Community West Bancshares (“CWBC”), incorporated under the laws of the state of California, is a bank holding company providing full-service banking through its wholly owned subsidiary Community West Bank, N.A. (“CWB” or the “Bank”) which includes 445 Pine, LLC, the Bank’s wholly owned limited liability company. Unless indicated otherwise or unless the context suggests otherwise, these entities are referred to herein collectively and on a consolidated basis as the “Company.”

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the banking industry. The accounts of the Company and its consolidated subsidiary are included in these consolidated financial statements. All significant intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses and fair value of investment securities available for sale. Although management believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of management, all adjustments considered necessary have been reflected in the financial statements during their preparation.

On October 10, 2023, the Company announced the signing of an Agreement of Reorganization and Merger with Central Valley Community Bancorp (NASDAQ: CVCY), headquartered in Fresno, California, together with its banking subsidiary, Central Valley Community Bank, pursuant to which the companies will combine in an all-stock merger transaction. Under the terms of the agreement, Community West Bancshares will merge with and into Central Valley Community Bancorp and Community West Bank will merge with and into Central Valley Community Bank. The Central Valley Community Bancorp and Community West Bancshares Boards of Directors have unanimously approved the transaction. The merger closed on April 1, 2024. On the effective date of the merger, Central Valley Community Bancorp and Central Valley Community Bank were rebranded and changed their names to “Community West Bancshares” and “Community West Bank,” respectively.

The Company’s lending activities are primarily driven by the customers served in the market areas where the Company has branch offices in the Central Coast of California. The Company monitors concentrations within selected categories, such as geography and product. The Company makes manufactured housing, commercial, SBA, construction, commercial real estate, single family real estate, and consumer loans to customers through branch offices located in the Company’s primary markets. The Company’s business is concentrated in these areas and the loan portfolio includes significant credit exposure to the commercial real estate and manufactured housing markets of these areas. As of December 31, 2023 and 2022, commercial real estate loans accounted for approximately 57.9% and 57.1% of total loans (including loans held for sale), respectively. Approximately 27.5% and 24.5% of these commercial real estate loans were owner occupied at December 31, 2023 and 2022, respectively. Substantially all of these loans are secured by first liens with an average loan to value ratios of 50.3% and 50.4% at December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, manufactured housing loans comprised 34.1% and 33.1%, respectively, of total loans. The Company was within established lending policy limits at December 31, 2023 and 2022.

Reportable business segments are determined using the “management approach” and are intended to present reportable segments consistent with how the chief operating decision maker organizes segments within the company for making operating decisions and assessing performance. As of December 31, 2023 and 2022, the Company had only one reportable business segment.

Depository institutions are required by law to maintain reserves against their transaction deposits. The reserves must be held in cash or with the Federal Reserve Bank. The amount of the reserve varies by bank as the bank is permitted to meet this requirement by maintaining the specified amount as an average balance over a two-week period. The Federal Reserve reduced the reserve requirement ratio to zero percent across all deposit tiers as of March 26, 2020, to aid institutions impacted by COVID-19.

Securities classified as HTM are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.

Securities classified as AFS are debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations. AFS securities are reported as an asset on the consolidated balance sheets at their estimated fair value. As the fair value of AFS securities changes, the changes are reported net of income tax as an element of other comprehensive income (loss) (“OCI”). When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to non-interest income.

The allowance for credit losses for HTM investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. For investment securities where the Company has reason to believe the credit loss exposure is remote, a zero-credit loss assumption is applied. Such investment securities typically consist of those guaranteed by the U.S. government or government agencies, where there is an explicit or implicit guarantee by the U.S. government, that are highly rated by rating agencies, and historically have had no credit loss experience.

For AFS securities, the Company performs a quarterly evaluation for securities in an unrealized loss position to determine if the decline in fair value below the security’s amortized cost is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security; (v) the ability of the issuer of the security to make scheduled principal and interest payments; and (vi) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss, or a portion thereof, is credit related, the Company records the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in the current period’s earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If the Company intends to sell, or if it is more likely than not that the Company will be required to sell, a security in an unrealized loss position before the recovery of its amortized cost basis, the total amount of the unrealized loss is recognized in the current period’s earnings. Unrealized losses deemed non-credit related are recorded, net of tax, through accumulated other comprehensive income (loss).

