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CVCY > SEC Filings for CVCY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CENTRAL VALLEY COMMUNITY BANCORP

Form 10-Q for CENTRAL VALLEY COMMUNITY BANCORP


9-Nov-2012

Quarterly Report


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained herein that are not historical facts, such as statements regarding the Company's current business strategy and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to
(1) significant increases in competitive pressure in the banking industry;
(2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company's results of operations, the Company's ability to continue its internal growth at historical rates, the Company's ability to maintain its net interest margin, and the quality of the Company's earning assets; (3) changes in the regulatory environment; (4) fluctuations in the real estate market; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

When the Company uses in this Quarterly Report on Form 10-Q the words "anticipate," "estimate," "expect," "project," "intend," "commit," "believe," and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The Internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company's most critical accounting policies are those which the Company's financial condition depends upon, and which involve the most complex or subjective decisions or assessments.

There have been no material changes to the Company's critical accounting policies during 2012. Please refer to the Company's 2011 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

This discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

OVERVIEW

Third Quarter of 2012

In the third quarter of 2012, our consolidated net income was $2,456,000 compared to net income of $1,408,000 for the same period in 2011. Diluted EPS was $0.25 for the third quarter ended September 30, 2012 compared to $0.13 for the same period in 2011. Net income increased primarily as a result of a decrease in non-interest expense and an increase in non-interest income for the third quarter of 2012 compared to the corresponding period in 2011. No additional provision for credit losses was booked for the third quarter of 2012 compared to $400,000 for the third quarter of 2011, a decrease of $400,000. Net interest income before the provision for credit losses decreased $377,000 or 4.74% comparing the quarter ended September 30, 2012 to the same period in 2011.


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Net interest margin (fully tax equivalent basis) was 4.21% for the quarter ended September 30, 2012 compared to 4.66% for the same period in 2011, a 45 basis point decrease. The margin decreased principally due to the decrease in yields on interest-earning assets outpacing the decrease in rates on interest-bearing liabilities. The yield on average total interest-earning assets decreased 61 basis points and interest rates on deposits decreased 21 basis points comparing the quarter ended September 30, 2012 to the same period in 2011. The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, decreased 17 basis points to 0.20% for the quarter ended September 30, 2012 compared to 0.37% for the same period in 2011. This decrease was due to the repricing of interest bearing deposits in the lower current interest rate environment.

Non-interest income increased $689,000 or 43.20% primarily due to an increase in net realized gain on sales and calls of investment securities of $620,000. The net gain realized on sales and calls of investment securities was the result of a partial restructuring of the investment portfolio designed to improve future performance. Non-interest expense decreased $567,000 or 7.85% for the same periods mainly due to decreases in regulatory assessments, advertising expense, legal fees, salary and employee benefits, occupancy expense and amortization expenses, partially offset by increases in audit and accounting fees.

Annualized return on average equity for the third quarter of 2012 was 8.43% compared to 5.34% for the same period in 2011. Total average equity was $116,535,000 for the third quarter 2012 compared to $105,485,000 for the third quarter 2011. The growth in capital was driven by net income during the period, an increase in other comprehensive income, and the issuance of common stock from the exercise of stock options.

Our average total assets increased $52,944,000 or 6.56% in the third quarter of 2012 compared to the same period in 2011. Total average interest-earning assets increased $51,344,000 or 7.11% comparing the third quarter of 2012 to the same period of 2011. Average total loans, including nonaccrual loans, decreased $31,274,000 or 7.19% while average total investments and interest-earning deposits increased $77,193,000 or 25.80% in the three month period ended September 30, 2012 compared to the same period in 2011. The increase of the investment portfolio balance at significantly reduced yields decreased net interest income and contributed to the decrease in net interest margin. Average interest-bearing liabilities decreased $2,858,000 or 0.56% over the same period. Average non-interest bearing demand deposits increased 20.56% to $222,974,000 in 2012 compared to $184,948,000 for 2011. The ratio of average non-interest bearing demand deposits to average total deposits was 30.97% in the third quarter of 2012 compared to 27.01% for 2011.

