CENTRAL VALLEY COMMUNITY BANCORP - Quarter Report: 2008 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

		(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                     TO

 

COMMISSION FILE NUMBER: 000—31977

 

CENTRAL VALLEY COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number (559) 298-1775

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   x     No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o   No   x

 

As of November 12, 2008 there were 6,019,319 shares of the registrant’s common stock outstanding

 

 

Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP

 

2008 QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART 1: FINANCIAL INFORMATION	3
ITEM 1: FINANCIAL STATEMENTS	3
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4. CONTROLS AND PROCEDURES	33
PART II OTHER INFORMATION	33
ITEM 1 LEGAL PROCEEDINGS	33
ITEM 1A RISK FACTORS	33
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS	34
ITEM 3 DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	34
ITEM 5 OTHER INFORMATION	34
ITEM 6 EXHIBITS	34
SIGNATURES	35

 

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PART 1: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

CENTRAL VALLEY COMMUNITY BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share amounts)		September 30, 2008			December 31, 2007
ASSETS
Cash and due from banks		$	19,461		$	17,108
Federal funds sold		23,759			14,536
Total cash and cash equivalents		43,220			31,644
Securities:
Available-for-sale investment securities (Amortized cost of $94,388 at September 30, 2008 and $84,139 at December 31, 2007)		90,533			84,373
Held-to-maturity, at amortized cost		7,453			—
Loans, less allowance for credit losses of $4,533 at September 30, 2008 and $3,887 at December 31, 2007		349,345			337,241
Bank premises and equipment, net		5,940			5,767
Bank owned life insurance		6,911			6,723
Federal Home Loan Bank stock		2,110			2,022
Goodwill		8,934			8,934
Accrued interest receivable, intangibles and other assets		10,190			6,981
Total assets		$	524,636		$	483,685
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	126,063		$	128,120
Interest bearing		296,123			274,442
Total deposits		422,186			402,562
Short-term borrowings		19,900			20,000
Long-term debt		19,000			—
Accrued interest payable and other liabilities		8,444			6,929
Total liabilities		469,530			429,491
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value: 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, no par value; 80,000,000 authorized; outstanding 6,019,319 at September 30, 2008, 5,975,316 at December 31, 2007		14,016			13,571
Retained earnings		43,403			40,483
Accumulated other comprehensive (loss) income, net of tax		(2,313		)	140
Total shareholders’ equity		55,106			54,194
Total liabilities and shareholders’ equity		$	524,636		$	483,685

 

See notes to unaudited condensed consolidated financial statements.

 

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CENTRAL VALLEY COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands except earnings per share amounts)		2008			2007			2008			2007
INTEREST INCOME:
Interest and fees on loans		$	6,165		$	7,155		$	18,851		$	20,733
Interest on Federal funds sold		78			109			206			408
Interest and dividends on investment securities:
Taxable		1,209			805			3,126			2,575
Exempt from Federal income taxes		224			212			681			662
Total interest income		7,676			8,281			22,864			24,378
INTEREST EXPENSE:
Interest on deposits		1,388			2,065			4,580			5,951
Other		265			30			686			143
Total interest expense		1,653			2,095			5,266			6,094
Net interest income before provision for credit losses		6,023			6,186			17,598			18,284
PROVISION FOR CREDIT LOSSES		635			120			905			360
Net interest income after provision for credit losses		5,388			6,066			16,693			17,924
NON-INTEREST INCOME:
Service charges		827			707			2,473			2,064
Appreciation in cash surrender value of bank owned life insurance		64			57			188			168
Loan placement fees		19			33			74			161
Net realized gains on sales and calls of investment securities		156			—			156			44
Federal Home Loan Bank stock dividends		32			25			88			76
Gain on sale and disposal of equipment		—			—			—			4
Other income		284			253			915			833
Total non-interest income		1,382			1,075			3,894			3,350
NON-INTEREST EXPENSES:
Salaries and employee benefits		2,775			2,731			8,491			8,103
Occupancy and equipment		713			675			2,023			1,982
Other expense		1,496			1,458			4,408			4,240
Total non-interest expenses		4,984			4,864			14,922			14,325
Income before provision for income taxes		1,786			2,277			5,665			6,949
PROVISION FOR INCOME TAXES		572			701			1,831			2,302
Net income		$	1,214		$	1,576		$	3,834		$	4,647
Basic earnings per share		$	0.20		$	0.26		$	0.64		$	0.78
Diluted earnings per share		$	0.19		$	0.25		$	0.61		$	0.73
Cash dividends per share		$	—		$	—		$	0.10		$	—

 

See notes to unaudited condensed consolidated financial statements.

