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| BVBC.OB > SEC Filings for BVBC.OB > Form 10-K on 30-Mar-2009 | All Recent SEC Filings |
30-Mar-2009
Annual Report
• problem and non-performing loans and other loans presenting credit concerns;
• trends in loan growth, portfolio composition and quality;
• appraisals of the value of collateral; and
• management's judgment with respect to current economic conditions and their impact on the existing loan portfolio.
The Bank computes its allowance by assigning specific reserves to impaired
loans, plus a general reserve based on loss factors applied to the rest of the
loan portfolio. The specific reserve on impaired loans is computed as the amount
of the loan in excess of the present value of the estimated future cash flows
discounted at the loan's effective interest rate, or based on the loan's
observable market value or the fair value of the collateral if the loan is
collateral dependent. The general reserve loss factors are determined based on
such items as management's evaluation of risk in the portfolio, local economic
conditions, and historical loss experience. The Bank has further refined its
risk grading system by developing associated reserve factors for each risk
grade.
Overview
The Company had a challenging year in 2008 due to the continued decline in
interest rates and the industry wide decline in the real estate market and the
general economy. The prime lending rate continued to decline throughout 2008 and
dropped a total of 400 basis points. The drop in market rates along with the
industry wide decline in the real estate market and general economy has resulted
in lower interest income on loans during 2008. This lower interest income was
partly offset by growth experienced in our loan portfolio of 11.02%. The
deterioration of the real estate market and general economy, along with the
growth in our loan portfolio, has resulted in an increase in our provision for
loan losses as compared to the prior year. The deterioration of the real estate
market, as well as the Company operating with a smaller mortgage department as a
result of restructuring and reduction in staff, has resulted in lower mortgage
origination activity as compared with prior years and declining fee income on
loans held for sale. Despite a decline in the economy, our deposits have
increased 12.02% during 2008, primarily due to an increase in our time deposits
and interest-bearing demand deposits. This was a result of several time deposit
promotions during the year and an increase in activity in the CDARS program.
Both have allowed us to cross sell other products to new and existing customers.
The increase in deposits was also a result of an increase in deposit balances in
our performance checking product which was introduced in 2007 of $36.2 million,
or 220.36%. In December 2008, we participated in the U.S. Treasury Capital
Purchase Plan which was designed to attract broad participation by institutions,
to stabilize the financial system, and to increase lending for the benefit of
the U.S. economy. Pursuant to the plan, we issued and sold to the U.S.
Department of the Treasury 21,750 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, along with a ten year warrant to purchase 111,083 shares of the
Company's common stock, for a total cash price of $21.75 million. Our lending
activity increased during the fourth quarter of 2008, with an increase of
$19.6 million, or 3.04%, in loans for the fourth quarter. We expect 2009 to be a
year of rebuilding for the Company as we look to continue to expand our loan and
deposit portfolios, increase our mortgage origination volume, and stabilize our
net interest margin.
The Company and the Bank entered into an agreement in August 2008 with the
Federal Reserve and the OSBC imposing certain limitations and requirements on
the Bank and Company. This agreement was a result of the examination conducted
by the regulators in June 2008, and related primarily to the Bank's real estate
construction loan portfolio. As a result of the agreement, prior approval by the
regulators will be required prior to payment of any dividends from the Company
or the Bank and prior to making or entering into an agreement to make a
severance payment to any officer, director, or employee. In addition, the
agreement required management to formalize plans regarding asset quality and
credit risk management, capital, earnings, and liquidity management. Substantial
compliance has been achieved with most provisions of the agreement and most
concerns detailed in the previous examination have been addressed.
The Company experienced a net loss for 2008 of $10.3 million, a
$14.8 million, or 328.41% decrease from the $4.5 million net income earned in
2007. Excluding the goodwill impairment, the Company experienced a net loss, of
$5.4 million, a $9.9 million, or 220.99% decrease from the prior year. Loss per
share on a diluted basis was $4.20 for the year ended December 31, 2008, a
decrease of 328.26% compared to diluted earnings per share of $1.84 for the
previous year. The Company's returns on average assets and average stockholders'
equity for 2008 were negative 1.31% and negative 17.53% compared to .62% and
7.88%, respectively, for 2007.