A debt security is placed on nonaccrual status at the time any principal or interest payments become greater than 90 days delinquent. Interest accrued but not received when a security is placed on nonaccrual status is reversed against interest income. Accrued interest receivable on available-for-sale securities is excluded from the estimate of the required allowance for credit losses.

Prior to the adoption of ASC 326 on January 1, 2023, the Company estimated whether there were any other than temporary impairment losses related to HTM or AFS securities. When making this determination, management considered: 1) the length of time and the extent to which the fair value was less than the security’s amortized cost; 2) the financial condition and near term prospects of the issuer; 3) the impact of changes in market interest rates; and 4) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in a security’s fair value whether it was more likely than not that the Company would be required to sell the security. Declines in the fair value of individual debt securities classified as AFS that were deemed to be other than temporary were reflected in earnings when identified. The fair value of the debt security then became the new cost basis. For individual debt securities where the Company did not intend to sell the security and it was not more likely than not that the Company would have been required to sell the security before the recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to 1) credit loss was recognized in earnings, and 2) market or other factors was recognized in other comprehensive income or loss.

The Company’s subsidiary bank is a member of the FHLB system and maintains an investment in capital stock of the FHLB. The bank also maintains an investment in FRB stock. These investments are considered equity securities with no actively traded market. These investments are carried at cost, which is equal to the value at which they may be redeemed. The dividend income received from the stock is reported in interest and dividend income. Management conducts a periodic review and evaluation of the Company’s holdings of FHLB and FRB stock to determine if any impairment exists. No impairment was deemed to have existed during the years ended December 31, 2023 or 2022.

Loans which are originated and intended for sale in the secondary market are carried at the lower of their amortized cost or estimated fair value, determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to lower of cost or fair value provision. Loans held for sale are comprised of SBA and commercial agriculture loans. Gains or losses realized on the sales of loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of loans held for sale are included in gains from loan sales, net in the accompanying consolidated income statements. The Company did not incur any lower of cost or fair value provision in the years ended December 31, 2023, 2022, and 2021.

Interest income on loans is accrued daily using the effective interest method and recognized over the terms of the loans. Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.

When a borrower discontinues making payments as contractually required by the note, management must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by more than 90 days or when management determines that the full repayment of principal and collection of interest is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90 days delinquent if they are well secured by collateral and in the process of collection.

When a loan is placed on nonaccrual status, all interest accrued but uncollected is reversed against interest income in the period in which the status is changed. Subsequent payments received from the borrower are applied to principal and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. The Company occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the remaining principal balance is not in doubt.

Effective January 1, 2023, the Company accounts for credit losses on loans in accordance with ASC 326. The allowance for credit losses (“ACL”) for loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Company has elected to exclude accrued interest receivable from the amortized cost basis in the estimate of the ACL. The provision for credit losses on loans (which is a component of the provision for credit losses on the consolidated income statements) reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The Company’s methodologies for determining the adequacy of ACL are set forth in a formal policy and take into consideration the need for an ACL for loans evaluated on a collective pool basis which have similar risk characteristics, as well as allowances that are tied to individual loans that do not share risk characteristics and are individually evaluated. The Company increases its ACL by charging the provision for credit losses on its consolidated income statements. Losses related to specific assets are applied as a reduction of the carrying value of the assets and charged against the ACL when management believes the non-collectability of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the ACL.

Management conducts an assessment of the ACL on a monthly basis and undertakes a more comprehensive evaluation quarterly. The ACL is estimated using relevant information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts and is maintained at a level sufficient to provide for expected credit losses over the life of the loan, including expected prepayments, based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio and economic conditions.