First Nine Months of 2012

For the nine months ended September 30, 2012, our consolidated net income was $5,878,000 compared to net income of $4,769,000 for the same period in 2011. Diluted EPS was $0.58 for the first nine months of 2012 compared to $0.46 for the first nine months of 2011. Net income increased 23.25%, primarily driven by decreases in interest expense and non-interest expense and increases in non-interest income, partially offset by decreases in interest income in 2012 compared to 2011. During the nine month period ended September 30, 2012, our net interest margin (fully tax equivalent basis) decreased 38 basis points to 4.30%. Net interest income before the provision for credit losses decreased $593,000 or 2.54%. Non-interest income increased $473,000 or 9.57%, provision for credit losses decreased $250,000 or 33.33%, and non-interest expense decreased $1,151,000 or 5.37% in the first nine months of 2012 compared to 2011.

Annualized return on average equity for the nine months ended September 30, 2012 was 6.91% compared to 6.21% for the same period in 2011. Annualized return on average assets was 0.93% and 0.81% for the nine months ended September 30, 2012 and 2011, respectively. Total average equity was $113,358,000 for the nine months ended September 30, 2012 compared to $102,321,000 for the same period in 2011. The growth in capital was driven by net income during the period, an increase in other comprehensive income, and the issuance of common stock from the exercise of stock options.

Our average total assets increased $56,083,000 or 7.13% in the first nine months of 2012 compared to the same period in 2011. Total average interest-earning assets increased $54,136,000 or 7.71% comparing the first nine months of 2012 to the same period in 2011. Average total loans decreased $22,416,000 or 5.19% while average total investments increased $71,200,000 or 25.11% in the nine month period ended September 30, 2012 compared to the same period in 2011. Average interest-bearing liabilities increased $9,898,000 or 1.98% over the same period.

Our net interest margin (fully tax equivalent basis) for the first nine months ended September 30, 2012 was 4.30% compared to 4.68% for the same period in 2011. The margin decreased principally due to the decrease in yields on interest-earning assets outpacing the decrease in rates on interest-bearing liabilities. The effective yield on interest earning assets decreased 54 basis points to 4.57% for the nine month period ended September 30, 2012 compared to 5.11% for the same period in 2011. For the nine months ended September 30, 2012, the effective yield on investment securities including Federal funds sold and interest-


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earning deposits in other banks decreased 54 basis points, while the effective yield on loans decreased 20 basis points. The cost of total interest-bearing liabilities decreased 22 basis points to 0.39% compared to 0.61% for the same period in 2011. The cost of total deposits, including noninterest bearing accounts, decreased 17 basis points to 0.25% for the nine months ended September 30, 2012 compared to 0.42% for the same period in 2011.

Net interest income before the provision for credit losses for the third quarter of 2012 was $22,748,000 compared to $23,341,000 for the same period in 2011, a decrease of $593,000 or 2.54%. Net interest income before the provision for credit losses decreased as a result of the decrease in interest income. The Bank had non-accrual loans totaling $10,190,000 at September 30, 2012, compared to $14,434,000 at December 31, 2011 and $16,794,000 at September 30, 2011. The Company had no other real estate owned at September 30, 2012 and December 31, 2011, compared to $270,000 at September 30, 2011.

At September 30, 2012, we had total net loans of $388,922,000, total assets of $887,737,000, total deposits of $737,286,000, and shareholders' equity of $117,486,000.

Central Valley Community Bancorp (Company)

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank). We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, Madera, Merced, Sacramento, Stanislaus, and San Joaquin Counties of central California. Additionally, we have a private banking office in Sacramento County. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.

Central Valley Community Bank (Bank)

The Bank commenced operations in January 1980 as a state-chartered bank. As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the Department of Financial Institutions. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to $250,000 and extended unlimited FDIC deposit insurance to qualifying noninterest-bearing transaction accounts through December 31, 2012.

