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| NARA > SEC Filings for NARA > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
The following is management's discussion and analysis of the major factors that caused changes in our consolidated results of operations and financial condition as of and for the three and six months ended June 30, 2009. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.
GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the
periods indicated:
At or for the Three Months At or for the Six Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
(Dollars in thousands, except share and per share data)
Income Statement Data:
Interest income $ 38,410 $ 41,787 $ 74,469 $ 86,147
Interest expense 17,150 17,631 32,770 37,381
Net interest income 21,260 24,156 41,699 48,766
Provision for loan losses 19,000 9,652 34,670 14,645
Net interest income after provision
for loan losses 2,260 14,504 7,029 34,121
Non-interest income 3,785 3,325 8,150 7,924
Non-interest expense 16,822 14,840 32,070 29,271
Income (loss) before income tax
provision (benefit) (10,777 ) 2,989 (16,891 ) 12,774
Income tax provision (benefit) (4,769 ) 1,136 (7,703 ) 5,148
Net income (loss) $ (6,008 ) $ 1,853 $ (9,188 ) $ 7,626
Dividends and discount accretion on
preferred stock $ (1,069 ) $ - $ (2,137 ) $ -
Net income (loss) available to common
stockholders $ (7,077 ) $ 1,853 $ (11,325 ) $ 7,626
Per Share Data:
Earnings (loss) per common share -
basic $ (0.27 ) $ 0.07 $ (0.43 ) $ 0.29
Earnings (loss) per common share -
diluted $ (0.27 ) $ 0.07 $ (0.43 ) $ 0.29
Book value (period end, excluding
preferred stock and warrants) $ 8.14 $ 8.69 $ 8.14 $ 8.69
Common shares outstanding 26,256,960 26,197,560 26,256,960 26,197,560
Weighted average shares - basic 26,256,960 26,195,035 26,253,627 26,194,353
Weighted average shares - diluted 26,256,960 26,450,222 26,253,627 26,424,045
Statement of Financial Condition Data
- at Period End:
Assets $ 3,260,809 $ 2,573,584 $ 3,260,809 $ 2,573,584
Securities available for sale 745,792 291,343 745,792 291,343
Gross loans, net of deferred loan
fees and costs - -
(excludes loans held for sale) 2,080,312 2,120,706 2,080,312 2,120,706
Deposits 2,439,795 1,928,580 2,439,795 1,928,580
Federal Home Loan Bank borrowings 350,000 350,000 350,000 350,000
Subordinated debentures 39,268 39,268 39,268 39,268
Stockholders' equity 281,419 227,679 281,419 227,679
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At or for the Three Months At or for the Six Months
Ended June 30, Ended June 30,
2009 2008 2009 2008
(Dollars in thousands)
Average Balance Sheet Data:
Assets $ 3,007,256 $ 2,545,239 $ 2,852,961 $ 2,512,140
Securities available for sale and held
to maturity 530,322 283,782 477,424 288,033
Gross loans, including loans held for
sale 2,092,809 2,096,825 2,100,206 2,076,180
Deposits 2,274,661 1,874,979 2,118,335 1,823,025
Stockholders' equity 290,959 232,865 291,094 230,232
Selected Performance Ratios:
Return on average assets (1) (7) -0.80 % 0.29 % -0.64 % 0.61 %
Return on average stockholders' equity
(1) (7) -8.26 % 3.18 % -6.31 % 6.62 %
Non-interest expense to average assets
(1) 2.24 % 2.33 % 2.25 % 2.33 %
Efficiency ratio (2) 67.17 % 54.00 % 64.33 % 51.63 %
Net interest margin (3) 2.94 % 3.97 % 3.04 % 4.06 %
Regulatory Capital Ratios (4)
Leverage capital ratio (5) 10.50 % 10.35 % 10.50 % 10.35 %
Tier 1 risk-based capital ratio 13.37 % 11.53 % 13.37 % 11.53 %
Total risk-based capital ratio 14.63 % 12.76 % 14.63 % 12.76 %
Tangible common equity ratio (8) 6.45 % 8.68 % 6.45 % 8.68 %
Asset Quality Ratios:
Allowance for loan losses to gross
loans, excluding loans held for sale 2.42 % 1.32 % 2.42 % 1.32 %
Allowance for loan losses to
non-performing loans 163.17 % 110.61 % 163.17 % 110.61 %
Total non-performing loans to gross
loans 1.48 % 1.19 % 1.48 % 1.19 %
Total non-performing assets to total
assets (6) 2.20 % 1.03 % 2.20 % 1.03 %
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(1) Annualized.
(2) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income and non-interest income.
(3) Net interest margin is calculated by dividing annualized net interest income by average total interest-earning assets.
(4) The required ratios for a "well-capitalized" institution are 5% leverage capital, 6% tier I risk-based capital and 10% total risk-based capital.
(5) Calculations are based on average quarterly asset balances.
(6) Non-performing assets include non-accrual loans, loans past due 90 or more and still accruing interest, other real estate owned, and restructured loans.
(7) Based on net income (loss) before effect of dividends and discount accretion on preferred stock
(8) Excludes TARP preferred stock and stock warrants of $67 million
Overview
During the first half of 2009, we experienced strong growth in assets, primarily cash and cash equivalents and securities, supported by growth in deposits. Our total assets grew by $588.8 million, or 22.0%, to $3.3 billion at June 30, 2009 from $2.7 billion at December 31, 2008. Our deposits grew $501.2 million.