The ACL is measured on a collective pool basis when similar risk characteristics exist. In estimating the component of the ACL for loans that share common risk characteristics, loans are pooled based on the loan types and areas of risk concentration. For loans evaluated collectively as a pool, the ACL is calculated using the weighted average remaining maturity (“WARM”) method. The WARM method utilizes a historical average annual charge-off rate containing loan loss information over a historical lookback period that is used as a foundation for estimating the ACL for the remaining outstanding balances of loans in a segment at a particular consolidated balance sheet date. The WARM methodology was chosen because each of the loan segments have had loan loss histories dating back as far as 2006 and therefore capture the Company’s historical losses and recoveries and thus established reliable loan loss rates for each loan segment. In the events where there was insufficient historical loan data to establish a reliable loan loss rate, California peer bank data has been utilized to establish loan loss rates.

Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for a required ACL and are not included in the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, when the Company determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs. Collateral may consist of various types of real estate including residential properties, commercial properties, agriculture land, vacant land, and manufactured housing. In certain cases, the Company may hold business assets as collateral. The Company assesses these loans on each reporting date to determine whether repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty.

If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will recognize an ACL or partial charge off as the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged off. Subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

The calculation of the ACL is adjusted using qualitative factors for current conditions and for reasonable and supportable forecast periods. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not directly reflected in the Company’s historical loan losses and may include adjustments for changes in environmental and economic conditions, such as changes in unemployment rates, changes in Gross Domestic Product, the impact of droughts in the Company’s lending areas, and other relevant factors.

The process of assessing the adequacy of the ACL is necessarily subjective. Further, and particularly in times of economic downturns, it is reasonably possible that future credit losses may exceed historical loss levels and may also exceed management’s current estimates of expected credit losses within the loan portfolio. As such, there can be no assurance that future charge offs will not exceed management’s current estimate of what constitutes a reasonable ACL.

Portfolio segmentation is defined as the level at which an entity develops and documents a systematic methodology to determine its ACL. The method for determining the ACL described above is used to determine the ACL in each portfolio segment in the Company’s loan portfolio. The Company has designated the following portfolio segments of loans:

Manufactured Housing: The Company has a financing program for manufactured housing to provide affordable home ownership. These loans are offered in approved mobile home parks throughout California primarily on or near the coast. The parks must meet specific criteria. The manufactured housing loans are secured by the manufactured home and are retained in the Company’s loan portfolio. The primary risks of manufactured housing loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates, which may reduce the borrower’s ability to make the required principal or interest payments.

Commercial Real Estate (“CRE”): CRE loans are those for which the Company holds commercial real estate property as collateral. This category of loans also includes loans secured by agriculture/farmland and construction loans. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Commercial: Commercial loans are loans that are secured by business assets including inventory, receivables, machinery, and equipment. Risk associated with commercial loans arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Small Business Administration (“SBA”): These are the unguaranteed portion of loans that are partially guaranteed by the SBA. SBA loans are similar to commercial business loans. The Company originates SBA loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis. Certain loans classified as SBA loans are secured by commercial real estate property which are included in the commercial real estate category above. SBA loans secured by all other forms of real estate are included in the business loans secured by real estate segment. All other SBA loans are secured by business assets and have similar risks to those discussed in the commercial category above.

Single Family Real Estate and Home Equity Lines of Credit (“HELOC”): These loans are made to consumers and are secured by residential real estate. The primary risks of single family real estate and HELOC loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may reduce the borrower’s ability to make the required principal or interest payments.

Prior to the adoption of ASC 326 on January 1, 2023, the allowance for loan losses was intended to provide for losses that were considered inherent in the loan portfolio. This process involved deriving probable loss estimates that were based on migration analyses and historical loss rates, in addition to qualitative factors that were based on management’s judgment. The migration analysis and historical loss rate calculations were based on annualized loss rates. Migration analysis was utilized for the commercial real estate, commercial, commercial agriculture, SBA, HELOC, single family residential, and consumer portfolios. The historical loss rate method was utilized primarily for the manufactured housing portfolio. The migration analysis considered the risk rating of loans that were charged off in each loan category.

