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| CWBC > SEC Filings for CWBC > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this report.
Forward Looking Statements
This Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above.
Overview of Earnings Performance
The Company reported net income of $675,000, or $.11 per diluted share, for the third quarter 2008 compared to net income of $963,000, or $0.16 per diluted share, for the third quarter 2007.
The significant factors impacting operations for the third quarter 2008 were:
· a decline in interest income from loans of $650,000 due to the decline in yields, in part, resulting from the impact of actions of the Federal Open Market Committee (FOMC), which was partly offset by an increase to the average loan balance of $77.5 million for the third quarter 2008 compared to 2007
· a 275 basis point cut in the target federal funds rate from 4.75% at September 30, 2007 to 2.00% as of September 30, 2008, impacting both yields on loans and rates paid on deposits and contributing to a 79 basis point decline in net interest margin from 4.39% to 3.60%
· loan loss provision of $652,000 for the third quarter 2008 reflecting management's assessment of heightened credit risk for the Company related to the current macroeconomic conditions impacting California and national business, real estate and consumer markets
· relatively flat non-interest income and non-interest expenses for the third quarter 2008 compared to 2007
Critical Accounting Policies
A number of critical accounting policies are used in the preparation of the Company's consolidated financial statements. These policies relate to areas of the financial statements that involve estimates and judgments made by management. These include: the provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company's 2007 Annual Report on Form 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
Results of Operations - Third Quarter Comparison
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
Three Months Ended
September 30, Increase
2008 2007 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 11,336 $ 12,030 $ (694 )
Interest expense 5,562 5,877 (315 )
Net interest income 5,774 6,153 (379 )
Provision for loan losses 652 547 105
Net interest income after provision for loan losses 5,122 5,606 (484 )
Non-interest income 1,198 1,212 (14 )
Non-interest expenses 5,154 5,154 -
Income before provision for income taxes 1,166 1,664 (498 )
Provision for income taxes 491 701 (210 )
Net income $ 675 $ 963 $ (288 )
Income per share - Basic $ .11 $ .16 $ (.05 )
Income per share - Diluted $ .11 $ .16 $ (.05 )
Comprehensive income $ 692 $ 1,012 $ (320 )
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The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
Three Months Ended
September 30,
2008 versus 2007
Total Change due to
change Rate Volume
(in thousands)
Loans, net $ (650 ) $ (2,001 ) $ 1,351
Investment securities 64 11 53
Other (108 ) (115 ) 7
Total interest-earning assets (694 ) (2,105 ) 1,411
Deposits (290 ) (1,196 ) 906
Other borrowings (25 ) (68 ) 43
Total interest-bearing liabilities (315 ) (1,264 ) 949
Net interest income $ (379 ) $ (841 ) $ 462
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Net Interest Income
Net interest income declined by $379,000 for the third quarter 2008 compared to
2007. Total interest income declined by $694,000. While average interest earning
assets grew to $637.3 million for the third quarter 2008 compared to $555.4
million for the same period in 2007, an increase of $81.9 million, yields
declined to 7.08% from 8.59% and the net interest margin declined 79 basis
points from 4.39% to 3.60%. The decline in interest income due to rates of $2.1
million exceeded the increase of $1.4 million due to volume growth.
The decline in rates benefited the Bank in a reduction in interest expense of $315,000. The decline due to rates of $1.3 million was partly offset by the increase due to deposit growth and borrowing volume of $949,000 for the third quarter of 2008 compared to 2007.
The rapid nature of the reduction in the target federal funds rate by the FOMC over the last year from 4.75% at September 30, 2007 to 2.00% at September 30, 2008, for asset-sensitive institutions, tended to reduce yields on interest earning assets more quickly than rates paid on interest bearing liabilities, primarily deposits.
Provision for Loan Losses
The provision for loan losses increased to $652,000 for the third quarter 2008
reflecting management's assessment of increased credit risk for the Company
related to weaknesses in our portfolio identified by management as well as the
current California and national business, real estate and consumer economic
slowdown. The provision is impacted by both quantitative factors resulting from
actual loss experience and qualitative factors which take into consideration
management's judgment regarding several internal and external factors including
concentration of credit risk and overall macroeconomic conditions. The higher
provision is primarily a result of increased qualitative factors which reflect
the aforementioned economic circumstances and outlook. The Bank continues to
diligently monitor the portfolio implementing policies and procedures developed
to assist in identifying weaknesses in its portfolio. The Bank has also enhanced
underwriting standards as necessary to prudently reflect the dynamics of the
current economic outlook.
