Risk Factors Dashboard
Once a year, publicly traded companies issue a comprehensive report of their business, called a 10-K. A component mandated in the 10-K is the ‘Risk Factors’ section, where companies disclose any major potential risks that they may face. This dashboard highlights all major changes and additions in new 10K reports, allowing investors to quickly identify new potential risks and opportunities.
View risk factors by ticker
Search filings by term
Risk Factors - CWBC
-New additions in green
-Changes in blue
-Hover to see similar sentence in last filing
ITEM 1A.
RISK FACTORS
Investing in our common stock involves various risks which are specific to the Company. Several of these risks and uncertainties are discussed below and elsewhere in this Form 10-K. Several of these risks and uncertainties, are discussed below and elsewhere in this Form 10-K. This listing should not be considered as all-inclusive. This listing should not be considered as all-inclusive. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations, and financial condition. These factors represent risks and uncertainties that could have a material adverse effect on our business, results of operations and financial condition. Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. Other risks that we do not know about now, or that we do not believe are significant, could negatively impact our business or the trading price of our securities. In addition to common business risks such as theft, loss of market share, and disasters, the Company is subject to special types of risk due to the nature of its business. In addition to common business risks such as theft, loss of market share and disasters, the Company is subject to special types of risk due to the nature of its business. See additional discussions about credit, interest rate, market, and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section of this Form 10-K. See additional discussions about credit, interest rate, market and litigation risks in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K and additional information regarding legislative and regulatory risks in the “Supervision and Regulation” section of this Form 10-K.
Terrorist attacks and threats of war may impact all aspects of our operations, revenues, costs, and stock price in unpredictable ways.
The recent special military actions of the Russian Republic and its invasion of Ukraine and the resulting geopolitical uncertainty have had and may continue to have an impact on the European Union and the United Kingdom and, other countries, including the United States. The threat that these military operations may expand beyond Ukraine may have a negative impact as well. Significant increases in the price of oil and natural gas have occurred and are likely to continue putting additional inflationary pressures on central banks, including the FRB. Significant increases in the price of oil and natural gas have occurred and are likely to continue putting additional inflationary pressures on central banks, including the FRB. It is expected that the FRB will pause on further rate increases in 2024 and begin lowering rates, but the timing, magnitude, and duration of such decreases are not fully known at this time. It is expected that interest rate hikes already announced by the FRB will occur in 2022, but the amount, timing, and frequency of such increases are not fully known at this time. The Russian Republic has also threatened increased cyberattacks as part of its recent actions which could affect the Bank and its customers. The Russian Federation has also threatened increased cyberattacks as part of its recent actions which could affect the Bank and its customers. Additionally, the United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions on Russian banks and wealthy individuals as well as halting certification of the Nord Stream 2 gas pipeline. Additionally, the United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions on Russian banks and wealthy individuals as well as halting certification of the Nord Stream 2 gas pipeline. They have denied Russian banks access the Society for Worldwide Interbank Financial Telecommunications or SWIFT which is expected to slow down international trade and make such transactions costlier to accomplish which could also negatively affect the Bank and its customers. They have denied Russian banks access the Society for Worldwide Interbank Financial Telecommunications or SWIFT which is expected to slow international trade and make such transactions costlier to accomplish which could also negatively affect the Bank and its customers. In response to the Russian military actions, many businesses headquartered in the Eurozone and the United States have stopped doing business with Russia which may negatively affect the profitability of those companies. In response to the Russian military actions, many businesses headquartered in the Eurozone and the United States have stopped doing business with Russia, which may negatively affect the profitability of those companies. The international turmoil has already had and may continue to have a negative impact on the stock market generally and, in turn, on our stock price. The international turmoil has already had and may continue to have a negative impact on the stock market generally and, in turn, on our stock price. The full impact of the actions by the Russian Republic regarding Ukraine over the past year and which are likely to continue in 2024 are not fully known at this time, but they could have a material adverse impact on our business, financial condition, results of operations, and stock price. The full impact of the recent actions by the Russian Federation regarding Ukraine are not known at this time, but they could have a material adverse impact on our business, financial condition, results of operations, and stock price.
Risks Relating to the Bank and to the Business of Banking in General
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the State of California. A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations, and prospects. A decline in the economies of our local market areas of Santa Barbara, San Luis Obispo, and Ventura Counties in which we operate, and which we consider to be our primary market areas, could have a material adverse effect on our business, financial condition, results of operations and prospects.
While real estate values and unemployment rates remain stable, a deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition, and results of operations:
| • | loan delinquencies, problem assets, and foreclosures may increase; |
| • | the sale of foreclosed assets may slow; |
| • | demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets; |
| • | collateral securing our outstanding loans could decline in value, exposing us to increased risk in our loans or reducing customers’ borrowing power; |
| • | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and |
| • | the amount of our low-cost or non-interest-bearing deposits may decrease and the composition of our deposits may be adversely affected. |
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Interest rate changes, which are beyond our control, could harm our profitability.
Our profitability depends to a large extent upon net interest income, which is the difference between interest income and dividends we earn on interest-earning assets, such as loans and investments, and interest expense we pay on interest-bearing liabilities, such as deposits and borrowings. Any change in general market interest rates, whether as a result of changes in the monetary policy of the Federal Reserve or otherwise, may have a significant effect on net interest income and prepayments on our loans. After maintaining its federal funds rate target in a range of 0% to 0.25% since March 2020, as part of its efforts to combat inflation, the Federal Reserve raised the federal funds target to a range of 5.25% to 5.50% as of December 31, 2023. Although the Federal Reserve has indicated that they do not intend to raise the federal funds target rate and expect that the target rate range will be reduced in 2024, the amount and timing of these reductions are unknown.