 

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CENTRAL VALLEY COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2007

AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2008

(Unaudited)

 

(In thousands except share and per share amounts)		Shares		Amount			Retained Earnings			Accumulated Other Comprehensive (Loss)/ Income (Net of Taxes)			Total Shareholders’ Equity			Total Comprehensive Income
Balance, January 1, 2007		6,037,656		$	14,007		$	35,888		$	(117	)	$	49,778
Comprehensive income:
Net income							6,280						6,280			$	6,280
Other comprehensive loss, net of tax:
Net change in unrealized gain (loss) on available-for-sale investment securities										257			257			257
Total comprehensive income																$	6,537
Cash dividend - $.10 per share							(595		)				(595		)
Repurchase and retirement of common stock		(186,800	)	(1,617		)	(1,090		)				(2,707		)
Stock-based compensation expense				221									221
Stock options exercised and related tax benefit		124,460		960									960
Balance, December 31, 2007		5,975,316		13,571			40,483			140			54,194
Comprehensive income:
Net income							3,834						3,834			$	3,834
Other comprehensive loss, net of tax:
Net change in unrealized gain (loss) on available-for-sale investment securities										(2,453		)	(2,453		)	(2,453		)
Total comprehensive income																$	1,381
Cash dividend - $.10 per share							(598		)				(598		)
Stock options exercised and related tax benefit		44,003		264									264
Stock-based compensation expense				181									181
Cumulative effect of adopting EITF 06-4							(316		)				(316		)
Balance, September 30, 2008		6,019,319		$	14,016		$	43,403		$	(2,313	)	$	55,106

 

See notes to unaudited condensed consolidated financial statements.

 

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CENTRAL VALLEY COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

 

(In thousands)		2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,834		$	4,647
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease in deferred loan fees		(68		)	(133		)
Depreciation, accretion and amortization, net		709			811
Stock-based compensation		181			144
Tax benefit from exercise of stock options		(57		)	(369		)
Provision for credit losses		905			360
Net realized gains on sales and calls of investment securities		(156		)	(44		)
Net gain on sale and disposal of equipment		—			(4		)
Increase in bank owned life insurance, net of expenses		(188		)	(169		)
FHLB stock dividends		(88		)	(76		)
Net increase in accrued interest receivable and other assets		(1,531		)	(257		)
Net increase in accrued interest payable and other liabilities		1,199			368
Provision for deferred income taxes		(145		)	(25		)
Net cash provided by operating activities		4,595			5,253
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investment securities		(43,657		)	(4,044		)
Purchases of held-to-maturity investment securities		(7,466		)	—
Proceeds from sales or calls of available-for-sale investment securities		10,782			5,699
Proceeds from maturity of available-for-sale investment securities		8,500			6,150
Proceeds from principal repayments of available-for-sale investment securities		14,436			11,327
Proceeds from principal repayments of held-to-maturity investment securities		23			—
Net decrease in interest bearing deposits in other banks		—			205
Net FHLB stock purchases		—			(29		)
Net increase in loans		(12,941		)	(15,281		)
Purchases of premises and equipment		(886		)	(1,985		)
Proceeds from sale of premises and equipment		—			4
Net cash (used in) provided by investing activities		(31,209		)	2,046
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest bearing and savings deposits		12,499			(37,755		)
Net increase in time deposits		7,125			5,204
Proceeds from borrowings from Federal Home Loan Bank		164,500			67,500
Repayments to Federal Home Loan Bank		(145,600		)	(59,500		)
Repayments of borrowings from other financial institutions		—			(937		)
Share repurchase and retirement		—			(2,402		)
Proceeds from exercise of stock options		207			565
Tax benefit from exercise of stock options		57			369
Cash paid for dividends		(598		)	(595		)
Net cash provided by (used in) financing activities		38,190			(27,551		)
Increase (decrease) in cash and cash equivalents		11,576			(20,252		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		31,644			48,116
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	43,220		$	27,864
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense		$	5,310		$	6,060
Income taxes		$	2,389		$	2,540
Non-Cash Investing Activities:
Net pre-tax change in unrealized (losses) gains on available-for-sale investment securities		$	(4,089	)	$	340
Non-Cash Financing Activities:
Tax benefit from stock options exercised		$	57		$	369

 

See notes to unaudited condensed consolidated financial statements

 

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CENTRAL VALLEY COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The interim unaudited condensed consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim condensed consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2007 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position and shareholders’ equity at September 30, 2008 and December 31, 2007, and the results of its operations for the three and nine month interim periods ended September 30, 2008 and September 30, 2007 and its cash flows for the nine month interim periods ended September 30, 2008 and September 30, 2007 have been included. Certain reclassifications have been made to prior year amounts to conform to the 2008 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.