The Bank operates 17 branches which serve the communities of Clovis, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, and Tracy, California. Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2012 FDIC data, the Bank's branches in Fresno, Madera and San Joaquin Counties had a 3.58% combined deposit market share of all insured depositories.

    Key Factors in Evaluating Financial Condition and Operating Performance

As a publicly traded community bank holding company, we focus on several key
factors including:

                      Return to our shareholders;
                      Return on average assets;
                      Development of revenue streams, including net interest
income and non-interest income;
                      Asset quality;
                      Asset growth;
                      Capital adequacy;
                      Operating efficiency; and
                      Liquidity

Return to Our Shareholders

Our return to our shareholders is measured in a ratio that measures the return on average equity (ROE). Our annualized ROE was 6.91% for the nine months ended September 30, 2012 compared to 6.26% for the year ended December 31, 2011 and 6.21% for the nine months ended September 30, 2011. Our net income for the nine months ended September 30, 2012 increased $1,109,000 or 23.25% to $5,878,000 compared to $4,769,000 for the nine months ended September 30, 2011. Net income increased due to decreases in non-interest expenses, a decrease in interest expense and a decrease in the provision for


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credit losses, partially offset by a decrease in interest income and an increase in tax expense. Net interest margin (NIM) decreased 38 basis points comparing the nine month periods ended September 30, 2012 and 2011. Diluted EPS was $0.58 for the nine months ended September 30, 2012 and $0.46 for the same period in 2011.

Return on Average Assets

Our return on average assets (ROA) is a ratio that we use to measure our performance compared with other banks and bank holding companies. Our annualized ROA for the nine months ended September 30, 2012 was 0.93% compared to 0.81% for the year ended December 31, 2011 and 0.81% for the nine months ended September 30, 2011. The increase in ROA compared to December 2011 is due to the increase in net income relative to total average assets. Average assets for the nine months ended September 30, 2012 were $842,477,000 compared to $800,178,000 for the year ended December 31, 2011. ROA for our peer group was 0.80% for the six months ended June 30, 2012. Our peer group from SNL Financial data includes certain bank holding companies in central California with assets from $300 million to $2 billion that are not subchapter S corporations.

Development of Revenue Streams

Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets, and minimizing the effects of the recent interest rate decline on our net interest margin by focusing on core deposits and managing the cost of funds. The Company's net interest margin (fully tax equivalent basis) was 4.30% for the nine months ended September 30, 2012, compared to 4.68% for the same period in 2011. The decrease in net interest margin is principally due to a decrease in the yield on earning assets which was greater than the decrease in our rates on interest-bearing liabilities. In comparing the two periods, the effective yield on total earning assets decreased 54 basis points, while the cost of total interest bearing liabilities decreased 22 basis points and the cost of total deposits decreased 17 basis points. The Company's total cost of deposits for the nine months ended September 30, 2012 was 0.25% compared to 0.42% for the same period in 2011. At September 30, 2012, 29.57% of the Company's average deposits were non-interest bearing compared to 30.02% for the Company's peer group as of June 30, 2012. Net interest income before the provision for credit losses for the nine month period ended September 30, 2012 was $22,748,000 compared to $23,341,000 for the same period in 2011.

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements and other services, and gains from sales of investment securities. Non-interest income for the nine months ended September 30, 2012 increased $473,000 or 9.57% to $5,413,000 compared to $4,940,000 for the nine months ended September 30, 2011. The increase resulted primarily from an increase in net realized gains on sales and calls of investment securities and an increase in loan placement fees compared to the comparable 2011 period, partially offset by a decrease in gain on sale of other real estate owned and a decrease in service charge income. The net gain realized on sales and calls of investment securities was the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio. Further detail of non-interest income is provided below.

