Community West Bancshares quarterly report, Q3 FY2011

Business context and reporting period

Central Valley Community Bancorp and subsidiary (Central Valley Community Bank), a central California community banking company, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The filing identifies the registrant as Central Valley Community Bancorp, not Community West Bancshares; verify that this is the intended filing.

Financial performance and position

Amounts below are in millions of dollars unless otherwise stated.

For the first nine months, operating cash flow was $10.470 million, investing cash flow was negative $59.539 million, and financing cash flow was positive $46.143 million; cash declined $2.926 million. The allowance for credit losses was $11.031 million, or 2.59% of gross loans. The company reported nine-month annualized ROE of 6.21%, ROA of 0.81%, and an efficiency ratio of 76.93%.

Material changes versus comparable periods

• Q3 net income rose 63% year over year; nine-month net income rose 79%. Management attributed the improvement chiefly to lower credit-loss provisions and higher non-interest income, despite lower net interest income.
• Net interest margin contracted 44 basis points in Q3 and 37 basis points for the nine-month period. The yield on earning assets fell more than funding costs, while average loans declined and investment balances increased.
• Nine-month non-interest income increased to $4.940 million from $3.375 million, including $0.608 million in gains on OREO sales and $0.249 million in realized securities gains. Non-interest expense decreased to $21.442 million from $21.755 million.
• Deposits grew 8.58% and assets grew 7.37% from year-end 2010, while gross loans declined 1.35%. The loan-to-deposit ratio fell to 60.28% from 66.35%.
• Nonaccrual loans declined to $16.794 million from $18.561 million at year-end 2010; OREO declined to $0.270 million from $1.325 million. However, reported impaired loans increased to $25.876 million from $18.561 million.
• Regulatory capital ratios improved: holding-company total risk-based capital was 17.25%, Tier 1 risk-based capital 15.95%, and Tier 1 leverage 10.19% at quarter-end.

Outlook, risks, contingencies, and unusual items

• No quantified earnings or financial guidance is provided. Management expected economic weakness nationally, statewide, and locally to continue and cautioned that further credit deterioration could require additional provisions.
• Credit risk remains significant: 97.8% of loans were commercial or real-estate-related. Management cited possible further declines in the economy or property values as risks to collections and asset quality. The allowance was considered adequate by management, but the filing gives no assurance that future charge-offs will not exceed it.
• Adoption of updated troubled-debt-restructuring guidance identified eight additional TDR loans totaling $18.739 million and increased specific reserves by $0.427 million. The company reported 12 TDRs totaling $25.876 million in the financial-statement note; MD&A also gives a $21.524 million TDR balance, a difference that should be reconciled. One modified commercial real estate TDR of $1.211 million subsequently defaulted.
• Investment securities had an unrealized gain of $7.914 million at quarter-end. Seven private-label mortgage securities with $6.396 million principal were rated below investment grade. Management recorded a $0.031 million OTTI charge on a mutual fund and warned that further market-value deterioration could produce future OTTI losses. A modeled immediate 200-basis-point rate increase would reduce investment-portfolio value by about $23.009 million.
• The company replaced $7.0 million of Treasury Series A preferred stock with $7.0 million of Series C preferred stock under the Small Business Lending Fund and repurchased the Treasury warrant for $0.185 million. The Series A redemption accelerated remaining discount accretion, adding $0.103 million to preferred dividends and accretion in Q3.
• Off-balance-sheet commitments to extend credit totaled $128.944 million; standby letters of credit and guarantees were $0.320 million. Management did not anticipate material losses from these commitments. Legal proceedings were reported as none; ordinary-course claims were described as not expected to materially affect results.
• Available liquidity included $98.073 million in cash and cash equivalents, $149.130 million in unpledged securities, approximately $39 million in unsecured correspondent lines, and unused FHLB capacity. Management considered liquidity sources stable and adequate.

Important facts for investors to verify

1. Confirm the issuer identity: this filing names Central Valley Community Bancorp, whereas the request names Community West Bancshares.
2. Reconcile the differing TDR totals in the filing, including the $25.876 million financial-statement note balance and the $21.524 million MD&A figure.
3. Assess whether lower provisions and securities/OREO gains are sustainable drivers of earnings given margin compression and elevated impaired assets.
4. Review credit quality, collateral valuations, TDR performance, and the adequacy of the $11.031 million allowance, particularly for real-estate-related exposures.
5. Evaluate investment-portfolio credit and interest-rate risk, including below-investment-grade mortgage securities and the sensitivity estimates disclosed by management.
6. Verify the preferred-stock exchange terms, ongoing preferred-dividend burden, and capital and liquidity measures against subsequent filings.