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| BYFC > SEC Filings for BYFC > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
The following discussion provides information about our results of operations, financial condition, liquidity, and capital resources. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report.
Critical Accounting Policies
We have established various accounting policies that are consistent with generally accepted accounting principles in the United States of America in the preparation of our consolidated financial statements. Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Certain of these accounting policies, which we consider to be critical accounting policies, require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities and on our reported results of operations. These policies include our policies for accounting for the allowance for loan losses, which involve significant judgments and assumptions by management as to the value of properties securing our loans, the borrowers' ability and willingness to repay their loans and other factors. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results may differ in material respects from these estimates under different assumptions or conditions.
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007
Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments (interest-earning assets) and interest expense is generated from deposits and borrowings (interest-bearing liabilities). Our results of operations are also affected by our provision for loan losses, non-interest income generated from service charges and fees on loan and deposit accounts, gain or loss on the sale of loans and securities, non-interest expenses and income taxes.
Net Earnings. We recorded net earnings of $2.3 million, or $1.18 per diluted common share, for the year ended December 31, 2008, compared to net earnings of $1.5 million, or $0.74 per diluted common share, for the year ended December 31, 2007. Current year net earnings increased by $848 thousand, or 58.36%, primarily due to increases in net interest income before provision for loan losses and non-interest income which were partially offset by increases in our provision for loan losses and non-interest expense.
Net Interest Income. Net interest income before provision for loan losses totaled $14.3 million, up $3.2 million, or 28.85%, from a year ago. This increase reflected a $70.3 million, or 22.78%, increase in our average interest-earning assets and an 18 basis point improvement in our net interest rate margin.
Interest Income. Interest income for 2008 increased $4.2 million primarily due to a $70.3 million increase in our average interest-earning assets which was partially offset by a 16 basis point decrease in our yield on average interest-earning assets. Our net loan portfolio accounted for a substantial portion of the increase in our average interest-earning assets, and averaged $336.6 million in 2008 compared to $264.4 million in 2007. Our loan portfolio yield decreased 20 basis points during 2008 due to a general decline in market interest rates in 2008.
Interest Expense. Interest expense for 2008 increased $1.0 million as a result of a $66.9 million increase in our average interest-bearing liabilities which was partially offset by a 36 basis point decrease in our cost of average interest-bearing liabilities. Deposits averaged $264.5 million in 2008, up $37.7 million from $226.8 million in 2007. FHLB borrowings averaged $89.4 million in 2008, up $28.1 million from $61.3 million in 2007. The decrease in our cost of average interest-bearing liabilities was primarily due to the declining interest rate environment and maturities of higher costing time deposits and FHLB borrowings over the past year.
Average Balance Sheet and Yield/Rate Analysis. We analyze our earnings performance using, among other measures, the net interest rate spread and effective net interest rate margin. The interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. The net interest rate margin is net interest income expressed as a percentage of average interest-earning assets.
The following table presents for the years indicated the total dollar amount of
(1) interest income from average interest-earning assets and the resultant
yields; and (2) interest expense on average interest-bearing liabilities and the
resultant costs, expressed as annual rates. The table also sets forth our net
interest income, net interest rate spread, net interest rate margin and certain
additional information. We did not include non-accrual loans in the average
interest-earning assets balance. Average balances are derived from average daily
balances. The yields and costs include loan prepayment fees and amortization of
fees, costs, premiums and discounts which are considered adjustments to interest
rates.