 

The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts are for more than 10 percent of revenues for the Company or the Bank.

 

Note 2.  Stock-Based Compensation

 

The Company has three stock-based compensation plans which are described as follows:

 

During 1992, the Bank established a Stock Option Plan for which shares are reserved for issuance to employees and directors under incentive and nonstatutory agreements.  The Company assumed all obligations under this plan as of November 15, 2000, and options to purchase shares of the Company’s common stock were substituted for options to purchase shares of common stock of the Bank.  Outstanding options under this plan are exercisable until their expiration, however, no new options will be granted under this plan.

 

On November 15, 2000, the Company adopted, and subsequently amended on December 20, 2000, the Central Valley Community Bancorp 2000 Stock Option Plan for which 793,881 shares remain reserved for issuance for options already granted to employees and directors under incentive and nonstatutory agreements and 10,936 remain reserved for future grants.  The plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised.  The options under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.  The vesting period is determined by the Board of Directors and is generally over five years.

 

In May 2005, the Company adopted the Central Valley Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan).  The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock.  The plan also allows for performance awards that may be in the form of cash or shares of the Company, including restricted stock.  The maximum number of shares that can be issued with respect to all awards under the plan is 476,000.  Currently under the 2005 Plan, there are 15,000 shares reserved for issuance for options already granted to employees and 461,000 remain reserved for future grants as of September 30, 2008.  The plan requires that the exercise price may not be less than 100% of the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised.  The options and awards under the plan expire on dates determined by the Board of Directors, but not later than 10 years from the date of grant.  The vesting period for the options and option related stock appreciation rights is determined by the Board of Directors and is generally over five years.

 

Stock Option Compensation

 

For the nine month periods ended September 30, 2008 and 2007, the compensation cost recognized for stock option compensation was $181,000 and $144,000, respectively. For the quarter ended September 30, 2008 and 2007, compensation cost recognized was $59,000 and $48,000, respectively.  The recognized tax benefit for stock option compensation expense was $57,000 and $370,000, for the nine month periods ended September 30, 2008 and 2007, respectively.  For the three month period ended September 30, 2008, no tax benefit was recognized and for three month period in 2007, recognized tax benefits were $205,000.  As of September 30, 2008, there was $645,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all plans.  The cost is expected to be recognized over a weighted average period of 3.1 years.

 

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The Company bases the fair value of the options granted on the date of grant using a Black-Scholes option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The “simplified” method described in SEC Staff Accounting Bulletin No. 107 was used to determine the expected term of the Company’s options in 2007.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.

 

No options have been granted from either the 2000 Plan or the 2005 Plan in 2008.  In the fourth quarter of 2007, the Board of Directors of the Company approved the cancellation of 15,000 stock options granted on May 1, 2006 and 78,900 stock options granted on April 23, 2007.  The Board granted new options to the directors, senior managers and other employees in the same numbers and to the same employees who were holders of the cancelled options. The grant date of the new options was October 17, 2007 and the options were granted with an exercise price equal to the fair market value on the grant date of $12.00 per share.  The modification affected 60 employees and 8 directors and the total incremental compensation cost recognized in 2007 for the modification was $29,000.

 

Stock Option Activity

 

A summary of the combined activity of the plans follows:

 

		Nine months ended September 30, 2008
				Weighted			Weighted
				Average			Average Remaining		Average
				Exercise			Contractual		Intrinsic
		Shares		Price			Term		Value
									(In thousands)
Options outstanding, beginning of period		861,834		$	7.22				$	3,712
Options granted		—		—
Options exercised		(44,003	)	$	4.71
Options canceled		(8,950	)	$	13.01
Options outstanding, end of period		808,881		$	7.29		4.17		$	1,667
Options vested or expected to vest at September 30, 2008		787,051		$	7.14		5.24		$	1,667
Options exercisable, end of period		670,381		$	6.20		3.41		$	1,667

 

The total intrinsic value of options exercised in the nine months ended September 30, 2008 and 2007, was $142,000 and $900,000, respectively.

 

Note 3.  Earnings per share

 

Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, stock appreciation rights settled in stock or restricted stock awards, result in the issuance of common stock which shares in the earnings of the Company. There was no difference in the net income used in the calculation of basic earnings per share and diluted earnings per share.

