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CVCY > SEC Filings for CVCY > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CENTRAL VALLEY COMMUNITY BANCORP

Form 10-Q for CENTRAL VALLEY COMMUNITY BANCORP


7-Aug-2014

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


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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 2014. Please refer to the Company's 2013 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

Second Quarter of 2014

In the second quarter of 2014, our consolidated net income was $2,693,000 compared to net income of $1,287,000 for the same period in 2013. Diluted EPS was $0.24 for the second quarter ended June 30, 2014 compared to $0.12 for the same period in 2013. The increase in net income was primarily driven by an increase in net interest income and a reverse provision for credit losses of $400,000, partially offset by increases in non-interest expense for the second quarter of 2014 compared to the corresponding period in 2013. No provision for credit losses was booked for the second quarter of 2013. Net interest income before the provision for credit losses increased $3,027,000 or 44.01% comparing the quarter ended June 30, 2014 to the same period in 2013.

Net interest margin (fully tax equivalent basis) was 4.09% for the quarter ended June 30, 2014 compared to 3.84% for the same period in 2013, a 25 basis point increase. The margin increased principally due to an increase in yields on interest-earning assets combined with a decrease in rates on interest-bearing liabilities. The yield on average total interest-earning assets increased 19 basis points and interest rates on deposits decreased 8 basis points comparing the quarter ended June 30, 2014 to the same period in 2013. The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, decreased 6 basis points to 0.11% for the quarter ended June 30, 2014 compared to 0.17% for the same period in 2013. This decrease was due to the repricing of interest bearing deposits in the lower current interest rate environment.

Non-interest income increased $217,000 or 11.88% primarily due to a $149,000 increase in service charge income, a $129,000 increase in interchange fees, and a $43,000 increase in Federal Home Loan Bank dividends, partially offset by a decrease in net realized gains on sales and calls of investment securities of $256,000, and a $83,000 decrease in loan placement fees. The net gains realized on sales and calls of investment securities reported in 2013 was the result of a partial restructuring of the


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investment portfolio designed to improve future performance. Non-interest expense increased $1,511,000 or 20.92% for the same periods mainly due to increase in salary and employee benefits, occupancy expense, data processing expenses, Internet banking expenses, and regulatory assessments.

Annualized return on average equity for the second quarter of 2014 was 8.27% compared to 4.45% for the same period in 2013. Total average equity was $130,203,000 for the second quarter 2014 compared to $115,673,000 for the second quarter 2013. The increase in ROE reflects an increase in net income notwithstanding an increase in capital from the retention of earnings net of dividends paid and improvement in unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income (AOCI).

The balance sheet increases during 2013 were primarily driven by the VCB acquisition which was completed on July 1, 2013. Recognized amounts of identifiable assets acquired and liabilities assumed as of the acquisition date were $197,621,000 in total assets, $128,983,000 in interest earning assets and $174,206,000 in deposit liabilities. Our average total assets increased $273,685,000 or 31.14% to $1,152,451,000 at the end of the second quarter 2014 compared to the same period in 2013. Total average interest-earning assets increased $253,732,000 or 31.95% comparing the second quarter of 2014 to the same period of 2013. Average total loans, including nonaccrual loans, increased $133,171,000 or 33.37% comparing the second quarter of 2014 to the same period of 2013. Average total investments and interest-earning deposits increased $114,098,000 or 28.39% in the three month period ended June 30, 2014 compared to the same period in 2013. Average interest-bearing liabilities increased $140,377,000 or 27.00% over the same period. Average non-interest bearing demand deposits increased 53.69% to $347,575,000 in 2014 compared to $226,157,000 for 2013. The ratio of average non-interest bearing demand deposits to average total deposits was 34.66% in the second quarter of 2014 compared to 30.53% for 2013.

First Six Months of 2014

For the six months ended June 30, 2014, our consolidated net income was $5,309,000 compared to net income of $3,070,000 for the same period in 2013. Diluted EPS was $0.48 for the first six months of 2014 compared to $0.30 for the first six months of 2013. Net income increased 72.93%, primarily driven by an increase in net interest income in 2014 compared to 2013. During the six month period ended June 30, 2014, our net interest margin (fully tax equivalent basis) increased 32 basis points to 4.17%. Net interest income before the provision for credit losses increased $6,281,000 or 45.77%. Net interest income during the first quarter of 2014 was positively impacted by payment collections of nonaccrual loans totaling $1,846,000 which resulted in a recovery of interest income of $861,000. Non-interest income decreased $32,000 or 0.79%, and non-interest expense increased $3,314,000 or 23.41% in the first six months of 2014 compared to 2013. During the six months ended June 30, 2014 the Company recorded a reverse provision for credit losses of $400,000. The Company did not record a provision during the six months ended June 30, 2013. Unless otherwise noted, material changes in year-over-year operating performance in dollar terms for the six months ended June 30, 2014 were the result of the VCB acquisition.