For the Year Ended December 31,
2008 2007 2006
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-earning deposits $ 3,718 $ 73 1.96 % $ 2,970 $ 138 4.65 % $ 2,954 $ 128 4.33 %
Federal Funds sold and other
short-term investments 3,032 37 1.22 % 1,368 66 4.82 % 1,750 87 4.97 %
Investment securities 1,079 55 5.10 % 2,000 100 5.00 % 2,000 82 4.10 %
Mortgage-backed securities 29,109 1,371 4.71 % 34,709 1,601 4.61 % 38,846 1,693 4.36 %
Loans receivable (1)(2) 336,619 23,744 7.05 % 264,366 19,178 7.25 % 230,676 15,335 6.65 %
FHLB stock 5,086 204 4.01 % 2,980 162 5.44 % 2,851 152 5.33 %
Total interest-earning assets 378,643 $ 25,484 6.73 % 308,393 $ 21,245 6.89 % 279,077 $ 17,477 6.26 %
Non-interest-earning assets 11,825 10,512 8,424
Total assets $ 390,468 $ 318,905 $ 287,501
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market deposits $ 29,035 $ 705 2.43 % $ 20,411 $ 693 3.40 % $ 13,537 $ 369 2.73 %
Passbook deposits 39,378 547 1.39 % 39,973 536 1.34 % 51,981 763 1.47 %
NOW and other demand deposits 39,853 303 0.76 % 36,281 59 0.16 % 32,217 26 0.08 %
Certificate accounts 156,228 5,624 3.60 % 130,164 5,770 4.43 % 112,456 4,294 3.82 %
Total deposits 264,494 7,179 2.71 % 226,829 7,058 3.11 % 210,191 5,452 2.59 %
FHLB advances 89,404 3,566 3.99 % 61,350 2,590 4.22 % 48,932 1,728 3.53 %
Junior subordinated debentures
and other borrowings 7,192 421 5.85 % 6,000 485 8.08 % 6,000 463 7.72 %
Total interest-bearing
liabilities 361,090 $ 11,166 3.09 % 294,179 $ 10,133 3.45 % 265,123 $ 7,643 2.88 %
Non-interest-bearing liabilities 4,954 3,735 3,808
Stockholders' Equity 24,424 20,991 18,570
Total liabilities and
stockholders' equity $ 390,468 $ 318,905 $ 287,501
Net interest rate spread (3) $ 14,318 3.64 % $ 11,112 3.44 % $ 9,834 3.38 %
Net interest rate margin (4) 3.78 % 3.60 % 3.52 %
Ratio of interest-earning assets
to interest-bearing liabilities 104.86 % 104.83 % 105.26 %
Return on average assets 0.59 % 0.46 % 0.58 %
Return on average equity 9.42 % 6.92 % 8.96 %
Average equity to average assets
ratio 6.26 % 6.58 % 6.46 %
Dividend payout ratio (5) 16.90 % 25.81 % 20.80 %
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(1) Amount is net of deferred loan fees, loan discounts, loans in process and loan loss allowances, and includes loans held for sale.
(2) Amount excludes non-performing loans.
(4) Net interest rate margin represents net interest income as a percentage of average interest-earning assets.
(5) Percentage is calculated based on dividends on common stocks divided by net earnings less dividends and accretion on preferred stocks.
Rate/Volume Analysis. Changes in our net interest income are a function of
changes in both rates and volumes of interest-earning assets and
interest-bearing liabilities. The following table sets forth information
regarding changes in our interest income and expense for the years indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) the total change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Year ended December 31, 2008 Year ended December 31, 2007
Compared to Compared to
Year ended December 31, 2007 Year ended December 31, 2006
Increase (Decrease) in Net Increase (Decrease) in Net
Interest Income Interest Income
Due to Due to Due to Due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest-earning assets:
Interest-earning deposits $ 29 $ (94 ) $ (65 ) $ 1 $ 9 $ 10
Federal funds sold and other
short term investments 43 (72 ) (29 ) (18 ) (3 ) (21 )
Investment securities, net (47 ) 2 (45 ) - 18 18
Loans receivable, net 5,110 (544 ) 4,566 2,365 1,478 3,843
Mortgage backed securities, net (263 ) 33 (230 ) (187 ) 95 (92 )
FHLB stock 93 (51 ) 42 7 3 10
Total interest-earning assets 4,965 (726 ) 4,239 2,168 1,600 3,768
Interest-bearing liabilities:
Money market deposits 243 (231 ) 12 218 106 324
Passbook deposits (8 ) 19 11 (165 ) (62 ) (227 )
NOW and other demand deposits 6 238 244 4 29 33
Certificate accounts 1,043 (1,189 ) (146 ) 730 746 1,476
FHLB advances 1,126 (150 ) 976 487 375 862
Junior subordinated debentures - (134 ) (134 ) - 22 22
Other borrowings 70 - 70 - - -
Total interest-bearing
liabilities 2,480 (1,447 ) 1,033 1,274 1,216 2,490
Change in net interest income $ 2,485 $ 721 $ 3,206 $ 894 $ 384 $ 1,278
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Provision for Loan Losses. The provision for loan losses represents the charge against current earnings that is determined by management as the amount needed to maintain an allowance for loan losses that management believes should be sufficient to absorb loan losses inherent in the Bank's loan portfolio. The size of the provision for each year is determined by management based upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, value of collateral and general economic factors.