Net interest income for 2008 was $23.3 million compared to $26.6 million
earned during 2007. The decrease of $3.3 million, or 12.49%, was primarily due
to a decrease in market rates. The Federal Reserve lowered the Federal Funds
Rate 400 basis points during 2008, and the interest rates on our variable rate
assets were reduced accordingly. The decrease in interest income was also a
result of the reversal of $1.2 million in interest on loans placed on
non-accrual during 2008. The increase in loans placed on non-accrual was a
result of a decline in the credit quality of
our real estate and construction portfolios. This decrease in interest income
was partially offset by a decrease in interest expense. As market rates have
declined, the rates paid on deposits have also declined. The current credit
environment has made it difficult to anticipate the future of the Company's net
interest margin. If interest rates remain at the current levels or continue to
decline, the Company anticipates a negative impact to net interest income as a
result of the repricing of assets and liabilities. The magnitude of this impact
will be dependent upon the Federal Reserve's policy decisions and market
movements.
The provision for loan losses in 2008 was $17.0 million compared to
$2.9 million in 2007, and $1.2 million in 2006. The increase in the provision in
2008 was a result of management's decision to charge down approximately
$13.9 million in non performing loans primarily related to the decline in the
credit quality of the Bank's real estate and construction portfolios, one
deteriorating commercial credit relationship and an uncollected overdraft with
one commercial relationship. In the analyses, management also recognized the
impact of the continued industry wide decline in the real estate market and
general economy. The increase in the provision was also a result of an increase
in non-performing loans. For the five years ended December 31, 2008, our average
year-end ratio of non-performing loans to total loans was 2.76%. As of
December 31, 2008, our ratio of non-performing loans to total loans was 6.54%.
Non-interest income increased 16.83% to $8.4 million in 2008 from
$7.2 million in 2007. The increase in non-interest income was a result of gains
realized from the sale of available-for-sale securities of $702,000 during 2008
to provide funding for loan growth and to restructure the investment portfolio
to provide additional protection in the rate sensitive environment. In addition,
the increase in non-interest income was the result of $1.0 million realized as a
result of a legal judgment. This was partially offset by a decrease in loans
held for sale fee income. The industry wide decline in the real estate market,
as well as the Company operating with a smaller mortgage department as a result
of restructuring, resulted in a continued decline in the volume of residential
mortgage loans originated during 2008 as compared to 2007. This resulted in
lower origination fees during 2008 than during 2007 for our Company.
Non-interest expense increased 18.80% to $28.8 million in 2008 from
$24.2 million in 2007. The increase in non-interest expense was primarily a
result of the goodwill impairment recognized of $4.8 million during the fourth
quarter of 2008. Management reviewed goodwill for impairment and based upon
guidelines contained in FASB Statement No. 142, Goodwill and Other Intangible
Assets,the Company recognized a goodwill impairment charge. The goodwill
impairment charge was a result of the continued volatility throughout the
financial services industry and the effect such volatility has had on market
prices of financial services stocks, weakened economic conditions, decline in
the credit quality of the real estate and construction portfolio, and the
operating loss recorded by the Company in 2008. Excluding the goodwill
impairment charge, non-interest expense decreased $269,000, or 1.11%, due to a
decrease in salaries and employee benefits as a result of a restructuring of and
reduction in staff during 2008.
Total assets at December 31, 2008, were $815.7 million, an increase of
$79.5 million, or 10.80%, from $736.2 million at December 31, 2007. Deposits and
stockholders' equity at December 31, 2008 were $600.9 million and $76.4 million,
compared with $536.4 million and $58.9 million at December 31, 2007, increases
of $64.5 million, or 12.02%, and $17.5 million, or 29.70%, respectively.
Loans at December 31, 2008 totaled $662.4 million, an increase of
$65.8 million, or 11.02%, compared to December 31, 2007. The loan to deposit
ratio at December 31, 2008 was 110.24% compared to 111.24% at December 31, 2007.
Our funding philosophy for loans not held for sale is to primarily increase
deposits from retail and commercial deposit sources and secondarily use other
borrowing sources as necessary to fund loans within the limits of the Bank's
capital base.
