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, 2016. The filing identifies Central Valley Community Bancorp—not Community West Bancshares—as the registrant; verify the company identity against the intended filing.
The company is a central California bank holding company operating Central Valley Community Bank. The reported financial statements exclude Sierra Vista Bank, whose merger closed October 1, 2016.
Financial performance and condition
- Third-quarter results: Net income was $3.1 million, up from $2.5 million a year earlier; diluted EPS was $0.28 versus $0.23. Net interest income before credit-loss provision increased 6.2% to $11.0 million. Net interest margin was unchanged at 4.01% on a fully tax-equivalent basis.
- Nine-month results: Net income rose 56.0% to $12.6 million from $8.1 million; diluted EPS was $1.14 versus $0.73. Net interest income before provision increased 8.9% to $32.8 million. Fully tax-equivalent net interest margin improved to 4.05% from 4.01%.
- Credit provision and asset quality: The company recorded a $5.85 million reversal of credit-loss provision for the first nine months, versus a $0.60 million provision in 2015. Management attributed the reversal mainly to $5.54 million of net loan recoveries and its allowance assessment. The allowance was $9.30 million, or 1.48% of gross loans. Nonperforming loans declined to $1.27 million (0.20% of loans) from $2.41 million at year-end 2015. Classified loans increased to $39.8 million from $31.8 million, chiefly reflecting a migration into agricultural real estate; management highlighted one borrower with approximately $21.3 million in loans under continued monitoring.
- Revenue, expenses, and returns: Nine-month noninterest income decreased 2.1% to $7.35 million, while noninterest expense increased 3.7% to $28.01 million. The nine-month efficiency ratio improved to 68.65% from 69.93%. Annualized return on average assets and equity were 1.31% and 11.21%, respectively. The company paid $0.18 per share in dividends during the nine months.
- Balance sheet and funding: At September 30, total assets were $1.308 billion, net loans $620.5 million, deposits $1.127 billion, and shareholders’ equity $156.3 million. Gross loans increased 5.3% and deposits 1.0% from December 31, 2015. The loan-to-deposit ratio was 55.86%. Junior subordinated debentures were $5.16 million; there were no FHLB advances or federal funds purchased.
- Cash flow and liquidity: Nine-month operating cash flow was $10.5 million, investing cash flow was negative $69.5 million, and financing cash flow was positive $9.5 million. Cash and cash equivalents fell $49.5 million to $45.1 million, mainly alongside investment activity. The company reported $440.4 million in unpledged securities, $40.0 million in unused correspondent credit lines, $322.6 million of unused FHLB capacity, and $9.7 million of Federal Reserve credit capacity.
- Capital: The company and bank were described as well capitalized. At September 30, the company’s Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based capital ratios were 9.35%, 13.80%, 14.24%, and 15.39%, respectively.
Material changes and unusual items
- Growth in net income was substantially influenced by the reversal of credit-loss provision, as well as higher net interest income; it should not be viewed as solely recurring operating growth.
- During the first quarter, the company inadvertently sold five securities previously designated as held-to-maturity, with $8.5 million book value and a $696,000 gain. It consequently reclassified the remaining $23.1 million of those securities to available-for-sale. The nine-month results also included a $136,000 other-than-temporary impairment charge on one municipal security and $1.84 million of net realized investment-security gains.
- The October 1 Sierra Vista Bank merger involved approximately $155 million of assets, 1,058,851 Central Valley shares, and approximately $9.47 million in cash. Acquisition accounting, including goodwill and core deposit intangible values, was incomplete at filing time.
- Accumulated other comprehensive income rose to $10.45 million, reflecting gains on available-for-sale securities. Management estimated that an immediate 200-basis-point rate increase would reduce the investment portfolio’s market value by approximately $34.0 million; a 200-basis-point decrease would increase it by approximately $26.7 million.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management said it considered the allowance adequate but cautioned that future charge-offs could exceed it and that economic weakness could require additional provisions. It cited agricultural and water-related pressures, real-estate exposure, and a significant agricultural-real-estate borrower as areas to monitor. Other stated risks include interest-rate changes, competition, regulation, local economic conditions, securities-market movements, and acquisition integration costs. Management reported adequate liquidity and no material change in internal controls; it also reported no material legal proceedings.
Important facts for investors to verify
- Confirm that Central Valley Community Bancorp is the intended issuer, given the request’s Community West Bancshares label.
- Assess how much reported earnings growth depends on unusually large loan recoveries and provision reversals, versus ongoing operating performance.
- Review the agricultural-real-estate classified loans, particularly the approximately $21.3 million borrower exposure, and the assumptions supporting the allowance.
- Track the Sierra Vista acquisition’s final fair-value accounting, integration costs, and impact on capital, earnings, and shares outstanding.
- Evaluate the securities portfolio’s interest-rate sensitivity and the consequences of the inadvertent held-to-maturity sales and reclassification.
- Reconcile reported cash decline with securities purchases and assess liquidity capacity, deposit trends, and off-balance-sheet commitments of $223.4 million.