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Commercial real estate, commercial, commercial agriculture, SBA, HELOC, single family residential, and consumer: Migration analysis combined with risk rating of the loans was used to determine the required allowance for loan losses for all non-impaired loans. In addition, the migration results were adjusted based upon qualitative factors that affect the specific portfolio category. Reserves on impaired loans were determined based upon the individual characteristics of the loan.

A loan was considered impaired when, based on current information, it was probable that the Company would be unable to collect the scheduled payments of principal or interest under the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value, and the probability of collecting scheduled principal or interest payments. Loans that experienced insignificant payment delays or payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays or payment shortfalls on a case-by-case basis. When determining the possibility of impairment, management considered the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. For collateral-dependent loans, the Company used the fair value of collateral method to measure impairment. The collateral-dependent loans that recognized impairment were charged down to the fair value of the collateral less costs to sell. All other loans were measured for impairment either based on the present value of future cash flows or the loan’s observable market price.

The Company evaluated and individually assessed for impairment loans either on nonaccrual, those that were classified as a troubled debt restructuring, or when other conditions existed which led management to review for possible impairment. Measurement of impairment on impaired loans was determined on a loan-by-loan basis and in total established a specific reserve for impaired loans. Interest income was not recognized on impaired loans except for limited circumstances in which a loan, although considered impaired, continued to perform in accordance with the loan contract and the borrower provided financial information to support maintaining the loan on accrual.

The Company determined the appropriate allowance for loan losses on a monthly basis. Any differences between estimated and actual observed losses from the prior month were reflected in the current period in determining the appropriate allowance for loan losses determination and adjusted as deemed necessary. The review of the appropriateness of the allowance took into consideration such factors as concentrations of credit, changes in the growth, size, and composition of the loan portfolio, overall and individual portfolio quality, review of specific problem loans, collateral, guarantees and economic and environmental conditions that may have affected borrowers’ ability to pay or the value of the underlying collateral. Additional factors considered included geographic location of borrowers, changes in the Company’s product-specific credit policy, and lending staff experience. These estimates depended on the outcome of future events and, therefore, contained inherent uncertainties.

From time to time, the Company will modify certain loans in order to alleviate temporary difficulties in a borrower’s financial condition or constraints on a borrower’s ability to repay the loan, and to minimize potential losses to the Company. Such modifications may include changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and in limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been in default for a period of 90 days or more. These loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL on these loans on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated fair value of the underlying collateral, less estimated selling costs. See Note 4 - Loans Held for Investment for additional information concerning modified loans to troubled borrowers.

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheets. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.

After the adoption of ASC 326 on January 1, 2023, the estimate of the ACL for off-balance sheet commitments provides for current estimated credit losses for the unused portion of collective pools of off-balance sheet credit exposures expected to be funded, except for unconditionally cancellable commitments for which no allowance for credit losses is required under ASC 326. The ACL for off-balance sheet commitments includes factors that are consistent with the ACL methodology for loans using the expected loss factors and an estimated utilization or probability of draw factor, which are based on historical experience. Changes in the ACL for off-balance sheet commitments are reported as a component of provision for credit losses in the consolidated income statements and the allowance for credit losses for off-balance sheet commitments is included in other liabilities in the consolidated balance sheets.

Prior to the adoption of ASC 326 on January 1, 2023, the Company applied qualitative factors to its off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. The estimate for losses on off-balance sheet instruments is included within other liabilities and the charge to income that established this liability is included in other expense on the consolidated income statement.

At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are determined to be an operating lease, a corresponding Right of Use (“ROU”) asset and operating lease liability are recorded in separate line items on the consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset during the lease term and a lease liability represents the Company’s commitment to make contractually obligated lease payments. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease and are based on the present value of lease payments over the lease term. The measurement of the operating lease ROU asset includes any lease payments made and is reduced by lease incentives that are paid or are payable to the Company. Variable lease payments that depend on an index are included in lease payments based on the rate in effect at the commencement date of the lease. Lease payments are recognized on a straight-line basis as part of occupancy expense over the lease term.

