Central Valley Community Bancorp Reports Earnings Results for the Six Months and Quarter Ended June 30, 2014

Net income increased 72.93%, primarily driven by an increase in net interest income in 2014 compared to 2013. Net interest income during the first six months of 2014 was positively impacted by the collection of nonaccrual loans totaling $1,846,000 which resulted in a recovery of interest income of $861,000.

Non-performing assets decreased by $3,144,000, or 40.43%, to $4,632,000 at June 30, 2014, compared to $7,776,000 at December 31, 2013. During the six months ended June 30, 2014, the Company’s shareholders’ equity increased $10,888,000, or 9.07%. 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).

During the first two quarters of 2014, the Company’s total assets increased 1.31%, and total liabilities increased 0.41% compared to December 31, 2013. The Company declared and paid $1,092,000 in cash dividends to holders of common stock during the first six months of 2014 ($0.10 per share). Annualized return on average equity (ROE) for the six months ended June 30, 2014 was 8.32%, compared to 5.27% for the six months ended June 30, 2013. The increase in ROE in the first six months of 2014 reflects an increase in net income, notwithstanding an increase in capital from an increase in AOCI and an increase in retained earnings as previously discussed. Annualized return on average assets (ROA) was 0.93% and 0.70% for the six months ended June 30, 2014 and 2013, respectively. The increase in ROA is due to an increase in net income, notwithstanding an increase in average assets.

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. During the six months ended June 30, 2014, the Company recorded $1,501,000 in net loan charge-offs, compared to $532,000 for the six months ended June 30, 2013. The net charge-off ratio, which reflects net charge-offs to average loans, was 0.57% for the six months ended June 30, 2014, compared to 0.27% for the same period in 2013. The majority of the loans charged off during the six months ended June 30, 2014 were previously classified and sufficient funds were held in the allowance for credit losses as of December 31, 2013.

At June 30, 2014, the allowance for credit losses stood at $7,307,000, compared to $9,208,000 at December 31, 2013, a net decrease of $1,901,000 reflecting the net charge offs, the majority of which related to a nonaccrual commercial and industrial loan charged off in the first quarter which was reserved for as of December 31, 2013. The allowance for credit losses as a percentage of total loans was 1.34% at June 30, 2014, and 1.80% at December 31, 2013. Part of the decrease in the ALLL as a percentage of total loans is primarily due to the inclusion of $82,262,000 from VCB loans that were recorded at fair value in connection with the acquisition and therefore have no related allowance. Excluding these VCB loans from the calculation, the allowance for credit losses to total gross loans as of June 30, 2014 was 1.58%. The Company believes the allowance for credit losses is adequate to provide for probable incurred losses inherent within the loan portfolio at June 30, 2014.

Total non-performing assets were $4,632,000, or 0.40% of total assets as of June 30, 2014, compared to $7,776,000, or 0.68% of total assets as of December 31, 2013. Total non-performing assets as of June 30, 2013 were $10,267,000 or 1.18% of total assets.

The following provides a reconciliation of the change in non-accrual loans for 2014.

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 six months ended June 30, 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.

For the six months ended June 30, 2014, the effective yield on total earning assets increased 26 basis points to 4.28% compared to 4.02% for the six months ended June 30, 2013, while the cost of total interest-bearing liabilities decreased 7 basis points to 0.19% compared to 0.26% for the six months ended June 30, 2013. The cost of total deposits decreased 5 basis points to 0.12% for the six months ended June 30, 2014, compared to 0.17% for the six months ended June 30, 2013.

For the six months ended June 30, 2014, the Company’s average investment securities, including interest-earning deposits in other banks and Federal funds sold, increased by $113,975,000, or 28.39%, compared to the six months ended June 30, 2013.