Non-Interest Income
Non-interest income includes gains from sale of loans, loan document fees,
service charges on deposit accounts, loan servicing fees and other revenues not
derived from interest on earning assets. Non-interest income remained flat for
the third quarter of 2008 compared to the same period in 2007, declining by
$14,000.
Non-Interest Expenses
Non-interest expenses remained flat for the third quarter 2008 compared to 2007
reflecting management's continuing efforts to control costs.
Results of Operations -Nine-Month Comparison
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
Nine Months Ended
September 30, Increase
2008 2007 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 34,727 $ 34,702 $ 25
Interest expense 16,989 16,810 179
Net interest income 17,738 17,892 (154 )
Provision for loan losses 3,856 769 3,087
Net interest income after provision for loan losses 13,882 17,123 (3,241 )
Non-interest income 4,252 3,789 463
Non-interest expenses 15,647 15,656 (9 )
Income before provision for income taxes 2,487 5,256 (2,769 )
Provision for income taxes 1,067 2,215 (1,148 )
Net income $ 1,420 $ 3,041 $ (1,621 )
Income per share - Basic $ .24 $ .52 $ (.28 )
Income per share - Diluted $ .24 $ .50 $ (.26 )
Comprehensive income $ 1,458 $ 3,114 $ (1,656 )
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The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
Nine Months Ended
September 30,
2008 versus 2007
Total Change due to
change Rate Volume
(in thousands)
Loans, net $ 65 $ (4,471 ) $ 4,536
Investment securities 316 92 224
Other (356 ) (303 ) (53 )
Total interest-earning assets 25 (4,682 ) 4,707
Deposits (9 ) (2,360 ) 2,351
Other borrowings 188 (208 ) 396
Total interest-bearing liabilities 179 (2,568 ) 2,747
Net interest income $ (154 ) $ (2,114 ) $ 1,960
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Net Interest Income
Net interest income declined by $154,000 for the first nine months of 2008
compared to 2007. Total interest income increased $25,000 for the period ended
September 30, 2008 compared to the same period in 2007. The increase of $4.7
million due to growth in average earning assets was offset by a $4.7 million
decline due to lower rates. For the first nine months of 2008, average earning
assets were $623.4 million compared to $538.5 million for the same period in
2007, an increase of 15.8%. This growth was offset by the decline in yield on
interest earning assets to 7.44% for the first nine months of 2008 from 8.62%
for 2007 and a corresponding 64 basis point decline in net interest margin from
4.44% to 3.80%.
Interest expense increased $179,000, or 1.1%, for the first nine months of 2008 compared to 2007. The increase due to volume of $2.7 million was mostly offset due to a decline of 2.6 million attributable to lower rates paid on deposits and borrowings. Rates paid on interest bearing liabilities declined from 4.83% for the first nine months on 2007 to 4.15% for the same period of 2008.
Provision for Loan Losses
The provision for loan losses increased to $3.9 million for the first nine
months of 2008 compared to $769,000 for the same period of 2007. This increase
reflected management's assessment of increased credit risk for the Company
related to weaknesses in our portfolio identified by management as well as the
current California and national business, real estate and consumer economic
slowdown. The provision is impacted by both quantitative factors resulting from
actual loss experience and qualitative factors which take into consideration
management's judgment regarding several internal and external factors including
concentration of credit risk and overall macroeconomic conditions. The higher
provision is primarily a result of increased qualitative factors which reflect
the aforementioned economic circumstances and outlook. The Bank continues to
diligently monitor the portfolio implementing policies and procedures developed
to assist in identifying weaknesses in its loan portfolio. The Bank also has
enhanced underwriting standards as necessary to prudently reflect the dynamics
of the current economic outlook.