As the rate implicit in the lease is not readily determinable, the Company’s incremental borrowing rate is used to determine the present value of lease payments. This rate gives consideration to the applicable FHLB collateralized borrowing rates and is based on the information available at the commencement date. The Company has elected to apply the short-term lease measurement and recognition exemption to leases with an initial term of 12 months or less, therefore, these leases are not recorded on the Company’s consolidated balance sheets. Lease expense of these leases is recognized over the lease term on a straight-line basis. The Company’s lease agreements may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the option will be exercised.

The Company has also elected the practical expedient that allows lessees to make an accounting policy election to not separate non-lease components from the associated lease component, and instead account for them all together as part of the applicable lease component. The majority of the Company’s non-lease components, such as common area maintenance and taxes, are variable and expensed as incurred. Variable payment amounts are determined in arrears by the landlord depending on actual costs incurred.

Other assets acquired through foreclosure are recorded at fair value at the time of foreclosure, less estimated costs to sell. Any excess of loan balance over the fair value less estimated costs to sell of the assets is charged-off against the allowance for credit losses. Any excess of the fair value less estimated costs to sell over the loan balance is recorded as a credit loss recovery to the extent of the credit loss previously charged-off against the allowance for credit losses; and, if greater, recorded as a gain. Subsequent to the legal ownership date, the Company periodically performs a new valuation and the other assets acquired through foreclosure are carried at the lower of carrying amount or fair value less estimated costs to sell. Operating expenses or income, and gains or losses on disposition of such properties, are recorded in current operations.

The guaranteed portion of certain SBA loans can be sold into the secondary market. Servicing assets are recognized as separate assets when loans are sold with servicing retained. Servicing assets are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics and its own prepayment experience in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing asset and resulting gain on sale for SBA loan sales are calculated based on the difference between the best actual par and premium bids on an individual loan basis.

CWB is an approved Federal Agricultural Mortgage Corporation (“Farmer Mac”) seller/servicer. Servicing assets are recognized as separate assets as certain servicing requirements are retained. Servicing assets are amortized over the period of estimated net servicing income. CWB uses Farmer Mac prepayment statistics in estimating the expected life of the loans. Management evaluates its servicing assets for impairment quarterly. Servicing assets are evaluated for impairment based on the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis. The initial servicing asset and resulting gain is calculated based on the contractual net servicing fees. Farmer Mac servicing assets are valued based on the net servicing fee, estimated life of seven years, and discounted using the Company’s borrowing rate (the discount rate used was 5.63% and 5.91% at December 31, 2023 and 2022, respectively). Farmer Mac servicing assets measured under the amortization method were $1.3 million and $1.5 million at December 31, 2023 and 2022, respectively. Servicing assets are recorded in other assets on the consolidated balance sheets.

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to have been surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge and exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank owned life insurance is stated at its cash surrender value with changes recorded in other income in the consolidated income statements. The cash surrender value of the underlying policies was $8.9 million and $8.7 million as of December 31, 2023 and 2022, respectively, and was recorded in other assets on the consolidated balance sheets. There are no loans offset against cash surrender values, and there are no restrictions as to the use of proceeds.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820 - “Fair Value Measurements and Disclosures” (“ASC 820”) established a framework for measuring fair value using a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset as of the measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:

The availability of observable inputs varies based on the nature of the specific financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. When market assumptions are available, ASC 820 requires the Company to make assumptions regarding the assumptions that market participants would use to estimate the fair value of the financial instrument at the measurement date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2023 or 2022. The estimated fair value amounts for December 31, 2023 and 2022, have been measured as of period-end and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period-end.

The information presented in Note 16 - Fair Value Measurement should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.

Investment securities - The fair value of equity securities was based on quoted market prices and are categorized as Level 1 of the fair value hierarchy. The fair value of AFS and HTM debt securities was determined based on matrix pricing. Matrix pricing is a mathematical technique that utilizes observable market inputs including, for example, yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing are generally categorized as Level 2 in the fair value hierarchy.