As interest rates rise, our existing customers who have adjustable-rate loans may see their loan payments increase and, as a result, may experience difficulty repaying those loans. Increasing delinquencies, nonaccrual loans, and defaults lead to higher credit loss provisions, and potentially greater eventual losses that would lower our current profitability and capital ratios.
Changes in interest rates could adversely affect the Company’s profitability, business, and prospects.
Most of the Company’s assets and liabilities are monetary in nature, which subjects it to significant risks from changes in interest rates and can impact the Company’s net income and the valuation of its assets and liabilities. Increases or decreases in prevailing interest rates could have an adverse effect on the Company’s business, asset quality, and prospects. Increases or decreases in prevailing interest rates could have an adverse effect on the Company’s business, asset quality and prospects. The Company’s operating income and net income depend to a great extent on its net interest margin. The Company’s operating income and net income depend to a great extent on its net interest margin. Net interest margin is the difference between the interest yields received on loans, securities, and other earning assets and the interest rates paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities. Net interest margin is the difference between the interest yields received on loans, securities and other earning assets and the interest rates paid on interest-bearing deposits, borrowings and other liabilities. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions, and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. These rates are highly sensitive to many factors beyond the Company’s control, including competition, general economic conditions and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. If the rate of interest paid on interest-bearing deposits, borrowings, and other interest-bearing liabilities increases more than the rate of interest received on loans, securities, and other earning assets increases, the Company’s net interest income, and therefore earnings, would be adversely affected. If the rate of interest paid on interest-bearing deposits, borrowings and other liabilities increases more than the rate of interest received on loans, securities and other earning assets increases, the Company’s net interest income, and therefore earnings, would be adversely affected. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other interest-bearing liabilities. The Company’s earnings also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. Conversely, in rising interest rate environments, loan prepayment rates will decline and in falling interest rate environments, loan repayment rates will increase. No assurances can be given that the Company will be able to minimize interest rate risk. No assurances can be given that the Company will be able to minimize interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their debt obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the cost of borrowing increases. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business, consolidated financial condition, consolidated results of operations, and cash flows. Accordingly, changes in market interest rates could materially and adversely affect the Company’s net interest spread, asset quality, loan origination volume, business, financial condition, results of operations and cash flows.
CWBC and CWB have liquidity risk.
Like all financial institutions, liquidity risk is the risk that CWBC and CWB will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As can be seen from events regarding the operations and failures of other banks in the U.S. starting in March of 2023, an inability to raise funds through deposits, borrowings, the sale of loans, the sale of investment securities at or above the value of such securities on the Company’s books, and other sources could have a material adverse effect on liquidity. Access to funding sources in amounts adequate to finance business activities could be impaired by factors that affect either the Company specifically or the financial services industry in general. Access to funding sources in amounts adequate to finance business activities could be impaired by factors that affect either entity specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a market downturn or adverse regulatory action against the Company or the Bank. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a market downturn or adverse regulatory action against either entity. The ability of CWB to acquire deposits or borrow could also be impaired by factors that are not specific to CWB, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole which have been experienced during 2023 in both domestic and foreign markets. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits (“CD”) markets. CWB mitigates liquidity risk by establishing and accessing lines of credit with various financial institutions and having back-up access to the brokered Certificate of Deposits “CD’s” markets. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations. Results of operations could be adversely affected if either entity were unable to satisfy current or future financial obligations.
As a legal entity, separate and distinct from the Bank, CWBC must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. In addition to raising capital on its own behalf or borrowing from external sources, CWBC may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to CWBC, thereby negatively impacting its separate liquidity. However, statutory and regulatory constraints on CWB may restrict or totally preclude the payment of dividends by CWB to CWBC, thereby negatively impacting its separate liquidity.
From time to time, the Company has been dependent on borrowings from the FHLB and, infrequently, the FRB, and there can be no assurance these programs will be available as needed.
As of December 31, 2023, the Company has borrowings from the FHLB of San Francisco of $90.0 million and no borrowings from the FRB. The Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs. The Company in the past has been reliant on such borrowings to satisfy its liquidity needs. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral pledged to these entities. These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. These lenders could reduce the borrowing capacity of the Company or eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. Any change or termination could have an adverse effect on the Company’s liquidity and profitability. Any change or termination could have an adverse effect on the Company’s liquidity and profitability.
A return of recessionary conditions could result in increases in our level of non-performing loans or reduce demand for our products and services, which could have an adverse effect on our results of operations.
A return of recessionary conditions or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs, and profitability. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. Declines in real estate values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition. These negative events may cause us to incur losses and may adversely affect our capital, liquidity and financial condition.