 

A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:

 

Basic Earnings Per Share

 

In thousands (except share and per share		Three Months Ended September 30,						Nine Months Ended September 30,
amounts)		2008			2007			2008			2007
Net income		$	1,214		$	1,576		$	3,834		$	4,647
Weighted average shares outstanding		6,009,706			5,967,762			5,992,647			5,994,131
Net income per share		$	0.20		$	0.26		$	0.64		$	0.78

 

Diluted Earnings Per Share

 

In thousands (except share and per share		Three Months Ended September 30,						Nine Months Ended September 30,
amounts)		2008			2007			2008			2007
Net income		$	1,214		$	1,576		$	3,834		$	4,647
Weighted average shares outstanding		6,009,706			5,967,762			5,992,647			5,994,131
Effect of dilutive stock options		245,946			353,318			277,944			393,099
Weighted average shares of common stock and common stock equivalents		6,255,652			6,321,080			6,270,591			6,387,230
Net income per diluted share		$	0.19		$	0.25		$	0.61		$	0.73

 

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Note 4.  Fair Value of Assets and Liabilities

 

On January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America (GAAP) and expands disclosures about fair value measurements. There was no cumulative effect adjustment to beginning retained earnings recorded upon adoption and no impact on the financial statements in the nine month period ended September 30, 2008.

 

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non recurring basis as of September 30, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

					Fair Value Measurements at September 30, 2008, Using
(In thousands)		Fair Value September 30, 2008			Quoted Prices in Active Markets for Identical Assets (Level 1)			Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Available-for-sale investment securities		$	90,533		$	2,384		$	77,670		$	10,479
Total assets and liabilities measured at fair value on a recurring basis		$	90,533		$	2,384		$	77,670		$	10,479
Assets and liabilities measured on a non-recurring basis:
Impaired loans		$	1,419		$	—		$	1,419		$	—
Total assets and liabilities measured at fair value on a non-recurring basis		$	1,419		$	—		$	1,419		$	—

 

The fair value of available-for-sale investment securities is based on actual market price determinations from third party evaluation vendors. The fair value of impaired loans is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.

 

Fair Value Measurements Using Significant Unobservable Inputs

(Level 3)

 

		Available-for-sale Investment Securities
(In thousands)		Three Months Ended September 30, 2008			Nine Months Ended September 30, 2008
Beginning balance		$	7,509		$	9,011
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)		3			3
Included in other comprehensive income		452			482
Purchases, sales and principal payments		2,515			983
Ending balance		$	10,479		$	10,479

 

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Note 5.  Comprehensive Income

 

Total comprehensive income is comprised of net earnings and net unrealized gains and losses on available-for-sale securities, which is the Company’s only source of other comprehensive income. Total comprehensive income for the three-month periods ended September 30, 2008 and 2007 was $848,000 and $2,176,000 and was $1,381,000 and $4,851,000 for the nine month periods ended September 30, 2008 and 2007, respectively.

 

Note 6.  Commitments and Contingencies

 

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans.

 

Commitments to extend credit amounting to $121,573,000 and $135,638,000 were outstanding at September 30, 2008 and December 31, 2007, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

 

Undisbursed lines of credit amounting to $66,589,000 and $77,933,000 were outstanding at September 30, 2008 and December 31, 2007, respectively. Undisbursed lines of credit are revolving lines of credit whereby customers can repay principal and advance principal during the term of the loan at their discretion and most expire between one and twelve months.

 

The Company has undisbursed portions of construction loans totaling $13,784,000 and $15,868,000 as of September 30, 2008 and December 31, 2007, respectively. These commitments are agreements to lend to a customer, subject to meeting certain construction progress requirements. The underlying construction loans have fixed expiration dates.

 

Standby letters of credit and financial guarantees amounting to $400,000 and $969,000 were outstanding at September 30, 2008 and December 31, 2007, respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at September 30, 2008 and December 31, 2007. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

 

The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees.

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.

 

Note 7.  Income Taxes

 

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheets, net deferred tax assets are included in accrued interest receivable and other assets.

 

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Accounting for uncertainty in income taxes - The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the quarter ended September 30, 2008.

 

Note 8.  Stock Repurchase

 

On November 20, 2007, the Board of Directors approved a stock repurchase plan authorizing the purchase of shares of the Company’s common stock up to a total cost of approximately $1,000,000 during the period from November 21, 2007 to May 21, 2008. Under the plan, the Company repurchased 24,300 shares in 2007 at an average price of $12.55 for a total cost of $305,000. No shares have been repurchased under the plan in 2008 and the plan expired May 20, 2008.