The effective yield on average investment securities, including interest earning deposits in other banks and Federal funds sold, increased to 2.79% for the six months ended June 30, 2014, compared to 2.47% for the six months ended June 30, 2013. The increase in yield in the Company’s investment securities during 2014 resulted primarily from a decrease in the rate of prepayments on mortgage backed securities compared to the same period of 2013. Total average loans, which generally yield higher rates than investment securities, increased $128,458,000, from $394,890,000 for the six months ended June 30, 2013 to $523,348,000 for the six months ended June 30, 2014. The effective yield on average loans increased to 5.80% for the six months ended June 30, 2014, compared to 5.69% for the six months ended June 30, 2013.

Net interest income before the provision for credit losses for the six months ended June 30, 2014 was $20,004,000, compared to $13,723,000 for the six months ended June 30, 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.

Total average assets for the six months ended June 30, 2014 were $1,140,602,000 compared to $874,617,000, for the six months ended June 30, 2013, an increase of $265,985,000 or 30.41%. Total average loans increased $128,458,000, or 32.53% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Total average investments, including deposits in other banks and Federal funds sold, increased to $515,443,000 for the six months ended June 30, 2014, from $401,468,000 for the six months ended June 30, 2013, representing an increase of $113,975,000 or 28.39%. Total average deposits increased $255,650,000 or 34.63% to $993,936,000 for the six months ended June 30, 2014, compared to $738,286,000 for the six months ended June 30, 2013. Average interest-bearing deposits increased $133,573,000, or 26.07%, and average non-interest bearing demand deposits increased $122,077,000, or 54.02%, for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. The Company’s ratio of average non-interest bearing deposits to total deposits was 35.02% for the six months ended June 30, 2014, compared to 30.61% for the six months ended June 30, 2013.

Non-interest income for the six months ended June 30, 2014 decreased $32,000 to $4,021,000, compared to $4,053,000 for the six months ended June 30, 2013, primarily driven by a decrease of $800,000 in net realized gains on sales and calls of investment securities, and a $190,000 decrease in loan placement fees, partially offset by a $259,000 increase in service charge income, a $220,000 increase in interchange fees, a $97,000 increase in Federal Home Loan Bank dividends, and a $209,000 increase in other income.

Non-interest expense for the six months ended June 30, 2014 increased $3,314,000, or 23.41%, to $17,470,000 compared to $14,156,000 for the six months ended June 30, 2013. The net increase year over year was a result of increases in salaries and employee benefits of $1,888,000, increases in occupancy and equipment expenses of $648,000, increases in data processing expenses of $321,000, increases in Internet banking expenses of $77,000, increases in regulatory assessments of $94,000, increases in ATM/Debit card expenses of $92,000, increases in license and maintenance contracts of $59,000, increases in advertising fees of $86,000, and other non-interest expense increases of $458,000. During the six months ended June 30, 2014, other non-interest expenses included increases of $50,000 in armored courier expenses, $3,000 in legal fees, $41,000 in appraisal fees, $33,000 in postage expenses, $21,000 in personnel expenses, $7,000 in donations, and $16,000 in stationery/supplies expenses, as compared to the same period in 2013.

The Company recorded an income tax expense of $1,646,000 for the six months ended June 30, 2014, compared to $550,000 for the six months ended June 30, 2013. The effective tax rate for the first six months of 2014 was 23.67% compared to 15.19% for the six months ended June 30, 2013. The increase in the effective tax rate during 2014 was primarily due to the loss of the tax credits related to the California enterprise zone program, offset by a slight increase in interest income on non-taxable investment securities. Beginning January 1, 2014, tax credits and deductions related to the California enterprise zone program were reduced due to legislative changes affecting the program.

Quarter Ended June 30, 2014

For the quarter ended June 30, 2014, the Company reported unaudited consolidated net income of $2,693,000 and diluted earnings per common share of $0.24, compared to $1,287,000 and $0.12 per diluted share for the same period in 2013. Net income for the immediately trailing quarter ended March 31, 2014 was $2,616,000, or $0.24 per diluted common share.

