Community West Bancshares — 2018 Q2 Form 10-Q summary
Entity note: The supplied filing is for Central Valley Community Bancorp and its subsidiary, Central Valley Community Bank—not Community West Bancshares. The summary below reflects the filing as provided. Reporting period ended June 30, 2018; statements are unaudited.
Business context and reporting period
Central Valley Community Bancorp is a California bank holding company serving businesses and individuals in Central California. The quarter reflects the October 2017 acquisition of Folsom Lake Bank (FLB), which added branches, loans and deposits. The company reported as a single operating segment.
Financial performance and condition
- Second-quarter earnings: Net income was $4.965 million versus $4.948 million a year earlier. Diluted EPS was $0.36 versus $0.40; basic EPS was $0.36 versus $0.41.
- First-half earnings: Net income was $10.256 million versus $9.198 million. Diluted EPS was $0.74 versus $0.75. Annualized ROA was 1.28% versus 1.27%; annualized ROE was 9.84% versus 10.81%.
- Net interest: Q2 net interest income before credit-loss provision rose 11.7% to $15.397 million; first-half net interest income rose 13.8% to $30.823 million. Fully tax-equivalent net interest margin declined to 4.33% in Q2 from 4.47%, and to 4.29% for the first half from 4.41%.
- Non-interest income and expenses: Q2 non-interest income fell 34.4% to $2.686 million, mainly because securities-sale gains were $2.075 million lower year over year; it included a $578,000 gain on the credit-card portfolio sale. Q2 non-interest expense increased 6.6% to $11.499 million. For the first half, non-interest income declined 14.0% to $5.457 million, while expenses rose 9.4% to $22.867 million.
- Credit costs and asset quality: The company recorded a $50,000 credit-loss provision in Q2 and the first half, versus reversals of $150,000 and $250,000, respectively, in 2017. The allowance was $8.920 million, or 0.95% of gross loans. Nonaccrual loans were $4.092 million, up from $2.875 million at year-end 2017; nonperforming loans were 0.44% of loans versus 0.32%. Classified loans totaled $44.4 million. Troubled debt restructurings were $6.622 million, up from $3.551 million at year-end.
- Balance sheet: At June 30, total assets were $1.590 billion, net loans $925.9 million, deposits $1.324 billion and shareholders’ equity $211.2 million. Gross loans rose 3.8% from year-end; deposits fell 7.1% and total assets fell 4.3%. Commercial real estate loans were $320.0 million, or 34.2% of gross loans; total real-estate-related loans were 75.1%.
- Liquidity and funding: Cash and cash equivalents were $46.6 million, down from $100.4 million at year-end. Liquid assets, including available-for-sale securities, totaled $537.9 million, or 33.8% of assets. The company had $30 million of FHLB advances outstanding, $202.6 million of unused FHLB capacity and $40 million in unsecured correspondent-bank lines. Management said liquidity sources were adequate.
- Cash flows and capital: First-half operating cash flow was $20.6 million; investing activities used $1.7 million and financing activities used $72.7 million. The company and bank met applicable capital requirements and were described as well capitalized. The bank’s total risk-based capital ratio was 15.43%.
Changes, outlook, risks and unusual items
- Management attributed earnings growth mainly to higher net interest income and lower income-tax expense, offset by reduced securities gains and higher operating expenses. Loan growth reflected both FLB and organic growth; management attributed approximately $2.16 million of first-half net interest income growth to FLB and $2.512 million to organic growth.
- The federal corporate tax rate change to 21% contributed to lower effective tax rates: 24.01% in Q2 versus 31.69%, and 23.25% for the first half versus 28.05%.
- The available-for-sale securities portfolio had a $6.512 million pretax unrealized loss at June 30, compared with a $4.089 million unrealized gain at year-end 2017. Management attributed losses principally to interest-rate movements, reported no other-than-temporary impairment in the first half, and said it could not assure that future deterioration would not require impairment. A modeled immediate 200-basis-point rate increase would reduce portfolio market value by an estimated $35.3 million, or 7.30%.
- Other notable items included a $578,000 gain on the credit-card portfolio sale, approximately $257,000 of branch-consolidation costs in Q2, and favorable legal settlements contributing to other income. The Tracy office was closed after quarter-end; other branch consolidations were also reported.
- After quarter-end, the board declared an $0.08-per-share dividend and authorized a stock repurchase program of up to $10 million through July 18, 2019. No earnings or financial guidance was provided.
- Key disclosed risks include interest-rate changes, competition, Central Valley economic and real-estate conditions, loan and collateral quality, deposit trends, regulation, execution of acquisitions, and maintaining net interest margin. Management was preparing for CECL, effective in 2020, but could not estimate its impact and expected a one-time allowance adjustment. The filing also says the upcoming lease standard is expected to increase assets and liabilities, without a material effect on results or cash flows.
- Management reported no material changes to previously disclosed risk factors, no reportable legal proceedings, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Central Valley Community Bancorp, despite the request metadata naming Community West Bancshares.
- Assess whether deposit declines and the resulting increase in the loan-to-deposit ratio to 70.60% are temporary or persistent, and how funding costs evolve.
- Monitor net interest margin, securities valuation and rate sensitivity, including the concentration in mortgage-related investments.
- Track nonaccrual loans, TDRs, classified credits, commercial real-estate and agricultural exposures, and allowance adequacy.
- Separate recurring earnings from securities-sale gains, the credit-card portfolio gain, legal settlements, tax-rate effects and acquisition-related impacts.
- Review execution and capital/liquidity effects of branch actions, the announced repurchase authorization and the post-quarter dividend.