financial position or results of operations. However, in the short term increased rates may continue to be a benefit by repricing a portion of our loan portfolio. Higher long term inflation rates may drive increases in operating expenses or have other adverse effects on our borrowers, making collection on extensions of credit more difficult for us. Refer to Quantitative and Qualitative Disclosures About Market Risk for further discussion.