The increase in net income during the second quarter of 2014 compared to the same period in 2013 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.

Annualized return on average equity (ROE) for the second quarter of 2014 was 8.27%, compared to 4.45% for the same period of 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). Annualized return on average assets (ROA) was 0.93% for the second quarter of 2014 compared to 0.59% for the same period in 2013. This increase is due to an increase in net income, notwithstanding an increase in average assets.

In comparing the second quarter of 2014 to the second quarter of 2013, average total loans increased by $133,171,000, or 33.37%. During the second quarter of 2014, the Company recorded $614,000 in net loan charge-offs compared to $112,000 in net loan recoveries for the same period in 2013. The net charge-off ratio, which reflects annualized net charge-offs (recoveries) to average loans, was 0.46% for the quarter ended June 30, 2014 compared to (0.11)% for the quarter ended June 30, 2013.

The following provides a reconciliation of the change in non-accrual loans for the quarter ended June 30, 2014.

The Company recorded $235,000 in OREO during the quarter ended June 30, 2014 which was disposed of prior to the end of the quarter.

Average total deposits for the second quarter of 2014 increased $261,866,000, or 35.35%, to $1,002,725,000, compared to $740,859,000 for the same period of 2013.

The Company’s net interest margin (fully tax equivalent basis) increased 25 basis points to 4.09% for the quarter ended June 30, 2014, compared to 3.84% and 4.24% for the quarters ended June 30, 2013 and March 31, 2014, respectively. Net interest income, before provision for credit losses, increased $3,027,000, or 44.01%, to $9,905,000 for the second quarter of 2014, compared to $6,878,000 for the same period in 2013. The increases in net interest margin and in net interest income in the period-to-period comparison resulted primarily from an increase in the yield on investment securities and a decrease in the Company’s cost of funds. Over the same periods, the cost of total deposits decreased 6 basis points to 0.11% compared to 0.17% in 2013.

For the quarter ended June 30, 2014, the Company’s average investment securities, including interest-earning deposits in other banks and Federal funds sold, increased by $114,098,000, or 28.39%, compared to the quarter ended June 30, 2013 and increased by $1,139,000, or 0.22%, compared to the quarter ended March 31, 2014.

The effective yield on average investment securities including interest earning deposits in other banks and Federal funds sold, increased to 2.83% for the quarter ended June 30, 2014, compared to 2.49% for the quarter ended June 30, 2013 and 2.74% for the quarter ended March 31, 2014. Total average loans, which generally yield higher rates than investment securities, increased by $133,171,000 to $532,230,000 for the quarter ended June 30, 2014, from $399,059,000 for the quarter ended June 30, 2013 and increased by $17,851,000 from $514,379,000 for the quarter ended March 31, 2014. The effective yield on average loans decreased to 5.54% for the quarter ended June 30, 2014, compared to 5.61% and 6.08% for the quarters ended June 30, 2013 and March 31, 2014, respectively.

Total average assets for the quarter ended June 30, 2014 were $1,152,451,000 compared to $878,766,000 for the quarter ended June 30, 2013 and $1,128,628,000 for the quarter ended March 31, 2014, an increase of $273,685,000 and $23,823,000, or 31.14% and 2.11%, respectively.

Total average deposits increased $261,866,000, or 35.35%, to $1,002,725,000 for the quarter ended June 30, 2014, compared to $740,859,000 for the quarter ended June 30, 2013. Total average deposits increased $17,676,000, or 1.79%, for the quarter ended June 30, 2014, compared to $985,049,000 for the quarter ended March 31, 2014. The Company’s ratio of average non-interest bearing deposits to total deposits was 34.66% for the quarter ended June 30, 2014, compared to 30.53% and 35.38% for the quarters ended June 30, 2013 and March 31, 2014, respectively.