Our allowance for credit losses for loans may not be adequate to cover actual loan losses.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it occurs, may have an adverse effect on our consolidated balance sheet or consolidated income statement. The Company maintains an allowance for credit losses to absorb expected losses over the life of the loan and commitment portfolios as of the consolidated balance sheet date. The Company maintains a reserve for loan losses to absorb estimated probable losses inherent in the loan and commitment portfolios as of the balance sheet date. Provisions for credit losses are taken from earnings and applied to the allowance for credit losses as the risk of loss in the loan and commitment portfolios increases. Provisions are taken from earnings and applied to the loan loss reserves as the risk of loss in the loan and commitment portfolios increases. Conversely, credits to earnings from the allowance for credit losses are made when asset qualities improve resulting in a decrease in the risk of loss in the loan and commitment portfolios. Conversely, credits to earnings from the loan loss reserves are made when asset qualities improve, resulting in a decrease in the risk of loss in the loan and commitment portfolios. As of December 31, 2023, the Company’s allowance for credit losses for loans was $12.5 million, or 1.31% of gross loans held for investment. In addition, as of December 31, 2023, we had $4.0 million in loans on nonaccrual status. In addition, as of December 31, 2021, we had $0.6 million in loans on nonaccrual. In determining the level of the allowance for credit losses, management makes various assumptions and judgments about the loan portfolio. In determining the level of the reserve for loan losses, Management makes various assumptions and judgments about the loan portfolio. Management relies on an analysis of the loan portfolio based on historical loss experience, the volume and types of loans, trends in loan grades, the volume and trends in delinquent and non-accrual loans, national and local economic conditions, forecasts of future economic conditions, and other pertinent information known to management at the time of the analysis. Management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information known to Management at the time of the analysis. If management’s assumptions are incorrect, the allowance for credit losses may not be sufficient to cover losses which could have a material adverse effect on the Company’s consolidated balance sheet or consolidated income statement. If Management’s assumptions are incorrect, the reserve for loan losses may not be sufficient to cover losses, which could have a material adverse effect on the Company’s financial condition and/or results of operations. While the allowance for credit losses for loans was determined to be adequate at December 31, 2023, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future. While the allowance for loan losses was determined to be adequate at December 31, 2021, based on the information available to us at the time, there can be no assurance that the allowance will be adequate to cover actual losses in the loan portfolio in the future.
All of our lending involves underwriting risks.
Lending, even when secured by the assets of a business, involves considerable risk of loss in the event of failure of the business. To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, or life insurance or obtains personal guarantees. To reduce such risk, the Company typically takes additional security interests in other collateral of the borrower, such as real property, certificates of deposit, life insurance, and/or obtains personal guarantees. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. Despite efforts to reduce risk of loss, additional measures may not prove sufficient as the value of the additional collateral or personal guarantees may be significantly reduced. There can be no assurances that collateral values will be sufficient to repay loans should borrowers become unable to repay loans in accordance with their original terms and, if not, the cumulative effect may have an adverse effect on our financial condition or results of operations.
The Company is dependent on real estate concentrated in the State of California.
As of December 31, 2023, approximately $602.2 million, or 62%, of our loan portfolio is secured by various forms of real estate, including residential and commercial real estate. The real estate securing our loan portfolio is concentrated in California. The real estate securing our loan portfolio is concentrated in California. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing loans. A decline in the real estate market, particularly within California, could materially and adversely affect the business of the Company because a significant portion of its loans are secured by real estate. The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and the Company would be more likely to suffer losses on loans. The ability to recover on defaulted loans by selling the real estate collateral would then be diminished and CWB would be more likely to suffer losses on loans. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, further increases in interest rates, high levels of unemployment, drought, earthquakes, brush fires, and other natural disasters particular to California. Real estate values could be affected by, among other things, a decline of economic conditions, an increase in foreclosures, a decline in home sale volumes, an increase in interest rates, high levels of unemployment, drought, earthquakes, brush fires and other natural disasters particular to California.
We operate in a highly regulated industry and the laws and regulations that govern our operations, corporate governance, executive compensation, and financial accounting or reporting, including changes in them, or our failure to comply with them, may adversely affect us.
The Company is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect customers, depositors, consumers, deposit insurance funds, and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividend or distributions that the Company can pay, restrict the ability of institutions to guarantee the Company’s debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than accounting principles generally accepted in the United States (“GAAP”). Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. We are currently facing increased regulation and supervision of our industry. We are currently facing increased regulation and supervision of our industry. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, and other penalties, any of which could adversely affect our results of operations, capital base, and the price of our securities. Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules, or regulations could make compliance more difficult or expensive or otherwise adversely affect our business and consolidated financial condition. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.
We are subject to periodic examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.
Federal banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations, and reputation may be negatively impacted. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.
CWBC is subject to regulation and supervision by the FRB and CWB is subject to supervision and regulation by the OCC with applicable laws and regulations governing the types, amounts, and terms of investments and loans we make, disclosures of products and services we offer to our customers, the levels of capital we must maintain, and the rates of interest we may pay. Those regulations continuously change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. Those regulations continuously change and may increase our costs of doing business and reduce or limit our ability to pursue or affect our business. While legislation enacted in 2018 was designed to reduce some of the obligations imposed by the Dodd-Frank Act, recent events, including the failure of U.S. based financial institutions, has resulted in the current administration reaffirming that it will take affirmative action to assure compliance by financial institutions with applicable law, including many of the provisions of the Dodd-Frank Act. In addition, it is likely that the FDIC will consider whether to raise the base deposit insurance assessment to support any losses sustained by those recent bank failures. Such actions could increase CWB’s costs. No assurances can be given that future changes in applicable laws and regulations like the enactment of the Anti-Money Laundering Act of 2020 would not impose regulatory restrictions resulting in a negative impact on CWBC. For further discussion, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation.”
The short-term and long-term impact of the regulatory capital standards and the capital rules is uncertain.
The federal banking agencies revised capital guidelines to reflect the requirements of the Dodd-Frank Act and to affect the implementation of the Basel III Accords. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. The quantitative measures, established by the regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the FRB. Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the FRB. For a further discussion of the capital rules, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Supervision and Regulation.”
Curtailment of government guaranteed loan programs could affect a segment of the Company’s business.
A segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the USDA and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial, and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline.
Small business customers may lack the resources to weather a downturn in the economy.