Net Interest Income
A primary component of our net income is our net interest income. Net
interest income is determined by the spread between the fully tax equivalent
(FTE) yields we earn on our interest-earning assets and the rates we pay on our
interest-bearing liabilities, as well as the relative amounts of such assets and
liabilities. FTE net interest margin is determined by dividing FTE net interest
income by average interest-earning assets. The following discussion should be
read along with analysis of the "Average Balances, Yields and Rates" table on
page 27.
Years ended December 31, 2008 and 2007. FTE net interest income for 2008
decreased to $23.3 million from $26.6 million in 2007, a $3.3 million, or
12.51%, decrease.
FTE interest income for 2008 was $45.0 million, a decrease of $7.2 million,
or 13.83%, from $52.2 million in 2007. This decrease was primarily a result of
an overall decrease in yields on average earning assets. The overall yield on
average earning assets decreased by 159 basis points to 6.16% for 2008 compared
to 7.75% in 2007. This significant decrease in yield resulted from the decrease
in market interest rates as the Federal Reserve has lowered the Federal Funds
Rate 400 basis points during 2008. The decrease was also a result of an increase
in non-accrual loans and the reversal of $1.2 million in interest on loans
placed on non-accrual during 2008. The decline in yield would have been 143
basis points had the Company not reversed the interest on these non-accrual
loans. The decrease in interest income was partly offset by an increase in
average earning assets, which increased $55.9 million, or 8.29% during 2008. The
increase in average earning asset balance was a result of an increase in average
balance of loans by approximately $68.4 million, or 12.15%, from the prior year
attributed to internal loan growth. The increase was partially offset by a
decrease in available-for-sale securities by $20.7 million, or 22.83%. The
decrease was a result of the sale of $23.0 million in available-for-sale
securities during 2008 to provide funding for additional loan growth and to
restructure the investment portfolio to provide additional protection in the
rate sensitive environment.
Interest expense for 2008 was $21.7 million, a decrease of $3.9 million, or
15.21%, from $25.6 million in 2007. The decrease resulted from a decrease in the
rate paid on average interest-bearing liabilities resulting from the impact of
lower market interest rates on savings and money market deposits, time deposits,
and short- and long- term debt. The rate paid on our total average
interest-bearing liabilities decreased to 3.42% in 2008 compared to 4.47% in
2007, a decrease of 105 basis points. Total average interest bearing liabilities
increased $61.8 million, or 10.80%, during 2008 primarily due to increases in
interest-bearing demand accounts, time deposits and long-term debt. The increase
in average time deposits was a result of several time deposit promotions during
the year and an increase in activity by our customers in the CDARS program.
Average interest-bearing deposits increased as a result of an increase in the
balances of our performance checking product which was introduced during 2007.
The increase in long-term debt was a result of an increase in advances with
Federal Home Loan Bank to provide additional funding for loan growth and the
Company advancing funds on its operating line of credit to provide additional
capital for the Bank. This operating line of credit was paid off on December 5,
2008, with proceeds from the CPP.
Years ended December 31, 2007 and 2006. FTE net interest income for 2007
decreased to $26.6 million from $27.9 million in 2006, a $1.2 million, or 4.45%,
decrease.
FTE interest income for 2007 was $52.2 million, an increase of $3.4 million,
or 6.92%, from $48.8 million in 2006, primarily as a result of an increase in
the balances on average earning assets. The yield on average earning assets
increased 14 basis points to 7.75% in 2007 compared to 7.61% in 2006. Average
interest earning assets increased $32.0 million, or 4.99%, during 2007. Due to
the increase in earning asset volume, loan interest and fee income increased to
$47.2 million in 2007 from $44.5 million in 2006, a $2.7 million, or 5.97%,
increase. Interest income on investment securities increased $420,000, or
10.36%, in 2007 compared to the prior year due to higher yields earned on the
securities. Interest income earned on federal funds sold increased $301,000 or
117.58% in 2007 compared to the prior year due primarily to higher balances on
those earning assets.