 

Note 9.  Borrowing Arrangements

 

Federal Home Loan Bank Advances: Advances from the Federal Home Loan Bank (FHLB) of San Francisco consisted of the following:

 

September 30, 2008
(In thousands)
Amount			Rate		Maturity Date
$	3,890		2.26	%	November 6, 2008
11,110			2.27	%	November 6, 2008
4,900			2.24	%	November 7, 2008
5,000			2.73	%	February 5, 2010
5,000			3.00	%	February 7, 2011
5,000			3.10	%	February 14, 2011
4,000			3.59	%	February 13, 2013
38,900
(19,900)			Less short-term portion
$	19,000		Long-term debt

 

December 31, 2007
(In thousands)
Amount			Rate		Maturity Date
$	10,000		4.37	%	January 10, 2008
10,000			4.49	%	January 9, 2008
20,000
(20,000		)	Less short-term portion
$	—		Long-term debt

 

FHLB advances are secured by investment securities with amortized costs totaling $60,305,000 and $24,231,000 and market values totaling $57,225,000 and $24,203,000 at September 30, 2008 and December 31, 2007, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

 

Note 10.  Pending Acquisition

 

On May 28, 2008, Central Valley Community Bancorp and Service 1^st Bancorp, headquartered in Tracy, California entered into a Reorganization Agreement and Plan of Merger. Under the terms of the agreement, Service 1^st Bancorp will merge with and into Central Valley Community Bancorp (the “Merger”), and the Service 1^st Bancorp subsidiary, Service 1^st Bank, with branches in Tracy, Stockton and Lodi, will merge with and into Central Valley Community Bancorp’s subsidiary, Central Valley Community Bank (the “Bank Merger”). Regulatory merger approvals have been received from the Federal Deposit Insurance Corporation, the California Department of Financial Institutions, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission. The shareholders of Central Valley Community Bancorp and of Service 1^st Bancorp approved the merger at special meetings held on October 10, 2008. The Merger and Bank Merger are currently projected to be completed in the fourth quarter of 2008.

 

Under the merger agreement, Service 1^st Bancorp shareholders will receive in exchange for each share of Bancorp common stock held, cash in the amount of $2.50 and shares of Central Valley Community Bancorp common stock based on a exchange ratio of 0.681818, representing an aggregate cash amount of $5,971,848 and an aggregate share amount of 1,628,686, subject to certain adjustments that will be finalized prior to completion of the Merger, and subject to a cash holdback of $3,500,000, approximately $1.33 per share, to be deposited into an escrow account pending the outcome of certain litigation matters.

 

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Note 11.  New Accounting Pronouncements

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”(SFAS No. 162). This standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. The provisions of SFAS No. 162 did not have a material impact on the Company’s condensed consolidated financial statements.

 

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore the Company is subject to the provision of the FSP effective September 30, 2008. The implementation of FSP FAS 157-3 did not affect the Company’s fair value measurement as of September 30, 2008.

 

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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.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

On January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The Company adopted SFAS 157 on January 1, 2008 and there was no cumulative effect adjustment to beginning retained earnings recorded upon adoption and no impact on the financial statements in the first nine months of 2008.

 

In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (EITF 06-04), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. A question arose when an employer enters into an endorsement split-dollar life insurance arrangement related to whether the employer should recognize a liability for the future benefits or premiums to be provided to the employee. EITF 06-04 indicates that an employer should recognize a liability for future benefits and that a liability for the benefit obligation has not been settled through the purchase of an endorsement type policy. The Company adopted the provisions of EITF 06-04 on January 1, 2008 and a liability of $316,000 was recorded with the corresponding reduction as a cumulative-effect adjustment to beginning retained earnings.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”. SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value – with changes in fair value reported in earnings – and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 was effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008 and did not elect the fair value option for any of its financial instruments.

 

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore the Company is subject to the provision of the FSP effective September 30, 2008. The implementation of FSP FAS 157-3 did not affect the Company’s fair value measurement as of September 30, 2008.

 

There have been no other changes to the Company’s critical accounting policies from those discussed in the Company’s 2007 Annual Report to Shareholders’ on Form 10-K.  This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

 

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OVERVIEW

 

Third quarter 2008

 

In the third quarter of 2008, our consolidated net income was $1,214,000 compared to net income of $1,576,000 for the same period in 2007. Diluted EPS was $0.19 for the third quarter 2008 compared to $0.25 for the third quarter 2007. The decrease in net income was due to the increase in the provision for loan losses of $515,000 in the third quarter of 2008 compared to the same period in 2007 and decreasing yields on earning assets outpacing the decreases in rates paid on interest bearing liabilities. Net interest income declined $163,000 for the quarter ended September 30, 2008 from the same period in the prior year. The net interest margin decreased 61 basis points for the third quarter of 2008 compared to the same period in 2007. Average total interest bearing liabilities increased 16.9% while average earning assets increased 9.2%. Also contributing to the decrease in net income for the third quarter were increases in non-interest expenses of $120,000. These items were offset by increases in non–interest income of $307,000 and decreases in the provision for income taxes of $129,000.