One of the primary focal points of our business development and marketing strategy is serving the banking and financial services needs of small to medium-sized businesses and professional organizations. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than do larger entities. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. If economic conditions are generally unfavorable in the Company’s service areas, the businesses of the Company’s lending clients and their ability to repay outstanding loans may be negatively affected. As a consequence, the Company’s consolidated results of operations and consolidated financial condition may be adversely affected.
The Company is exposed to the risk of environmental liabilities with respect to properties to which we obtain title.
Approximately 62% of the Company’s loan portfolio at December 31, 2023, was secured by real estate. In the course of our business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. In the course of our business, the Company may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The Company may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. The costs associated with investigation or remediation activities could be substantial. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. In addition, if the Company is the owner or former owner of a contaminated site, it may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect the Company’s business and prospects. These costs and claims could adversely affect the Company’s business and prospects.
The Company’s future success will depend on our ability to compete effectively in a highly competitive market.
The Company faces substantial competition in all phases of its operations from a variety of different competitors. Its competitors, including “fintech” lenders, commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks, and other financial institutions compete with lending and deposit-gathering services offered by the Company. Its competitors, including commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds, online banks, and other financial institutions, compete with lending and deposit-gathering services offered by the Company. Increased competition in the Company’s markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we conduct our business from many local commercial banks as well as numerous national commercial banks and regionally-based commercial banks. Many of these competing institutions have much greater financial and marketing resources than we have. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than us. If we are unable to offer competitive products and services, our business may be negatively affected. If we are unable to offer competitive products and services, our business may be negatively affected.
In order to remain competitive in our industry and provide our customers with the latest products and services, we must be able to keep up with the changes in technology. Many of the financial institutions and the financial technology companies with which we compete have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse effect on our customer relations and, in turn, our financial condition and results of operations. Many of the financial institutions and the financial technology companies with which we compete have greater resources than we do to develop and implement the technology-driven products and our failure to keep pace with these changes could have an adverse effect on our customer relations and, in turn, our financial condition and results of operations.
Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. The banking business in our primary market areas is very competitive and the level of competition facing us may increase further, which may limit our asset growth and financial results. The banking business in our primary market areas is very competitive, and the level of competition facing us may increase further, which may limit our asset growth and financial results.
If we fail to maintain proper and effective internal controls, our ability to produce accurate consolidated financial statements on a timely basis could be impaired, which could result in a loss of investor confidence in our consolidated financial reports and have an adverse effect on our stock price.
The Company is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our consolidated financial information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq listing standards. If we are unable to maintain adequate internal control over financial reporting, we might be unable to report our financial information on a timely basis and might suffer adverse regulatory consequences or violate Nasdaq listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our consolidated financial statements. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. We have in the past and may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our system of internal control can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Our internal control conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company will be detected. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate consolidated financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action that could require us to restate our consolidated financial statements. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business, which could result in regulatory action and which could require us to restate our financial statements. Any such restatement could result in a loss of public confidence in the reliability of our consolidated financial statements and sanctions imposed on us by the SEC. Any such restatement could result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our consolidated financial condition and consolidated results of operations.
Our accounting policies and methods are fundamental to how we record and report our consolidated financial condition and consolidated results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and results of operations and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. If those assumptions, estimates, or judgments were incorrectly made, we could be required to correct and restate prior period consolidated financial statements. If those assumptions, estimates or judgments were incorrectly made, we could be required to correct and restate prior period financial statements. Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board (“FASB”), the SEC, banking regulators, and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. Accounting standard-setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, banking regulators and our independent registered public accounting firm) may also amend or even reverse their previous interpretations or positions on how various standards should be applied. These changes can be difficult to predict and can materially impact how we record and report our consolidated financial condition and consolidated results of operations. In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period consolidated financial statements. In some cases, we could be required to apply a new revised standard retroactively, resulting in the need to revise and republish prior period financial statements.
Natural disasters, severe weather and wild fires may impact all aspects of our operations, revenues, costs, and stock price in unpredictable ways.
In the last few years, California has experienced extensive wildfires that have burned millions of acres, destroyed thousands of homes and commercial properties, and resulted in the loss of life. Those natural disasters were followed by significant rains in the winters of 2022 and 2023 resulting in flooding and further loss of property. While the recent rains in California may have helped to reduce the drought experienced in recent years, to the extent that flooding is experienced it could adversely affect our customers. The potential resurgence of drought conditions could also negatively affect our customers. As of December 31, 2023, we had $24.4 million of agricultural loans (some of which are classified as held for sale). The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty and a substantial portion of our customers businesses and residences are located in areas susceptible to such events as earthquakes, floods, droughts, and wildfires. The occurrence of severe weather conditions and the resulting disasters cannot be predicted with any certainty and a substantial portion of our customers businesses and residences are located in areas susceptible to such events as earthquakes, floods, droughts and wildfires. The occurrence of such events could adversely impact our customers’ businesses and ability to repay their loans, which could have a material adverse effect on the Company. The occurrence of such events could adversely impact our customers' and their businesses and ability to repay their loans all of which could have a material adverse effect on CWBC.
The business may be adversely affected by internet fraud.
The Company is inherently exposed to many types of operational risk, including those caused by the use of computer, internet, and telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us, or our customers that use our internet banking, electronic banking, or some other form of our telecommunications systems. These risks may manifest themselves in the form of fraud by employees, by customers, other outside entities targeting us and/or our customers that use our internet banking, electronic banking or some other form of our telecommunication’s systems. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place, which losses could adversely affect the Company and its consolidated financial condition or consolidated results of operations. Given the growing level of use of electronic, internet-based, and networked systems to conduct business directly or indirectly with our clients, certain fraud losses may not be avoidable regardless of the preventative and detection systems in place, which losses could adversely affect the Company and its financial condition.