FRB and FHLB stock - CWB is a member of the FHLB system and maintains an investment in capital stock of the FHLB. CWB also maintains an investment in FRB stock. These investments are carried at cost since no ready market exists for them, and they have no quoted market value. The Company conducts a periodic review and evaluation of our FHLB stock to determine if any impairment exists. The fair values have been categorized as Level 2 in the fair value hierarchy.

Loans - Fair value for loans is estimated based on their discounted cash flows using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality with adjustments that the Company believes a market participant would consider in determining fair value. As a result, the fair value for loans is categorized as Level 2 in the fair value hierarchy. Fair values of collateral dependent loans with an ACL have been categorized as Level 3.

Accrued interest receivable and payable - the fair value of the accrued interest associated with interest-bearing assets and liabilities is considered to be approximately equal to its cost given its short-term nature and the fact that collectability is regularly assessed. Accrued interest is categorized within the same level of the fair value hierarchy as the associated interest-bearing asset or liability.

Deposit liabilities - The amount payable on demand at the reporting date is used to estimate the fair value of demand and savings deposits. The estimated fair values of fixed-rate time deposits are determined by discounting the cash flows of segments of deposits that have similar maturities and rates, utilizing a discount rate that approximates the prevailing rates offered to depositors as of the measurement date. The fair value measurement of deposit liabilities is categorized as Level 2 in the fair value hierarchy.

Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of the awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

The Company uses the asset and liability method, which recognizes an asset or liability representing the tax effects of future deductible or taxable amounts that have been recognized in the consolidated financial statements. Due to tax regulations, certain items of income and expense are recognized in different periods for tax return purposes than for financial statement reporting. These items represent “temporary differences.” Deferred income taxes are recognized for the tax effect of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets may not be realized. Any interest or penalties assessed by the taxing authorities is classified as income tax expense in the consolidated income statements. Deferred tax assets net of deferred tax liabilities are included in other assets on the consolidated balance sheets.

Management evaluates the Company’s deferred tax asset for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including the Company’s historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

The Company is subject to the provisions of ASC 740 - “Income Taxes” (“ASC 740”). ASC 740 prescribes a more likely than not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. On a quarterly basis, the Company evaluates income tax accruals in accordance with ASC 740 guidance on uncertain tax positions.

Basic earnings per common share is computed using the weighted average number of common shares outstanding for the period divided into the net income available to common shareholders. Diluted earnings per share is computed using the treasury stock method and includes the effect of all dilutive potential common shares for the period. Potentially dilutive common shares include stock options. Restricted stock awards are considered to be outstanding common shares for the purpose of computing basic and diluted earnings per share.

	Year Ended December 31
	2023		2022		2021
	(dollars in thousands, except per share amounts)
Net income available to common stockholders	$	7,316	$	13,449	$	13,101

Weighted average number of common shares outstanding - basic		8,840,524		8,722,481		8,567,839
Add: Dilutive effects of assumed exercises of stock options		138,677		169,646		155,099
Weighted average number of common shares outstanding - diluted		8,979,201		8,892,127		8,722,938

Earnings per share:
Basic	$	0.83	$	1.54	$	1.53
Diluted	$	0.81	$	1.51	$	1.50

In June of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 - “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU replaces the incurred loss impairment model in current GAAP with a model that reflects current expected credit losses (“CECL”). The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. CECL also requires credit losses on available-for-sale debt securities to be measured through an allowance for credit losses when the fair value is less than the amortized cost basis. It also applies to off-balance sheet credit exposures. The ASU requires that all expected credit losses for financial assets held at the reporting date be measured based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU also requires enhanced disclosure, including qualitative and quantitative disclosures that provide additional information about significant estimates and judgments used in estimating credit losses. The provisions of this Update became effective for the Company for all annual and interim periods beginning January 1, 2023.