Interest expense for 2007 was $25.6 million, up $4.6 million, or 22.04%, from
$21.0 million in 2006. The increase resulted from increases in the balances and
overall rate paid on our average interest-bearing liabilities. The rate paid on
our total average interest bearing liabilities increased to 4.47% in 2007
compared to 3.89% in 2006, an increase of 58 basis points. This increase
resulted from increases in rates paid on interest-bearing demand accounts, money
market deposits, time deposits, short- and long-term debt. Total average
interest bearing liabilities increased $33.0 million, or 6.13%, during 2007
primarily due to increases in money market deposits, time deposits and long-term
debt.
Average Balance Sheets. The following table sets forth for the periods and as
of the dates indicated, information regarding our average balances of assets and
liabilities as well as the dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities and
the resultant rates or costs. Ratio, yield and rate information are based on
average daily balances where available; otherwise, average monthly balances have
been used. Non-accrual loans are included in the calculation of average balances
for loans for the periods indicated.
AVERAGE BALANCES, YIELDS AND RATES
Year Ended December 31,
2008 2007 2006
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(In thousands)
Assets
Federal funds sold and other short-term investments $ 22,478 $ 378 1.68 % $ 10,902 $ 557 5.11 % $ 5,100 $ 256 5.01 %
Available-for-sale securities - taxable 69,741 3,369 4.83 90,246 4,452 4.93 93,043 4,013 4.31
Available-for-sale securities - non-taxable (1) 141 9 6.38 312 21 6.66 565 40 7.03
Mortgage loans held for sale 6,157 340 5.52 9,589 609 6.35 18,067 1,145 6.34
Loans, net of unearned discount and fees (2) 631,673 40,905 6.48 563,224 46,585 8.27 525,471 43,392 8.26
Total earning assets 730,190 45,001 6.16 674,273 52,224 7.75 642,246 48,846 7.61
Cash and due from banks - non-interest bearing 20,611 17,728 18,545
Allowance for possible loan losses (10,060 ) (6,962 ) (6,556 )
Premises and equipment, net 18,337 19,072 18,300
Other assets 25,704 20,895 16,444
Total assets $ 784,782 $ 725,006 $ 688,979
Liabilities and Stockholders' Equity
Deposits-interest bearing:
Interest-bearing demand accounts $ 52,776 $ 1,394 2.64 % $ 30,719 $ 656 2.14 % $ 24,979 $ 97 0.39 %
Savings and money market deposits 137,295 2,402 1.75 163,099 6,362 3.90 147,403 4,356 2.95
Time deposits 286,404 12,139 4.24 269,673 13,134 4.87 262,199 11,254 4.29
Total interest-bearing deposits 476,475 15,935 3.34 463,491 20,152 4.35 434,581 15,707 3.61
Short-term debt 46,008 943 2.05 33,610 1,319 3.93 32,047 1,365 4.26
Long-term debt 111,490 4,813 4.32 75,087 4,111 5.48 72,530 3,890 5.36
Total interest-bearing liabilities 633,973 21,691 3.42 572,188 25,582 4.47 539,158 20,962 3.89
Non-interest bearing deposits 86,811 91,151 93,916
Other liabilities 3,852 4,745 5,770
Stockholders' equity 60,146 56,922 50,135
Total liabilities and stockholders' equity $ 784,782 $ 725,006 $ 688,979
FTE net interest income/spread $ 23,310 2.74 % $ 26,642 3.28 % $ 27,884 3.72 %
FTE net interest margin 3.19 % 3.95 % 4.34 %
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(1) Presented on a fully tax-equivalent basis assuming a tax rate of 34%. For the three years ended December 31, 2008, 2007 and 2006, the tax equivalency adjustment amounted to $3,000, $7,000, and $14,000, respectively.
(2) Includes average balances and income from loans on non-accrual status
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates
and Volumes. The following table presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the increase
or decrease related to changes in balances and changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to:
• changes in rate, reflecting changes in rate multiplied by the prior period
volume; and
• changes in volume, reflecting changes in volume multiplied by the current period rate.
CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES
Year Ended December 31,
(In thousands)
2008 Compared to 2007 2007 Compared to 2006
Change Change Change Change
Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change
Federal funds sold $ (374 ) $ 195 $ (179 ) $ 5 $ 296 $ 301
Available-for-sale securities - taxable (93 ) (990 ) (1,083 ) 577 (138 ) 439
. . .
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