We may experience interruptions or breaches in our information system security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, or other systems. Any failure, interruption or breach in the security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of these information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur, or, if they do occur, that they will be adequately addressed. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of these information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our consolidated financial condition and consolidated results of operations. The occurrence of any failures, interruptions or security breaches of these information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.
As a financial institution, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses to us or our clients, privacy breaches against our clients, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and other dishonest acts. In recent periods, there has been a rise in electronic fraudulent activity within the financial services industry, especially in the commercial banking sector, due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods.
In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity, and availability of the Company’s and our customers’ information across all geographic and product lines and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of the Company’s and our customers’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software, and networks and those of our customers may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks, and other events that could have an adverse security impact and result in significant losses by us or our customers. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime, and other hackers, and outsourced or infrastructure-support providers and application developers, or the threats may originate from within our organization. Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses, or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data, or infrastructure. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations, and the continued uncertain global economic environment. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, or penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.
The success of the Company is dependent upon its ability to recruit and retain qualified employees, especially seasoned relationship bankers.
The Company’s business plan includes and is dependent upon hiring and retaining highly qualified and motivated executives and employees at every level. In particular, our relative success to date has been partly the result of our skills of our senior management and management’s ability to identify and retain highly qualified relationship bankers that have long-standing relationships in their communities. These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share. These professionals bring with them valuable customer relationships and have been integral in our ability to attract deposits and to expand our market share. From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer. From time to time, the Company recruits or utilizes the services of employees who are subject to limitations on their ability to use confidential information of a prior employer, to freely compete with that employer, or to solicit customers of that employer. If the Company is unable to hire or retain qualified employees it may not be able to successfully execute its business strategy. If the Company is unable to hire or retain qualified employees, it may not be able to successfully execute its business strategy. If the Company or its employee is found to have violated any non-solicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings. If the Company or its employee is found to have violated any nonsolicitation or other restrictions applicable to it or its employees, the Company or its employee could become subject to litigation or other proceedings.
We may be required to raise capital in the future, but that capital may not be available or may not be on acceptable terms when it is needed.
We are required by federal regulatory authorities to maintain adequate capital levels to support operations. We may need to raise additional capital in the future to achieve and maintain those adequate capital levels. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Our ability to raise additional capital is dependent on capital market conditions at that time and on our financial performance and outlook. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. Regulatory changes, such as regulations to implement Basel III and the Dodd-Frank Act, may require us to have more capital than was previously required. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected. If we cannot raise additional capital when needed, we may not be able to meet these requirements, and our ability to further expand our operations through organic growth or through acquisitions may be adversely affected.
Risks Relating to our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.
Our ability to pay dividends and continue with share repurchases is subject to restrictions.
As a holding company with no significant assets other than the Bank, CWBC is dependent on dividends from the Bank to fund operating expenses and estimated tax payments. The ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability to continue to pay dividends and conduct share repurchases depends in large part upon the receipt of dividends or other capital distributions from the Bank. The ability of the Bank to pay dividends or make other capital distributions is subject to the restrictions of the National Bank Act. The ability of the Bank to pay dividends or make other capital distributions is subject to the restrictions of the National Bank Act. In addition, it is possible, depending upon the financial condition of the Bank and other factors, that the OCC could assert that payment of dividends or other payments is an unsafe or unsound practice. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 7 - Management’s Discussion and Analysis of Operations - Regulatory Matters - Dividends” in this Form 10-K. The amount that the Bank may pay in dividends is further restricted due to the fact that the Bank must maintain a certain minimum amount of capital to be considered a “well capitalized” institution as well as a separate capital conservation buffer, as further described under “Item 7 - Management's Discussion and Analysis of Operations - Regulatory Matters- Dividends” in this Form 10-K.
In the event the Bank is unable to pay dividends to CWBC, it is likely that CWBC, in turn, would have to discontinue cash dividends and share repurchases and may have difficulty meeting its other financial obligations. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock. The inability of the Bank to pay dividends to CWBC could have a material adverse effect on our business, including the market price of our common stock.
For the year ended December 31, 2023, the Bank paid $3.6 million in dividends to CWBC. No assurances can be given that future performance will justify the payment of dividends in any particular year. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code. Moreover, CWBC’s ability to pay dividends is also subject to the restrictions of the California Corporations Code.
Issuance of additional common stock or other equity securities in the future could dilute the ownership interest of existing shareholders.
In order to maintain capital at desired or regulatory-required levels, or to fund future growth, the board of directors may decide from time to time to issue additional shares of common stock, or securities convertible into, exchangeable for, or representing rights to acquire shares of our common stock. The sale of these shares may significantly dilute the ownership interests of current shareholders. The sale of these shares may significantly dilute ownership interests of shareholders. New investors in the future may also have rights, preferences, and privileges senior to current shareholders which may adversely impact current shareholders. In addition, the Company issues options to purchase common stock and restricted stock awards under its equity compensation plans to plan participants, including directors, officers, and employees of the Company or the Bank, which may dilute the ownership interests of shareholders. In addition, the Company issues options to purchase common stock and restricted stock awards under its equity compensation plans to plan participants, including directors, officers and other employees of the Company and/or the Bank, which may dilute the ownership interests of shareholders.
Risks Relating to the Merger with Central Valley Community Bancorp
Central Valley and Community West are expected to incur substantial costs related to the merger and integration, and these costs may be greater than anticipated due to unexpected events.
