Business context and reporting period
This is Central Valley Community Bancorp’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The filing identifies the registrant as Central Valley Community Bancorp (NASDAQ: CVCY), not Community West Bancshares; verify the issuer before relying on this summary.
The company is a California bank holding company operating Central Valley Community Bank, serving businesses and individuals in central California.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income before credit-loss provision | $16.0 million | $16.2 million | $47.6 million | $48.0 million |
| Provision for credit losses | $0.6 million | $0.3 million | $5.0 million | $0.5 million |
| Non-interest income | $2.1 million | $3.7 million | $10.7 million | $11.3 million |
| Non-interest expense | $11.7 million | $11.5 million | $35.3 million | $35.0 million |
| Net income | $4.3 million | $5.7 million | $13.3 million | $17.0 million |
| Diluted EPS | $0.35 | $0.42 | $1.05 | $1.25 |
| Net interest margin, fully tax-equivalent | 3.63% | 4.50% | 3.93% | 4.54% |
At September 30, 2020, total assets were $1.951 billion, up 22.2% from December 31, 2019; gross loans were $1.110 billion, up 17.7%; deposits were $1.681 billion, up 26.1%; and shareholders’ equity was $235.8 million, up 3.4%. Cash and cash equivalents were $87.0 million. Available-for-sale securities totaled $631.9 million, with a $16.3 million pretax net unrealized gain.
For the first nine months, operating cash flow was $6.8 million, investing cash outflow was $305.5 million, and financing cash inflow was $333.2 million. The investing outflow largely reflected securities purchases and loan growth; deposit growth was the principal financing source. The loan-to-deposit ratio was 66.02%. Liquid assets were $726.5 million, or 37.25% of assets. The company had no FHLB advances outstanding and reported $110.0 million of unsecured correspondent lines, $242.0 million of available FHLB capacity, and a $14.2 million Federal Reserve line.
The allowance for credit losses was $14.7 million, or 1.32% of gross loans, versus $9.1 million and 0.97% at year-end 2019. Nonaccrual loans were $3.5 million, compared with $1.7 million at year-end. The Bank reported regulatory capital ratios above well-capitalized thresholds, including a 9.20% Tier 1 leverage ratio and a 15.81% total risk-based capital ratio.
Material changes versus prior comparable periods
- Q3 net income declined 23.7% year over year; nine-month net income declined 21.9%. Lower securities gains, margin compression, and higher credit-loss provisions were key factors.
- Q3 non-interest income fell 44.4%, primarily because net realized investment-security gains were $1.6 million lower than a year earlier. Nine-month securities gains were $4.2 million, versus $5.2 million in 2019.
- Credit-loss provision increased to $5.0 million for the first nine months from $0.5 million a year earlier, reflecting management’s assessment of COVID-19-related economic risks. Net recoveries for the period were $0.6 million.
- Gross loans grew by $166.5 million, substantially reflecting $210.1 million in outstanding PPP loans at quarter-end. Total deposits rose $347.9 million, supported by organic growth and PPP proceeds retained in customer accounts.
- Net interest margin fell 87 basis points in Q3 and 61 basis points for the nine-month period. Management cited lower yields on loans and investments, including 1% PPP loans, partly offset by lower funding costs.
- The allowance increased while nonperforming loans rose; classified loans totaled $37.6 million at quarter-end, compared with $33.8 million at December 31, 2019.
Outlook, commentary, risks and unusual items
Management provided no numerical earnings or revenue guidance. It said the pandemic’s ultimate financial impact was uncertain, while stating that capital, conservative underwriting, liquidity, and portfolio diversification positioned the company to manage the risks. It also warned that prolonged economic weakness could increase credit losses, reduce asset values and earnings, pressure liquidity and margins, and affect capital or dividends.
- At September 30, about $60.1 million of loans had COVID-related payment deferrals outstanding; approximately $4.0 million was expected to need a further deferral and $4.1 million a loan modification. These deferrals were not classified as troubled debt restructurings under applicable relief.
- The company had 1,076 PPP loans totaling $210.1 million outstanding at quarter-end. Management expected most to be forgiven, but disclosed risks of SBA review, guarantee denial or reduction, and PPP-related litigation.
- Two loans were modified as troubled debt restructurings during the first nine months. Reported TDR balances were $9.2 million at September 30, excluding qualifying COVID-19 modifications.
- Management completed a quantitative goodwill impairment test because of pandemic-related economic conditions; estimated fair value exceeded carrying value, and no impairment was recorded.
- Investment-security sales and calls produced a $4.2 million net gain for the nine-month period as the company repositioned its portfolio. No other-than-temporary impairment was recorded. A modeled immediate 200-basis-point rate increase would reduce investment portfolio market value by an estimated $61 million.
- The company repurchased and retired 621,379 shares for approximately $11.1 million during the first nine months, completing its repurchase plans. It paid $0.33 per share in dividends during that period; the board declared another $0.11-per-share dividend payable November 27, 2020.
- Management said it expected to evaluate CECL scenarios during 2021; adoption was deferred to January 1, 2023, and the impact could not yet be reasonably estimated.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Investor verification priorities
- Confirm the issuer: the supplied filing is for Central Valley Community Bancorp (CVCY), not Community West Bancshares.
- Track PPP forgiveness, SBA reviews and guarantees, and the repayment or modification status of deferred loans.
- Monitor credit quality, including nonaccrual and classified loans, TDRs, and whether further provisions are required as pandemic conditions evolve.
- Assess whether lower asset yields and PPP balances continue to pressure net interest margin and profitability.
- Review deposit stability, available borrowing capacity, capital ratios, and the sensitivity of securities values to interest-rate changes.
- Reconcile share repurchases, dividends, and reported per-share results with subsequent filings and confirm the declared dividend payment.