 

Annualized return on average equity for the third quarter of 2008 was 8.82% compared to 12.21% for the same period in 2007. Total average equity was $55,060,000 for the third quarter 2008 compared to $51,626,000 for the third quarter 2007. Equity increased primarily as a result of the net income included in retained earnings and proceeds from exercise of stock options offset by an increase in other comprehensive loss.

 

First Nine Months of 2008

 

For the nine months ended September 30, 2008, the Company’s consolidated net income was $3,834,000 compared to $4,647,000 for same period in 2007. Diluted EPS was $0.61 for the nine months ended September 30, 2008 compared to $0.73 for the same period in 2007.

 

Annualized return on average equity for the nine months ended September 30, 2008 was 9.36% compared to 12.15% for the same period in 2007. Annualized return on average assets for the nine months ended September 30, 2008 was 1.01% compared to 1.30% for the same period in 2007. Total average equity was $54,620,000 for the nine months ended September 30, 2008 compared to $51,006,000 for the same period in 2007. Equity increased primarily as a result of the net income and proceeds from the exercise of stock options offset by an increase in other comprehensive loss.

 

In comparing the first three quarters of 2008 to the same period in 2007, total loans continued to increase. Total average earning assets increased $25,783,000 or 5.9%, with the largest increase in average loans which increased $19,178,000 or 5.8% in the first nine months of 2008 compared to the nine months ended September 30, 2007. Over the same period average interest bearing liabilities increased $31,479,000 or 11.0%. While yields on earning assets decreased 85 basis points, the rates paid on interest bearing liabilities decreased at a slower rate by 63 basis points. As a result, net interest margin declined by 51 basis points from September 30, 2007 to September 30, 2008.

 

Although non-accrual loans have increased to $1,419,000 at September 30, 2008, compared to $179,000 at December 31, 2007 and $11,000 at September 30, 2007, the Company believes our asset quality continues to be a strength. The Company had no other real estate owned at September 30, 2008, December 31, 2007, or September 30, 2007.

 

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 and Madera Counties of central California. Additionally, we have a private banking office in Sacramento County and a loan production office in Modesto, California. As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank. We recently entered into a Reorganization Agreement and Plan of Merger with Service 1st Bancorp. Service 1st Bank has branches in Tracy, Stockton and Lodi, California. Regulatory merger approvals have been received from the Federal Deposit Insurance Corporation, the California Department of Financial Institutions, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission. The shareholders of Central Valley Community Bancorp and of Service 1^st Bancorp approved the merger at special meetings held on October 10, 2008. The Merger and Bank Merger are currently projected to be completed in the fourth quarter of 2008.

 

At September 30, 2008, we had total gross loans of $353,878,000, total assets of $524,636,000, total deposits of $422,186,000, and shareholders’ equity of $55,106,000.

 

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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 up to the applicable limits thereof, which have been increased to $250,000 per depositor through December 31, 2009, and the Bank is subject to supervision, examination and regulations of the FDIC.

 

The Bank operates 12 branches which serve the communities of Fresno, Clovis, Kerman, Prather, Oakhurst, Madera, and Sacramento, California; and a loan production office which serves the Modesto, California community. Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2008 FDIC data, the Bank’s seven branches in Fresno County (Clovis, Fresno, Kerman, and Prather) had a 4.0% combined deposit market share of all depositories including credit unions, thrifts, and savings banks.

 

Branch expansions and the anticipated merger with Service 1st Bank provide the Company with opportunities to expand its loan and deposit base. The merger will add three branch offices located in Tracy, Lodi and Stockton, California. During 2007 we opened a new loan production office in Modesto, California. During the second quarter of 2008 we relocated our Herndon & Fowler branch from an in-store location to a new larger stand alone branch location. The Bank anticipates additional branch openings in the future to meet the growing service needs of its customers. Management expects that new offices initially will have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.

 

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 stockholders;

·                                          Return on average assets;

·                                          Return on average equity;

·                                          Asset quality;

·                                          Asset growth; and

·                                          Operating efficiency.

 

Return to Our Stockholders

 

Our return to our stockholders is measured in the form of return on average equity (ROE). Our annualized ROE was 9.36% for the nine months ended September 30, 2008 compared to 12.13% for the year ended December 31, 2007 and 12.15% for the nine months ended September 30, 2007. Peer ROE, as of June 30, 2008 was 7.48%. Our net income for the nine months ended September 30, 2008 decreased $813,000 or 17.5% to $3,834,000 compared to $4,647,000 for the nine months ended September 30, 2007. Net income decreased due to decreases in net interest income, and increases in the provision for credit losses and non-interest expenses, offset by an increase in non-interest income and a reduction in the provision for income taxes. Diluted EPS was $0.61 for the nine months ended September 30, 2008 and $0.73 for the same period in 2007.