Annualized return on average equity for the six months ended June 30, 2014 was 8.32% compared to 5.27% for the same period in 2013. Annualized return on average assets was 0.93% and 0.70% for the six months ended June 30, 2014 and 2013, respectively. Total average equity was $127,583,000 for the six months ended June 30, 2014 compared to $116,565,000 for the same period in 2013. The increase in shareholders' equity was driven by the retention of earnings net of dividends paid and improvement in unrealized gains on available-for-sale securities recorded in accumulated other comprehensive income (AOCI).

Our average total assets increased $265,985,000 or 30.41% in the first six months of 2014 compared to the same period in 2013. Total average interest-earning assets increased $247,967,000 or 31.40% comparing the first six months of 2014 to the same period in 2013. Average total loans increased 128,458,000 or 32.53%. Average total investments increased $113,975,000, or 28.39% in the six month period ended June 30, 2014 compared to the same period in 2013. Average interest-bearing liabilities increased $132,585,000 or 25.57% over the same period.

Our net interest margin (fully tax equivalent basis) for the first six months ended June 30, 2014 was 4.17% compared to 3.85% for the same period in 2013. The increase in net interest margin in the period-to-period comparison resulted primarily from an increase in the yield on the Company's investment portfolio, the loan portfolio, and a decrease in the Company's cost of funds. The effective yield on interest earning assets increased 26 basis points to 4.28% for the six month period ended June 30, 2014 compared to 4.02% for the same period in 2013. For the six months ended June 30, 2014, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 32 basis points. The effective yield on loans also increased 11 basis points. The cost of total interest-bearing liabilities decreased 7 basis points to 0.19% compared to 0.26% for the same period in 2013. The cost of total deposits, including noninterest bearing accounts, decreased 5 basis points to 0.12% for the six months ended 2014 compared to 0.17% for the same period in 2013.


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Net interest income before the provision for credit losses for the second quarter of 2014 was $20,004,000 compared to $13,723,000 for the same period in 2013, an increase of $6,281,000 or 45.77%. Net interest income increased as a result of yield changes, the recovery of $861,000 of foregone interest income from the repayment of loans previously identified as nonaccrual, asset mix changes, and an increase in average earning assets, partially offset by an increase in interest-bearing liabilities, primarily as a result of the VCB acquisition. The Bank had non-accrual loans totaling $4,632,000 at June 30, 2014, compared to $7,586,000 at December 31, 2013 and $10,267,000 at June 30, 2013. The Company had no other real estate owned at June 30, 2014 or June 30, 2013, compared to $190,000 at December 31, 2013.

At June 30, 2014, we had total net loans of $537,848,000, total assets of $1,160,688,000, total deposits of $1,009,212,000, and shareholders' equity of $130,931,000.

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, San Joaquin, and Tulare 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 Business Oversight (DBO). 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 Bank is a member of the FDIC, which currently insures customer deposits in each member bank to a maximum of $250,000 per depositor. For this protection, the Bank is subject to the rules and regulations of the FDIC, and, as is the case with all insured banks, may be required to pay a quarterly statutory assessment.

The Bank operates 21 branches which serve the communities of Clovis, Exeter, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, Tracy, and Visalia, California. Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2013 FDIC data, the Bank's branches in Fresno, Madera, and Tulare Counties had a 4.58% combined deposit market share of all insured depositories. The Bank's branches in Merced, Sacramento, San Joaquin, and Stanislaus Counties had a 0.47% combined deposit market share of all insured depositories.

Effective July 1, 2013, the Company and Visalia Community Bank, headquartered in Visalia, California, completed a merger under which Visalia Community Bank, with three full-service offices in Visalia and one in Exeter, merged with and into Central Valley Community Bancorp's subsidiary, Central Valley Community Bank. The acquired assets and liabilities were recorded at fair value at the date of acquisition.