Non-interest income increased $217,000, or 11.88%, to $2,044,000 for the second quarter of 2014 compared to $1,827,000 for the same period in 2013. The second quarter of 2014 non-interest income included $64,000 in net realized gains on sales and calls of investment securities compared to $320,000 for the same period in 2013. For the quarter ended June 30, 2014, service charge income increased $149,000 and interchange fee income increased $129,000, compared to the same period in 2013. Loan placement fees decreased $83,000 during the second quarter of 2014, compared to the same period in 2013. Non-interest income for the quarter ended June 30, 2014 increased $67,000 to $2,044,000, compared to $1,977,000 for the quarter ended March 31, 2014.

Non-interest expense for the quarter ended June 30, 2014 increased $1,511,000, or 20.92%, to $8,734,000 compared to $7,223,000 for the quarter ended June 30, 2013. The net increase quarter over quarter was a result of increases in salaries and employee benefits of $871,000, increases in occupancy and equipment of $419,000, increases in data processing expenses of $174,000, partially offset by a decrease in acquisition and integration expenses of $380,000, and decreases in consulting and legal fees. Advertising expenses, audit and accounting fees, ATM/debit card expenses and Internet banking expenses also increased comparing the second quarter of 2014 to the same period in 2013. Non-interest expense for the quarter ended June 30, 2014 decreased $2,000 compared to $8,736,000 for the trailing quarter ended March 31, 2014.

“We are happy to report a very good second quarter in all key financial and asset quality metrics compared to the same quarter in 2013. Additionally, we are pleased that investors are seeing the benefits of the focused efforts of our team, who strive for consistent earnings and returns to our shareholders,” stated Daniel J. Doyle, President and CEO of Central Valley Community Bancorp and Central Valley Community Bank.

“The July 1, 2013 merger with Visalia Community Bank has proved valuable to our overall growth this past year. While the Central Valley of California is showing signs of growth, albeit slower than we would like, we are happy to report that the organic growth in average gross loans in the ‘legacy’ bank increased slightly more than 10% over the same period of 2013 and the average deposits increased 12.40% in the ‘legacy’ bank for that same period. Net income has been hindered in the current low interest rate environment for loans and securities and there is still slow loan growth in consumer credit and commercial and industrial loans. Loan increases have primarily come from our agriculture annual lines of credit usage, agriculture related business and commercial real estate. The drought in California will have some impact on certain agricultural yields this year due to less acreage planted, coupled with the cost of water and dependence on pumping ground water for our agricultural borrowers. While we believe our agricultural borrowers are maximizing their resources for this crop year, water storage continues to be a long term problem and may become a more critical issue in the upcoming years if improved water solutions are not determined and increased rain and snow pack is not realized,” continued Doyle.

“Our succession planning is on schedule and going well with the addition of Jim Ford as President in the first quarter and the recent restructuring of titles and responsibilities within the existing Executive and Senior Management team. The remainder of 2014 looks promising with opportunities for our Bank, our valued customers and team members, and for our shareholders,” concluded Doyle.

Central Valley Community Bancorp trades on the NASDAQ stock exchange under the symbol CVCY. Central Valley Community Bank, headquartered in Fresno, California, was founded in 1979 and is the sole subsidiary of Central Valley Community Bancorp. Central Valley Community Bank now operates 21 full service offices in Clovis, Exeter, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, Tracy, and Visalia, California. Additionally, the Bank operates Commercial Real Estate Lending, SBA Lending and Agribusiness Lending Departments. Investment services are provided by Investment Centers of America and insurance services are offered through Central Valley Community Insurance Services LLC.

Members of Central Valley Community Bancorp’s and the Bank’s Board of Directors are: Daniel N. Cunningham (Chairman), Sidney B. Cox, Edwin S. Darden, Jr., Daniel J. Doyle, F. T. “Tommy” Elliott, IV, Steven D. McDonald, Louis McMurray, William S. Smittcamp, Joseph B. Weirick. Wanda L. Rogers is Director Emeritus.