 

Return on Average Assets

 

Our return on average assets (ROA) is a measure we use to compare our performance with other banks and bank holding companies. Our annualized ROA for the nine months ended September 30, 2008 was 1.01% compared to 1.32% for the year ended December 31, 2007 and 1.30% for the nine months ended September 30, 2007. The decrease in ROA compared to December 2007 is due to the decrease in net income relative to our increase in average assets. Average assets for the nine months ended September 30, 2008 were $503,847,000 an increase of $26,526,000 from the $477,321,000 for the year ended December 31, 2007. Annualized ROA for our peer group was 0.69% at June 30, 2008. Peer group data from SNL Financial includes certain bank holding companies in central California with assets from $300 million to $1 billion.

 

Development of Core Earnings

 

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 as a result of loan generation and retention, 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 5.21% for the first three quarters of 2008, compared to 5.72% for the same period in 2007. The decrease in net interest margin is principally due to a decrease in the Company’s yield on earning assets which was greater than the decrease in our cost of funds. In comparing the two periods, the effective yield on total earning assets decreased 85 basis points while the cost of total interest bearing liabilities decreased 63 basis points and the cost of total deposits decreased 42 basis points. The Company’s total cost of deposits for the nine months ended September 30, 2008 was 1.48% compared to 1.90% for the same period in 2007. The Company has less exposure than many of its competitors to such interest expense increases, as 30.9% of its average deposits are non-interest bearing. Net interest income for the first three quarters of 2008 was $17,598,000 a decrease of $686,000 from $18,284,000 for the same period in 2007.

 

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements and other services, FHLB stock dividends, and gains from sales of investment securities. Non-interest income for the first nine months of 2008 increased $544,000 or 16.2% to $3,894,000 compared to $3,350,000 for the nine months ended September 30, 2007 mainly due to increases in service charge income, an increase in gains on sales of investment securities and other income. 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 percentage of total loans and total assets, and is a key element in estimating the future earnings of a company. The Company had non-performing loans totaling $1,419,000 or 0.40% of total loans as of September 30, 2008, $179,000 or 0.05% of total loans at December 31, 2007, and $11,000 or 0.003% of total loans as of September 30, 2007. Peer non-performing loans to total loans as of June 30, 2008 averaged 2.66%. 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. The Company did not have any other real estate owned at September 30, 2008, December 31, 2007, or September 30, 2007.

 

Asset Growth

 

As revenues from both net interest income and non-interest income are a function of asset size, the continued 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 8.5% during the first nine months of 2008 from $483,685,000 as of December 31, 2007 to $524,636,000 as of September 30, 2008. Total gross loans increased 3.7% to $353,878,000 as of September 30, 2008 compared to $341,128,000 as of December 31, 2007. Total deposits increased 4.9% to $422,186,000 as of September 30, 2008 compared to $402,562,000 as of December 31, 2007. We continue to be below our peers in the level of our loan to deposit ratio. Our loan to deposit ratio at September 30, 2008 remained consistent at 83.8% compared to 84.7% at December 31, 2007. The average loan to deposit ratio of our peers was 96.4% at June 30, 2008. Further discussion of loans and deposits is below.

 

Operating Efficiency

 

Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles, divided by net interest income plus non-interest income, excluding gains from sales of securities) was 69.2% for the first nine months of 2008 compared to 65.6% for the nine months ended September 30, 2007. The decline in the efficiency ratio is due to an increase in operating expenses and a decrease in revenues, primarily due to the decrease in interest rates since September of 2007. The Company’s net interest income before provision for credit losses plus non-interest income decreased 0.7% to $21,492,000 for the nine months ended September 30, 2008 compared to $21,634,000 for the same period in 2007, while operating expenses increased 4.2% to $14,922,000 from $14,325,000 for the same period in 2008 compared to 2007.

 

RESULTS OF OPERATIONS

 

Net Income for the First Nine Months of 2008 Compared to the Nine Months Ended September 30, 2007:

 

Net income decreased to $3,834,000 for the nine months ended September 30, 2008 compared to $4,647,000 for the nine months ended September 30, 2007. Basic earnings per share were $0.64 and $0.78 for the nine months ended September 30, 2008 and 2007, respectively. Diluted earnings per share were $0.61 for the nine months ended September 30, 2008 and $0.73 for the same period in 2007. Annualized ROE was 9.36% for the nine months ended September 30, 2008 compared to 12.15% for the nine months ended September 30, 2007. Annualized ROA for the nine months ended September 30, 2008 was 1.01% compared to 1.30% for the nine months ended September 30, 2007.