    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


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Return to Our Shareholders

Our return to our shareholders is determined in a ratio that measures the return on average equity (ROE). Our annualized ROE was 8.32% for the six months ended June 30, 2014 compared to 6.89% for the year ended December 31, 2013 and 5.27% for the annualized six months ended June 30, 2013. Our net income for the six months ended June 30, 2014 increased $2,239,000 or 72.93% to $5,309,000 compared to $3,070,000 for the six months ended June 30, 2013. Net income increased due to an increase in interest income and a reverse provision for credit losses, partially offset by an increase in tax expense, a decrease in non-interest income, and an increase in non-interest expenses. Net interest margin (NIM) increased 32 basis points comparing the six month periods ended June 30, 2014 and 2013. Diluted EPS was $0.48 for the six months ended June 30, 2014 and $0.30 for the same period in 2013.

Return on Average Assets

Our return on average assets (ROA) is a ratio that we use to compare our performance with other banks and bank holding companies. Our annualized ROA for the six months ended June 30, 2014 was 0.93% compared to 0.84% for the year ended December 31, 2013 and 0.70% for the annualized six months ended June 30, 2013. The increase in ROA compared to December 2013 and same period in 2013 is due to the increase in net income, notwithstanding an increase in average assets. Average assets for the six months ended June 30, 2014 were $1,140,602,000 compared to $986,924,000 for the year ended December 31, 2013. ROA for our peer group was 0.90% for the year ended December 31, 2013. 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 4.17% for the six months ended June 30, 2014, compared to 3.85% for the same period in 2013. The increase in net interest margin is principally due to an increase in the yield on earning assets and further benefited by the decrease in our rates on interest-bearing liabilities. More specifically, increases in the yield on the Company's investment and loan portfolios, and a decrease in the Company's cost of funds contributed to the increase in the Company's net interest margin. In comparing the two periods, the effective yield on total earning assets increased 26 basis points, while the cost of total interest bearing liabilities decreased 7 basis points and the cost of total deposits decreased 5 basis points. The Company's total cost of deposits for the six months ended June 30, 2014 was 0.12% compared to 0.17% for the same period in 2013. At June 30, 2014, 35.02% of the Company's average deposits were non-interest bearing compared to 31.56% for the Company's peer group as of December 31, 2013. Net interest income before the provision for credit losses for the six month period ended June 30, 2014 was $20,004,000 compared to $13,723,000 for the same period in 2013.

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank owned life insurance, and gains from sales of investment securities. Non-interest income for the six months ended June 30, 2014 decreased $32,000 or 0.79%, to $4,021,000 compared to $4,053,000 for the six months ended June 30, 2013. The decrease resulted primarily from decreases in net realized gains on sales and calls of investment securities, and loan placement fees, offset by increases in service charge income, appreciation in cash surrender value of bank owned life insurance, Federal Home Loan Bank dividends, and interchange fees compared to the comparable 2013 period. Further detail of non-interest income is provided below.


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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 $4,632,000 or 0.85% of total loans as of June 30, 2014 and $7,586,000 or 1.48% of total loans at December 31, 2013. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods and collectibility has been reasonably assured. The Company had no other real estate owned (OREO) at June 30, 2014. The Company had $190,000 OREO at December 31, 2013. The Company's ratio of non-performing assets as a percentage of total assets was 0.40% as of June 30, 2014 and 0.68% at December 31, 2013.

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 $15,053,000 or 1.31% during the six months ended ended June 30, 2014 to $1,160,688,000 compared to $1,145,635,000 as of December 31, 2013. Total gross loans increased $32,798,000 to $545,155,000 as of June 30, 2014 compared to $512,357,000 as of December 31, 2013. Total deposits increased 0.50% to $1,009,212,000 as of June 30, 2014 compared to $1,004,143,000 as of December 31, 2013. Our loan to deposit ratio at June 30, 2014 was 54.02% compared to 51.02% at December 31, 2013. The loan to deposit ratio of our peers was 72.44% at December 31, 2013. 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 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 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 June 30, 2014, the Company and the Bank were considered "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 72.91% for the first six months of 2014 compared to 84.46% for the first six months of 2013. The improvement in the efficiency ratio is primarily due to an increase in net interest income, partially offset by an increase in operating expenses. Further discussion of the increase in net interest income and increase in operating expenses is below.


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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, increased 41.98% to $23,629,000 for the first six months of 2014 compared to $16,643,000 for the same period in 2013, while operating expenses, net of OREO related expenses, loss on sale of assets and amortization of core deposit intangibles, increased 22.56% to $17,227,000 from $14,056,000 for the same period in 2013.

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 $284,687,000 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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