Central Valley and Community West have incurred and expect to incur a number of significant non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs, and other related costs. Some of these costs are payable by either Central Valley or Community West regardless of whether or not the merger is completed.
In addition, the combined company will incur integration costs following the completion of the merger as Central Valley and Community West integrate their businesses, including facilities and systems consolidation costs and employment-related costs. Central Valley and Community West may also incur additional costs to maintain employee morale and to retain key employees. There are a large number of processes, policies, procedures, operations, technologies, and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing, and benefits. While Central Valley and Community West have assumed that a certain level of costs will be incurred, there are many factors beyond their control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the combined company taking charges against earnings following the completion of the merger, and the amount and timing of such charges are uncertain at present. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset these transaction and integration costs over time.
The future results of the combined company following the completion of the merger may suffer if the combined company does not effectively manage its expanded operations.
Following the merger, the size of the business of the combined company will increase beyond the current size of businesses of either Central Valley or Community West. The combined company’s future success will depend, in part, upon its ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. The combined company may also face increased scrutiny from governmental entities as a result of the increased size of its business. There can be no assurances that the combined company will be successful or that it will realize the expected operating efficiencies, revenue enhancement, or other benefits currently anticipated from the merger.
The combined company may be unable to retain Central Valley or Community West personnel successfully after the completion of the merge.
The success of the merger will depend in part on the combined company’s ability to retain the talent and dedication of key employees currently employed by Central Valley and Community West. It is possible that these employees may decide not to remain with Central Valley or Community West, as applicable, while the merger is pending or with the combined company after the completion of the merger. If Central Valley and Community West are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, Central Valley and Community West could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment costs. Central Valley and Community West may not be able to locate or retain suitable replacements for any key employees who leave either company. In addition, following the completion of the merger, if key employees terminate their employment, the combined company’s business activities may be adversely affected.
The combined company may fail to realize cost savings for the merger.
Although Central Valley, CVCB, Community West, and CWB expect to realize cost savings from the merger when fully phased in, it is possible that these potential cost savings may not be realized fully or realized at all, or may take longer to realize than expected. For example, future business developments may require the combined company to continue to operate or maintain some facilities or support functions that are currently expected to be combined or reduced. Cost savings also depend on the combined company’s ability to combine the businesses of CVCB and CWB in a manner that permits those cost savings to be realized. If the combined company is not able to combine the two companies successfully, these anticipated cost savings may not be fully realized or realized at all, or may take longer to realize than expected. This in turn could reduce or otherwise adversely affect the profitability of the combined company and adversely affect its stock price.
The unaudited pro forma combined condensed financial information included in the joint proxy statement/prospectus is preliminary and the actual financial condition or results of operations of the combined company after the merger may differ materially.
The unaudited pro forma combined condensed financial information in the joint proxy statement/prospectus filed on January 2, 2024, is presented for illustrative purposes only and is not necessarily indicative of what the combined company’s actual financial condition or results of operations would have been had the merger been completed on the dates indicated. The unaudited pro forma combined condensed financial information reflects adjustments, which are based upon preliminary estimates, to record the identifiable Community West assets acquired and liabilities assumed at fair value and the resulting goodwill recognized. The pro forma allocation of purchase price reflected in the selected unaudited pro forma combined condensed financial information is preliminary, subject to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed. The final allocation of the purchase price will be based upon the value of Central Valley common stock issued in the merger, and the fair value of the assets and liabilities of Community West, as of the date of the completion of the merger, which was April 1, 2024. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected in the joint proxy statement/prospectus.
Because the fair value of the assets held by each of Central Valley and Community West at the time of the merger may fluctuate as a result of changes in interest rates, an adverse change may reduce or eliminate the anticipated benefits of the merger for Central Valley or Community West shareholders.
Changes in the market interest rates applicable to Central Valley or Community West up to the date of the completion of the merger could affect the value of the assets held by either or both of Central Valley and Community West. The magnitude of any such changes would not necessarily be equal between Central Valley and Community West, and consequently the relative value of the assets held by each company may be altered in a way that is material to either company or the anticipated benefits of the merger. Central Valley or Community West shareholders, as applicable, will not necessarily know or be able to calculate the impact any such changes in market interest rates on the value of assets held by Central Valley or Community West, as applicable.
As of the date that the merger closed (April 1, 2024), the combined company will need to adjust the fair value of Community West’s investment and loan portfolios. The changing interest rate environment could have the effect of changing the magnitude of the purchase accounting marks relating to such fair value adjustments, thereby changing initial tangible book value dilution, extending the tangible book value earn-back period, or negatively impacting the combined company’s capital ratios, which may result in the combined company taking steps to strengthen its capital position.
Should market interest rates rise in the future, it would have a negative effect on estimates of the fair value of loans and other assets held by Central Valley and Community West, which could be material and, in certain cases, may result in realized losses or require write-downs that could have a material effect on either company’s earnings or financial condition. The fair value of an obligation with a fixed interest rate generally decreases when prevailing interest rates rise, and the fair value of an obligation with an adjustable interest rate can be adversely affected when interest rates increase due to a lag in the implementation of repricing terms as well as due to interest rate caps which may limit the amount of increase in such obligation’s interest rate. Interest rate changes may result from a variety of factors, including general market and economic conditions, actions of central banks or other governmental authorities, regulatory considerations and the effects of SARS-CoV-2 or COVID-19, or any variants, evolutions or mutations thereof, or any other viruses (including influenza), and the governmental and other responses thereto (including any pandemic measures). These factors are generally beyond the control of both companies.
Impairment of goodwill resulting from the merger may adversely affect our results of operations.