For the year 2008, the provision for loan losses totaled $1.4 million, up $1.1 million, or 327.41%, from a year ago. The increase in the provision for loan losses was due to our continued loan growth, as well as the increase in our classified and non-performing loans. During 2008, our net loan portfolio grew $33.2 million and, as a result, an increase in the allowance for loan losses was deemed appropriate due to the increase in probable
incurred losses associated with growth in our loan portfolio. Non-performing assets, consisting of non-accrual and delinquent loans 90 or more days past due, at December 31, 2008 were $3.5 million compared to $34 thousand at December 31, 2007. We also recorded $222 thousand of specific allowance for loan loss allocations for a customer's deposit accounts that were overdrawn as of December 31, 2008. We had net recoveries of prior charge-offs of $136 thousand in 2008 whereas we experienced no net charge-offs in 2007.
Non-Interest Income. For the year 2008, non-interest income totaled $1.4 million, up $138 thousand, or 11.00%, from a year ago, primarily due to $296 thousand of higher net gains on mortgage banking activities primarily from recognizing mortgage servicing rights assets on loans sold to investors and $96 thousand of increased service charges for loan related fees and retail banking fees which were partially offset by a $260 thousand provision for losses on loans held for sale in 2008 that were delinquent at December 31, 2008.
Non-Interest Expense. For the year 2008, non-interest expense totaled $10.6 million, up $728 thousand, or 7.35%, from a year ago, primarily due to higher compensation and benefits expense, occupancy expense, office services and supplies, and other expense. The $108 thousand increase in compensation and benefits expense primarily reflected higher bonus expense, annual salary increases, staff additions and increased health insurance costs. Partially offsetting these increases were higher salaries that were deferred pursuant to FAS 91 as a result of increased loan originations and lower director fees, as the year 2007 included an accrual of $82 thousand for a director emeritus liability. Occupancy expense and office services and supplies expense increased a total of $330 thousand primarily due to the addition of a new branch this year. Other expense increased $258 thousand primarily due to increases in donations, sponsorships, promotion and FDIC assessments. Such increases were partially offset by lower losses on checking accounts and a $125 thousand expense recognized during the second quarter of 2007 to settle a personnel matter.
Income Taxes. The provision for income taxes for the year ended December 31, 2008 was $1.4 million as compared to $0.7 million in 2007. The effective tax rate was 37.94% for 2008 as compared to 32.20% for 2007. The income tax expense for 2007 was positively impacted by an increase in state tax credits. Income taxes are computed by applying the statutory federal income tax rate of 34% and the California income tax rate of 10.84% to earnings before income taxes. See Note 1 and Note 11 of the Notes to Consolidated Financial Statements for a further discussion of income taxes and an explanation of the factors that impact our effective tax rate due to adjustments related to our deferred income taxes.
Financial Condition
Total Assets. At December 31, 2008, assets totaled $407.9 million, up $51.1 million, or 14.33%, from year-end 2007. During 2008, net loans, including loans held for sale, increased $54.3 million, or 17.88%, and cash and cash equivalents increased $3.1 million, while securities available for sale and held to maturity decreased $6.9 million and FHLB stock decreased $0.4 million.
Loans. During 2008, net loans receivable, including loans held for sale, increased $54.3 million, or 17.88%, as loan originations and loan purchases exceeded loan repayments and loan sales. Loan originations, including purchases, for the year ended December 31, 2008 totaled $130.6 million, up $1.9 million, or 1.47%, from $128.7 million a year ago. Loan repayments, including loan sales, amounted to $75.9 million for the year ended December 31, 2008, up $5.0 million, or 7.07%, from $70.9 million for the year ended December 31, 2007.
Our loan portfolio consists primarily of first lien mortgage loans not insured or guaranteed by any government agency. At December 31, 2008, our gross loan portfolio totaled $338.2 million, of which approximately 45% was secured by commercial real estate properties, 26% was secured by multi-family properties, and 20% was secured by one- to four-family residential properties.
The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the total loan portfolio (held for investment and held for sale) by loan type at the dates indicated.