Non-Interest Income
Non-interest income for the first nine months of 2008 increased by $463,000 over
the same period of 2008 primarily due to an increase of $314,000 in gains on
loans sales and the net gain on the sale of other foreclosed assets of $198,000
included in other income. The Company sold $19.7 million in guaranteed SBA loans
and $1.7 million in unguaranteed SBA loans for the first nine months of 2008
compared to $5.3 million in guaranteed and $3.5 million in unguaranteed for the
same period of 2007. Loan servicing income also increased $312,000 due to lower
amortization of the servicing asset and I/O strip. These increases were partly
offset by a decline of $351,000 in other loan fees.
Non-Interest Expenses
Non-interest expenses remained flat with a decline of $9,000 for the first nine
months of 2008 compared to 2007.
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and
average rates on interest-bearing liabilities for the periods indicated.
Three Months Nine Months
Ended September 30, Ended September 30,
2008 2007 2008 2007
Interest-earning assets: (dollars in thousands)
Interest-earning deposits in other
financial institutions:
Average balance $ 1,016 $ 1,035 $ 1,008 $ 900
Interest income 10 11 29 30
Average yield 3.81 % 4.04 % 3.78 % 4.45 %
Federal funds sold:
Average balance $ 13,315 $ 13,161 $ 11,189 $ 14,240
Interest income 67 174 204 559
Average yield 2.04 % 5.24 % 2.45 % 5.25 %
Investment securities:
Average balance $ 45,336 $ 41,032 $ 45,310 $ 39,412
Interest income 568 504 1,723 1,407
Average yield 4.98 % 4.87 % 5.08 % 4.77 %
Gross loans:
Average balance $ 577,682 $ 500,213 $ 565,942 $ 483,914
Interest income 10,691 11,341 32,771 32,706
Average yield 7.36 % 9.00 % 7.73 % 9.04 %
Total interest-earning assets:
Average balance $ 637,349 $ 555,441 $ 623,449 $ 538,466
Interest income 11,336 12,030 34,727 34,702
Average yield 7.08 % 8.59 % 7.44 % 8.62 %
Interest-bearing liabilities:
Interest-bearing demand deposits:
Average balance $ 51,391 $ 74,417 $ 60,735 $ 61,658
Interest expense 245 720 922 1,678
Average cost of funds 1.89 % 3.84 % 2.03 % 3.64 %
Savings deposits:
Average balance $ 15,821 $ 16,160 $ 14,843 $ 15,678
Interest expense 128 149 386 415
Average cost of funds 3.21 % 3.66 % 3.47 % 3.54 %
Time certificates of deposit:
Average balance $ 387,457 $ 289,422 $ 362,121 $ 289,232
Interest expense 3,968 3,762 11,857 11,081
Average cost of funds 4.07 % 5.16 % 4.37 % 5.12 %
Other borrowings:
Average balance $ 104,550 $ 100,833 $ 109,695 $ 98,340
Interest expense 1,221 1,246 3,824 3,636
Average cost of funds 4.65 % 4.90 % 4.66 % 4.94 %
Total interest-bearing liabilities:
Average balance $ 559,219 $ 480,832 $ 547,394 $ 464,908
Interest expense 5,562 5,877 16,989 16,810
Average cost of funds 3.96 % 4.85 % 4.15 % 4.83 %
Net interest income $ 5,774 $ 6,153 $ 17,738 $ 17,892
Net interest spread 3.12 % 3.74 % 3.29 % 3.79 %
Net interest margin 3.60 % 4.39 % 3.80 % 4.44 %
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Average yields and rates are derived by dividing interest income by the average balances of interest-earning assets and by dividing interest expense by the average balances of interest-bearing liabilities for the periods indicated. Amounts outstanding are averages of daily balances during the applicable periods.
Nonaccrual loans are included in the average balance of loans outstanding.
Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and other liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.
Financial Condition
Average total assets increased by $84.9 million, or 15.3%, to $638.9 million at September 30, 2008 compared to $553.9 million at September 30, 2007. Average total equity increased by 5.5% to $51.3 million at September 30, 2008 from $48.6 million at September 30, 2007. Average total gross loans at September 30, 2008 increased by $82.0 million, or 17.0%, to $565.9 million from $483.9 million at September 30, 2007. Average deposits also increased from $401.2 million at September 30, 2007 to $472.9 million as of September 30, 2008.
The book value per share increased to $8.64 at September 30, 2008 from $8.51 at December 31, 2007.
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