Goodwill and other intangible assets are expected to increase as a result of the merger. The actual amount of goodwill and core deposits intangibles recorded will depend on a number of factors, including changes in the net assets acquired and changes in the fair values of the net assets acquired. Potential impairment of goodwill and amortization of other intangible assets could adversely affect our financial condition and results of operations. Central Valley assesses its goodwill, other intangible assets, and long-lived assets for impairment annually and more frequently when required by generally accepted accounting principles. Central Valley is required to record an impairment charge if circumstances indicate that the asset carrying values exceed their fair values. Central Valley’s assessment of goodwill, other intangible assets, or long-lived assets could indicate that an impairment of the carrying value of such assets may have occurred or may occur in a future accounting period, that could result in a material, non-cash write-down of such assets, which could have a material adverse effect on our results of operations and future earnings.
The market price of Central Valley common stock after the merger may be affected by factors different from those affecting the shares of Community West or Central Valley currently.
On the date of the completion of the merger, holders of Community West common stock became holders of Central Valley common stock. Central Valley’s business differs in certain respects from that of Community West and, accordingly, the results of operations of the combined company and the market price of Central Valley common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of Central Valley and Community West
Sales of substantial amounts of Central Valley common stock in the open market by former Community West shareholders could depress Central Valley’s stock price.
Shares of Central Valley common stock that were issued to Community West shareholders in the merger (other than Community West shareholders who are affiliates of Central Valley after the merger) are freely tradable without restrictions or further registration under the Securities Act of 1933, as amended (“Securities Act”). Community West’s former shareholders may sell substantial amounts of Central Valley common stock in the public market following completion of the merger. Any such sales may cause the market price of Central Valley common stock to decline. These sales might also make it more difficult for Central Valley to sell equity or equity-related securities at a time and price that it otherwise would deem appropriate.
Holders of Central Valley and Community West common stock will have a reduced ownership and voting interest after the merger and will exercise less influence over management.
Holders of Central Valley common stock and Community West common stock, prior to the completion of the merger, had the right to vote in the election of the board of directors and on other matters affecting Central Valley and Community West, respectively. After the completion of the merger, each Community West shareholder who received shares of Central Valley common stock became a shareholder of Central Valley with a percentage ownership of Central Valley that is smaller than the shareholder’s percentage ownership of Community West. In the aggregate, Central Valley’s current shareholders and Community West’s current shareholders own approximately 63% and 37%, respectively, of the outstanding shares of Central Valley common stock after the merger was completed. As a result, Community West common shareholders may have less influence on the management and policies of the combined company than they had on the management and policies of Community West and current Central Valley shareholders may have less influence on the combined company than they had on the management and policies of Central Valley.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 1C. | CYBERSECURITY |
We recognize the crucial importance of identifying, assessing, and managing material risks from cybersecurity threats. We are committed to implementing and maintaining a comprehensive cyber and information security program to manage such risks and safeguard our systems and data, including the data of our customers.
Information Security Policies and Procedures
We manage our cybersecurity risk in accordance with our Information Security Program (the “Information Security Program”), which is applicable to all users of our information technology assets, information assets, and facilities, including our directors, officers, employees, temporary workers, business partners, contractors, vendors, service providers, and individuals affiliated with third parties. The Information Security Program includes a dedicated Cybersecurity Incident Response Plan (the “CIRP”), which sets forth the rules and requirements for detecting, investigating, containing, eradicating, and resolving information security incidents, and addresses the response portion of security monitoring. The Information Security Program also includes: (i) a collection of Security Incident Forms (the “Security Incident Forms”), which delineate the processes for reporting, classifying, investigating, documenting, and communicating information security incidents and (ii) Security Guidelines and Baseline Protections, that establish the rules and requirements for enabling, logging, alerting, and monitoring real time security alerts and security logs (automated or manual) in connection with security incidents.
Potential information security incidents are identified in a number of ways, including, but not limited to: users reporting security violations, system weaknesses, violations of our Acceptable Use Policy which addresses the boundaries of acceptable and unacceptable use of our information technology assets, automated system alerts, and monitoring of both system generated and manually generated logs. Our Information Security Program mandates that any potential information security incident be reported to a IT Management, and / or member of the Information Security Team, to initiate the internal communication and investigation stage, during which such events undergo initial investigation for validation, including related to the scope and depth of such incident and to ensure that it has not resulted from a false positive. Internal communications regarding the potential incident are led by the Chief Risk Officer (CRO) and/or Information Security Officer in accordance with the Cybersecurity Incident Response Plan (CIRP).
Following this initial stage, we gather and update impact information and related documentation for such incidents. We use an incident classification matrix to determine the initial classification of a potential information security incident, which considers users, customers, and systems affected, the sensitivity of data at risk, and the potential business impacts to the Company including financial, legal, regulatory, operational, and reputation. The resulting classification of severity level “ S1-Critical,” “S2-Moderate,” or “S3-Low” identifies next steps for escalation and communication following the initial investigation of the potential incident. Upon escalation of an incident, per our Information Security Program, the CRO and ISO review and validate the initial determination of the priority of the incident prior to entering into subsequent investigative and response stages. Upon validation, the CRO or ISO will engage the Company’s designated Breach Coach to respond to the incident and notifications or communications are made to either additional personnel or any external entities. Depending on the specific details of any such incident, we may notify additional members of our management team, legal, our board of directors, the Audit Committee, state and federal regulators, technology service providers, and/or the SEC. The timing of such communications varies based on the details of a particular incident and applicable regulations governing such disclosure. Following this classification and communication stage, we enter the recovery stage to determine containment and a response to the incident, the Company’s technology service provider assigns technical staff to address such incident, implement containment, eradicate the incident source, and recover from such incident. Following any such incident and as determined by the Security Incident Forms, we engage in predefined follow-up activities to communicate with law enforcement and notify impacted third parties and customers, as appropriate, in addition to further investigating the cause of the incident, documenting takeaways, and engaging in remediation.