December 31,
2008 2007 2006 2005 2004
Percent Percent Percent Percent Percent
of of of of of
Amount total Amount total Amount total Amount total Amount total
(Dollars in thousands)
Real Estate:
One-to four-units $ 68,478 20.25 % $ 35,313 11.59 % $ 25,233 10.08 % $ 19,467 8.52 % $ 26,405 11.16 %
Five or more units 87,679 25.93 % 113,395 37.21 % 131,305 52.42 % 154,170 67.46 % 182,403 77.08 %
Construction 5,505 1.63 % 2,033 0.67 % 2,090 0.83 % 780 0.34 % 2,650 1.12 %
Commercial 150,902 44.62 % 130,590 42.85 % 78,072 31.17 % 53,276 23.31 % 24,290 10.26 %
Commercial 22,357 6.61 % 22,630 7.43 % 12,247 4.89 % - - - -
Loans secured by deposit
accounts 3,036 0.90 % 643 0.21 % 718 0.29 % 443 0.20 % 636 0.27 %
Other 210 0.06 % 141 0.04 % 812 0.32 % 388 0.17 % 250 0.11 %
Gross loans 338,167 100.00 % 304,745 100.00 % 250,477 100.00 % 228,524 100.00 % 236,634 100.00 %
Plus:
Premiums on loans
purchased 2 4 12 23 39
Less:
Loans in process 1,499 2,356 872 417 1,089
Deferred loan fees
(costs), net (213 ) 258 162 62 (110 )
Unamortized discounts 51 60 68 71 78
Allowance for loan
losses 3,559 2,051 1,730 1,455 1,420
Total loans held for
investment $ 333,273 $ 300,024 $ 247,657 $ 226,542 $ 234,196
Loans held for sale $ 24,576 $ 3,554 $ - $ - $ 1,145
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The following table sets forth the contractual maturities of our gross loans receivable at December 31, 2008 and does not reflect the effect of prepayments or scheduled principal amortization.
December 31, 2008
One-to- Five or Savings Gross
four more Commercial secured & loans
units units Construction real estate Commercial other receivable
(In thousands)
Amounts Due:
One year or less $ 706 $ 2,808 $ 2,052 $ 3,024 $ 6,879 $ 3,212 $ 18,681
After one year:
One year to five years 1,532 3,181 3,327 18,548 15,439 34 42,061
After five years 66,240 81,690 126 129,330 39 - 277,425
Total due after one year 67,772 84,871 3,453 147,878 15,478 34 319,486
Total $ 68,478 $ 87,679 $ 5,505 $ 150,902 $ 22,357 $ 3,246 $ 338,167
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The following table sets forth the dollar amount of gross loans receivable, excluding loans held for sale, at December 31, 2008 which are contractually due after December 31, 2009, and whether such loans have fixed interest rates or adjustable interest rates.
December 31, 2008
Adjustable Fixed Total
(Dollars in thousands)
Real estate loans:
One-to four-units $ 64,111 $ 3,661 $ 67,772
Five or more units 84,857 14 84,871
Construction 403 3,050 3,453
Commercial 137,656 10,222 147,878
Commercial 15,124 354 15,478
Other - 34 34
Total $ 302,151 $ 17,335 $ 319,486
% of total 94.57 % 5.43 % 100.00 %
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Origination, Purchase, Sale and Servicing of Loans. We originate and purchase loans for investment and for sale. Loan sales are made from the loans held for sale portfolio and from loans originated during the period that are designated as held for sale. It is our current practice to sell most single-family conforming fixed rate mortgage loans that we originate, retaining a limited amount in our portfolio. We also may sell commercial real estate and multi-family ARMs that we originate based upon our investment and liquidity needs and market opportunities. At December 31, 2008, we had 32 loans held for sale totaling $24.6 million. We typically retain the servicing rights associated with loans sold. The servicing rights are recorded as assets based upon the relative fair values of the servicing rights and the underlying loans and are amortized over the period of the related loan servicing income stream. At December 31, 2008 and 2007, we had $453 thousand and $134 thousand, respectively, in mortgage servicing rights.
We receive monthly loan servicing fees on loans sold and serviced for others that are payable by the loan purchaser out of loan collections in an amount equal to an agreed percentage of the monthly loan installments collected, plus late charges and certain other fees paid by the borrowers. Loan servicing activities include monthly loan payment collection, monitoring of insurance and tax payment status, responses to borrower information requests and dealing with loan delinquencies and defaults, including conducting loan foreclosures. At December 31, 2008 and 2007, we were servicing $43.2 million and $22.7 million, respectively, of loans for others.
From time to time, we purchase loans originated by other institutions based upon . . .
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