Asset Quality

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of non-performing assets as a percentage of total assets, and is a key element in estimating the future earnings of a company. Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets. Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. A loan is classified as nonaccrual when
1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

The Company had non-performing loans totaling $10,190,000 or 2.55% of total loans as of September 30, 2012 and $14,434,000 or 3.38% of total loans at December 31, 2011. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current in future periods and collectibility has been reasonably assured. The Company had no other real estate owned at September 30, 2012 and December 31, 2011. The Company's ratio of non-performing assets as a percentage of total assets was 1.15% as of September 30, 2012 and 1.70% at December 31, 2011.


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Asset Growth

As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. Total assets increased by $38,714,000 or 4.56% during the nine months ended September 30, 2012 to $887,737,000 compared to $849,023,000 as of December 31, 2011. Total gross loans decreased $28,259,000 to $399,136,000 as of September 30, 2012 compared to $427,395,000 as of December 31, 2011. Total deposits increased 3.41% to $737,286,000 as of September 30, 2012 compared to $712,986,000 as of December 31, 2011. Our loan to deposit ratio at September 30, 2012 was 54.14% compared to 59.94% at December 31, 2011. The loan to deposit ratio of our peers was 71.85% at June 30, 2012. Further discussion of loans and deposits is below.

Capital Adequacy

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses. The Company has historically maintained substantial levels of capital. The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions. Maintenance of adequate capital levels is integral to providing stability to the Company. The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can cause certain mandatory and discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation to ensure capital adequacy. As of September 30, 2012, the Company and the Bank were "well capitalized" under this regulatory framework. The Company's regulatory capital ratios are presented in the table in the capital section below.

Operating Efficiency

Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue. A lower ratio is more favorable. The Company's efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses plus non-interest income, excluding gains from sales of securities and OREO) was 74.70% for the first nine months of 2012 compared to 76.93% for the first nine months of 2011. The improvement in the efficiency ratio is primarily due to a decrease in operating expenses. Further discussion of the decrease in net interest income and decrease in operating expenses is below.

The Company's net interest income before provision for credit losses plus non-interest income, net of OREO related gain and investment securities related gains (losses), decreased 2.17% to $26,858,000 for the first nine months of 2012 compared to $27,455,000 for the same period in 2011, while operating expenses, net of OREO related expenses, loss on sale of assets and amortization of core deposit intangibles, decreased 5.00% to $20,063,000 from $21,120,000 for the same period in 2011.

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers' credit needs, funding of securities purchases, and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors' Asset/Liability Committee. This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB). We have available unsecured lines of credit with correspondent banks totaling approximately $40,000,000 and secured borrowing lines of approximately $125,287,000 with the FHLB. These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities. Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.


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RESULTS OF OPERATIONS

Net Income for the First Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011:

Net income increased to $5,878,000 for the nine months ended September 30, 2012 compared to $4,769,000 for the nine months ended September 30, 2011. Basic and diluted earnings per share for September 30, 2012 were $0.59 and $0.58, respectively. Basic and diluted earnings per share for the same period in 2011 were $0.46. Annualized ROE was 6.91% for the nine months ended September 30, 2012 compared to 6.21% for the nine months ended September 30, 2011. Annualized ROA for the nine months ended September 30, 2012 was 0.93% compared to 0.81% for the nine months ended September 30, 2011.

The increase in net income for the nine months ended September 30, 2012 compared to the same period in 2011 can be attributed to a decrease in interest expense, a decrease in non-interest expense and an increase in non-interest income, partially offset by a decrease in interest income and an increase in income tax expense. The increase in non-interest income is primarily due to increased net gains on sales and calls of investment securities and increased loan placement fees, partially offset by a decrease in service charges and a decrease in gain on sale of other real estate owned (OREO). Non-interest expenses decreased due to a decrease in salary and employee benefits expense, legal fees, regulatory assessments, advertising, and occupancy and equipment, partially offset by increases in audit and accounting fees and OREO related expenses. Further discussion of non-interest expenses is below.

Interest Income and Expense

Net interest income is the most significant component of our income from operations. Net interest income (the "interest rate spread") is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest earning assets and . . .

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