Our Information Security Officer (“ISO”) coordinates with other members of our Incident Response Team identified in our Information Security Program to document, validate, respond, and manage actual or potential security incidents according to their threat classifications as described above, and report to our board of directors and/or the Audit Committee on a periodic basis. The ISO also provides annual reports on the status of our Information Security Program and its compliance with regulatory requirements to our board of directors in connection with our board's general risk management oversight role, as described in further detail below. The ISO is responsible for overseeing day-to-day operations of the Information Security Program, coordinating, or contributing to reviews, audits, risk assessments, and other risk management material, development of departmental policies and procedures for board approval, and periodic updates to our Information Technology Steering Committee, Enterprise Risk Management Committee, and the Board of Directors Audit Committee. The ISO reports to the Chief Risk Officer.
With the approval of Audit Committee, we also engage third party assessors, consultants, and auditors in connection with the Company’s Information Security Program and in accordance with our Audit Program, including to conduct external and internal penetration testing, independent audits, and risk assessments. The ISO performs information security assessments for third party service providers that store and/or process our confidential data. These information security assessments, include a review of any service organization controls (SOC) reports, and proof of the vendor’s independent testing of their data protection controls, as well as a review of any exceptions noted and assessment of management responses, results of vulnerability and penetration testing, incident response processes, and third party data protection controls (which can include, but are not limited to: access reviews and controls, backups, monitoring, encryption standards, and disaster recovery). The review of these areas is taken into account in order to provide an overall information security conclusion and risk rating for the vendor.
In addition, we use a combination of technology, policies, procedures, training, and monitoring to promote security awareness and prevent security incidents.
Cybersecurity Risk Oversight
Our business unit managers with oversight and guidance from our risk management team is responsible for the development of our policies and procedures and for managing any exception to the same. In particular, our ISO, nonmember of the executive management team, oversees information security compliance, as described above. The board of directors of the Company has ultimate oversight of cybersecurity-related risk and activities, including the review and approval of our policies and procedures related to cybersecurity. The Information Security Program is approved on an annual basis. Cybersecurity risk management is also incorporated into our overall enterprise risk management model, which is updated on an annual basis and subject to oversight by our board of directors.
In the ordinary course of business, our board of directors receives at a minimum annual updates from the ISO regarding the Information Security Program and compliance with relevant regulations, as described above. Both our Information Technology Steering Committee and Enterprise Risk Management Committee consists of members of the Executive Management Team and department heads with relevant technology experience and meets on a monthly cadence with minutes, reports, and presentations flowing up to the Board of Directors Audit Committee which also meets on a monthly cadence. If an incident occurs, depending on its priority as identified through the procedures described above, management may inform our board of directors via the Audit Committee sooner than its next monthly update.
Relevant Regulations
As a regulated financial institution, the Bank is also subject to financial privacy laws, and our cybersecurity practices are subject to oversight by the federal banking agencies. In addition, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.
Prior Incidents
As of this reporting, the Bank has not experienced any S1-Critical/Material incidents.
Recently Filed
Click on a ticker to see risk factors
| Ticker * | File Date |
|---|---|
| CMCO | 10 hours ago |
| NRIS | 10 hours ago |
| TTGT | 10 hours ago |
| TGI | 10 hours ago |
| MNRO | 11 hours ago |
| CPRI | 11 hours ago |
| RSVR | 11 hours ago |
| SCGY | 16 hours ago |
| SOTK | 18 hours ago |
| MLAB | 19 hours ago |
| XELB | 1 day, 7 hours ago |
| ZEO | 1 day, 10 hours ago |
| SMID | 1 day, 10 hours ago |
| SKY | 1 day, 11 hours ago |
| TRNS | 1 day, 11 hours ago |
| VSAT | 5 days, 10 hours ago |
| LOGI | 5 days, 10 hours ago |
| GRST | 5 days, 11 hours ago |
| CRVL | 5 days, 11 hours ago |
| CVCO | 5 days, 11 hours ago |
| SODI | 5 days, 11 hours ago |
| STEP | 5 days, 11 hours ago |
| CRUS | 5 days, 11 hours ago |
| BZYR | 1 week, 1 day ago |
| DOCS | 1 week, 1 day ago |
| CSWC | 1 week, 1 day ago |
| TTWO | 1 week, 1 day ago |
| EDUC | 1 week, 2 days ago |
| QRVO | 1 week, 2 days ago |
| AREC | 1 week, 2 days ago |
| KCRD | 1 week, 5 days ago |
| RBC | 1 week, 5 days ago |
| SGRP | 1 week, 5 days ago |
| PNXP | 1 week, 6 days ago |
| GEN | 1 week, 6 days ago |
| ESSI | 1 week, 6 days ago |
| HLI | 1 week, 6 days ago |
| NTCT | 1 week, 6 days ago |
| BOOT | 1 week, 6 days ago |
| WMS | 1 week, 6 days ago |
| GWLL | 1 week, 6 days ago |
| EZOO | 1 week, 6 days ago |
| DXC | 2 weeks ago |
| STAI | 2 weeks ago |
| HWKN | 2 weeks ago |
| SNRG | 2 weeks ago |
| MESA | 2 weeks, 1 day ago |
| RGBP | 2 weeks, 1 day ago |
| GAIN | 2 weeks, 1 day ago |
| EA | 2 weeks, 1 day ago |