In April 2019, the FASB issued ASU 2019-04 - “Codification Improvements to Topic 326 - Financial Instruments - Credit Losses, Topic 815 - Derivatives and Hedging, and Topic 825 - Financial Instruments.” This ASU was issued as part of an ongoing project on the FASB’s agenda for improving the Codification or correcting for its unintended application. The FASB issued this ASU, which is specific to ASUs: 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” 2016-01 - “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” and 2017-12 - “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this Update became effective for all interim and annual reporting periods for the Company on January 1, 2023. The Company adopted the provisions within this ASU in conjunction with the implementation of ASC 326 - “Financial Instruments - Credit Losses,” including: (i) the election to not measure credit losses on accrued interest receivable when such balances are written-off in a timely manner when deemed uncollectable and (ii) the election to not include the balance of accrued interest receivable as part of the amortized cost of a loan, but rather to present it separately in the consolidated balance sheets.

In May 2019, the FASB issued ASU 2019-05 - “Financial Instruments - Credit Losses (Topic 326) - Targeted Transition Relief.” This ASU was issued to allow entities that have certain financial instruments within the scope of ASC 326-20 - “Financial Instruments - Credit Losses - Measured at Amortized Cost” to make an irrevocable election to elect the fair value option for those instruments in ASC 825-10 - “Financial Instruments - Overall” upon the adoption of ASC 326, which for the Company was January 1, 2023. The fair value option is not applicable to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company did not elect the fair value option for any of its financial assets upon the adoption of ASC 326 on January 1, 2023.

Effective January 1, 2023, the Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach, and recorded a net decrease of $1.6 million to the beginning balance of retained earnings for the cumulative effect adjustment.The following table illustrates the impact of adoption of the CECL methodology on the Company’s consolidated balance sheet as of January 1, 2023:

	Pre-CECL Adoption		Impact of CECL Adoption			As Reported Under CECL
	(in thousands)
Assets:
Allowance for credit losses on securities:
Available-for-sale	$	—	$	—		$	—
Held-to-maturity		—		—			—
Allowance for credit losses on loans		10,765		1,811			12,576
Deferred tax assets		5,053		659			5,712

Liabilities:
Allowance for credit losses for off-balance sheet commitments		94		421			515

Shareholders’ equity:
Retained earnings		67,727		(1,573	)		66,154

The Company’s assessment of HTM and AFS investment securities as of January 1, 2023, indicated that an allowance for credit losses was not required. The Company determined the likelihood of default on HTM investment securities was remote, and the amount of expected non-repayment on those investments was zero. The Company also analyzed AFS investment securities that were in an unrealized loss position as of January 1, 2023, and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As such, no allowance for credit losses was recorded for HTM and AFS securities as of January 1, 2023.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three-year period the Day 1 adverse regulatory capital effects of ASU 2016-13. As a result, entities have the option to gradually phase in the full effect of CECL on regulatory capital over a three-year transition period. The Company elected to phase in the full effect of CECL on regulatory capital over the three-year transition period.

In March 2022, the FASB issued ASU No. 2022-02 - “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Under the provisions of this ASU, an entity must determine whether a modification results in a new loan or the continuation of an existing loan. Further, the amendments in this ASU require that an entity disclose current period gross charge-offs on loans by year of origination and class of financing receivable. This guidance became effective for the Company on January 1, 2023. The new guidance did not have a material impact on the Company’s consolidated financial statements; however, the required disclosures were added to the consolidated financial statements.

In November 2023, the FASB issued ASU no 2023-07 - “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). This ASU expands disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. ASU 2023-07 should be applied retrospectively to all prior periods presented in the financial statements. The Company does not expect ASU 2023-07 to have a material effect on the Company’s current financial position, results of operations, or financial statement disclosures.

In December 2023, the FASB issued ASU No 2023-09 - “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 expands disclosures in the rate reconciliation and requires disclosure of income taxes paid by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. ASU 2023-09 should be applied prospectively; however, retrospective application is permitted. The Company does not expect ASU 2023-09 to have a material effect on the Company’s current financial position, results of operations, or financial statement disclosures.