 

Net income for the nine months ended September 30, 2008 compared to the same period in the prior year decreased due mainly to decreases in net interest income and increases in the provision for credit losses and non-interest expenses, offset by an increase in non-interest income and a decrease in the provision for income taxes. Net interest income decreased due to a decrease in the yield on interest earning assets and an increase in the level of average interest bearing-liabilities, partially offset by a lesser decrease in our cost of interest-bearing liabilities and an increase in the level of our total average interest earning assets. The provision for credit losses increased as a result of the growth in loans and our ongoing assessment of the inherent risks and probable losses in our portfolio and the related required level of allowance for loan losses. Non interest revenues increase primarily from service charges and gains on sales of investment securities. Non-interest expenses increased primarily due to salaries and benefits and other expenses. Further discussion of non-interest expenses is below. The decrease in the provision for income taxes is reflective of the overall decrease in net income.

 

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 portfolio 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 the volume of and interest rate paid on interest bearing liabilities.

 

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

 

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CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(Dollars in thousands)

 

		FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008								FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
		Average Balance			Interest Income/ Expense			Average Interest Rate		Average Balance			Interest Income/ Expense			Average Interest Rate
ASSETS
Interest-earning deposits in other banks		$	1,661		$	38		3.05	%	$	211		$	5		3.16	%
Securities
Taxable securities		73,230			3,088			5.62	%	69,822			2,570			4.91	%
Non-taxable securities (1)		24,472			1,032			5.62	%	23,942			1,003			5.59	%
Total investment securities		97,702			4,120			5.62	%	93,764			3,573			5.08	%
Federal funds sold		12,099			206			2.27	%	10,499			408			5.18	%
Total		111,462			4,364			5.22	%	104,474			3,986			5.09	%
Loans (2) (3)		348,318			18,851			7.23	%	329,635			20,733			8.39	%
Federal Home Loan Bank stock		2,061			88			5.69	%	1,949			76			5.20	%
Total interest-earning assets		461,841			23,303			6.73	%	436,058			24,795			7.58	%
Allowance for credit losses		(4,038		)						(3,771		)
Non-accrual loans		554								59
Cash and due from banks		17,105								16,844
Bank premises and equipment		5,908								5,709
Other non-earning assets		22,477								21,953
Total average assets		$	503,847							$	476,852
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts		$	72,867		189			0.35	%	$	73,584		379			0.69	%
Money market accounts		98,090			1,492			2.03	%	98,780			1,975			2.67	%
Time certificates of deposit, under $100,000		69,287			1,479			2.85	%	47,887			1,528			4.25	%
Time certificates of deposit, $100,000 and over		43,930			1,420			4.32	%	61,827			2,069			4.46	%
Total interest-bearing deposits		284,174			4,580			2.15	%	282,078			5,951			2.81	%
Other borrowed funds		32,562			686			2.81	%	3,179			143			6.00	%
Total interest-bearing liabilities		316,736			5,266			2.22	%	285,257			6,094			2.85	%
Non-interest bearing demand deposits		127,033								135,408
Other liabilities		5,458								5,181
Shareholders’ equity		54,620								51,006
Total average liabilities and shareholders’ equity		$	503,847							$	476,852
Interest income and rate earned on average earning assets					23,303			6.73	%				24,795			7.58	%
Interest expense and interest cost related to average interest-bearing liabilities					5,266			2.22	%				6,094			2.85	%
Net interest income and net interest margin (4)					$	18,037		5.21	%				$	18,701		5.72	%

 

(1)		Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $351 and $341 in 2008 and 2007, respectively.
(2)		Loan interest income includes net loan fees of $571 in 2008 and $586 in 2007.
(3)		Average loans do not include non-accrual loans.
(4)		Net interest margin is computed by dividing net interest income by total average interest-earning assets.

 

Interest and fee income from loans decreased $1,882,000 or 9.1% in the first nine months of 2008 compared to the same period in 2007.  Average total loans for the first nine months of 2008 increased 5.8% to $348,872,000 compared to $329,694,000 for the same period in 2007.  While loan growth was positive, the yield on average total loans decreased 116 basis points to 7.23% for the first nine months of 2008 compared to 8.39% for the same period in 2007 largely due to the 325 basis points decline in interest rates by the Federal Reserve Bank since September 2007 coupled with the competitive loan environment in the Central Valley.

 

Interest income from total investments (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) increased $368,000 in the first nine months of 2008 compared to the same period in 2007, mainly due to the 4.2% increase in average balances of total investments and the overall increase in yields earned.  Income from investments represents 22.8% of net interest income for the nine months ended September 30, 2008 compared to 19.9% for the same period in 2007.

 

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