Net income (loss)
Our net loss available to common stockholders for the three months ended June 30, 2009 was ($7.1 million), or ($0.27) per diluted share, compared to net income of $1.9 million, or $0.07 per diluted share, for the same period of 2008, representing a decrease of $8.9 million, or 482%. The decrease in earnings is primarily due to the increases in provision for loan losses, non-interest expenses, and a decrease in net interest income, partially offset by an income tax benefit.
Our net loss available to common stockholders for the six months ended June 30, 2009 was ($11.3 million), or ($0.43) per diluted share, compared to net income of $7.6 million, or $0.29 per diluted share, for the same period of 2008, representing a decrease of $18.9 million, or 248%. The decline in earnings during the period was also due to the same reasons mentioned above.
The annualized return (loss) on average assets was (0.80%) for the second quarter of 2009, compared to 0.29% for the same period of 2008. The annualized return (loss) on average equity was (8.26%) for the second quarter of 2009, compared to 3.18% for the same period of 2008. The efficiency ratio was 67.17% for the second quarter of 2009, compared to 54.00% for the same period of 2008.
The annualized return (loss) on average assets was (0.64%) for the first half of
2009, compared to 0.61% for the same period of 2008. The annualized return
(loss) on average equity was (6.31%) for the first half of 2009, compared to
6.62% for the same period of 2008. The efficiency ratio was 64.33% for the first
half of 2009, compared to 51.63% for the same period of 2008.
Net Interest Income and Net Interest Margin
Net Interest Income and Expense
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is defined as net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities (interest-bearing deposits and borrowed funds). Net interest income is affected by changes in the volume of interest-earning assets and funding liabilities as well as by changes in the yield earned on interest-earning assets and the rates paid on interest-bearing liabilities.
Net interest income before provision for loan losses was $21.3 million for the three months ended June 30, 2009, a decrease of $2.9 million, or 12.0%, compared to $24.2 million for the same period of 2008. The decrease is primarily due to the decline in net interest margin. The decline in the net interest margin was caused by a decrease in the prime rate and a significant shift in asset allocation from higher-yielding loan receivables to lower-yielding liquid assets and investment securities during the quarter. During the second quarter of 2009, we experienced a significant growth in our deposits, which were subsequently invested in those liquid assets and securities.
Net interest income before provision for loan losses was $41.7 million for the six months ended June 30, 2009, a decrease of $7.1 million, or 14.5%, compared to $48.8 million for the same period of 2008. The decrease is primarily due to a decline in net interest margin. The decline in net interest margin during this period was also due to the same reasons mentioned above.
Interest income for the second quarter of 2009 was $38.4 million, which represented a decrease of $3.4 million, or 8.1%, compared to $41.8 million for the same quarter of 2008. The decrease was the result of a $6.4 million decrease in interest income due to a decrease in the average yield earned on average interest-earning assets (rate change), offset by a $3.0 million increase in interest income due to an increase in the volume of those average interest-earning assets (volume change).
Interest income for the first half of 2009 was $74.5 million, which represented a decrease of $11.7 million, or 13.6%, compared to $86.1 million for the same period of 2008. The decrease was the result of a $17.4 million decrease in interest income due to a decrease in the average yield earned on average interest-earning assets (rate change), offset by a $5.7 million increase in interest income due to an increase in the volume of those average interest-earning assets (volume change).
Interest expense for the second quarter of 2009 was $17.2 million, a decrease of $481 thousand, or 2.7%, compared to interest expense of $17.6 million for the same quarter of 2008. The decrease was primarily the result of a $3.5 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities (rate change), offset by $3.0 million increase in interest expense due to an increase in the volume of average interest-bearing liabilities (volume change).
Interest expense for the first half of 2009 was $32.8 million, a decrease of $4.6 million, or 12.3%, compared to interest expense of $37.4 million for the same period of 2008. The decrease was primarily the result of a $9.6 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities (rate change), offset by $5.0 million increase in interest expense due to an increase in the volume of average interest-bearing liabilities (volume change).
Net Interest Margin
During the three months ended June 30, 2009, our net interest margin decreased 103 basis points to 2.94% from 3.97% for the same quarter of last year. The weighted average yield on the loan portfolio for the second quarter 2009 decreased 99 basis points to 6.20% from 7.19% for the same quarter of last year. The decrease was the result of the prime rate-based portion of the loan portfolio repricing downward as market interest rates continued to decline due to reductions in interest rates by the Federal Reserve throughout 2008. The prime rate declined 175 basis points since the second quarter 2008. The decrease in net interest margin was also attributable to a shift in asset allocation from loans into lower yielding investment securities and other short-term investments, such as overnight federal funds sold or interest-earning cash reserve on deposit at the FRB interest-earning account. The change in asset mix was part of a plan to improve our liquidity and strengthen the balance sheet.
The weighted average yield on our investment securities for the second quarter 2009 decreased 72 basis points to 4.31% from 5.03% for the same quarter 2008. The decrease was mainly attributable to a lower yield on our variable rate GSE CMO portfolio, which monthly resetting coupons are indexed to one month LIBOR plus a spread. A simple average rate of one month LIBOR decreased by more than 200 basis points to 0.37% for the second quarter 2009, compared to 2.59% for the same quarter 2008.
The weighted average cost of deposits for second quarter 2009 decreased 55 basis points to 2.35% from 2.90% for the same quarter last year. The cost of time deposits decreased 92 basis points to 2.76% from 3.68%, accounting for a substantial portion of the decrease.
Following are selected weighted average data on a spot rate basis at June 30, 2009 and 2008:
June 30, June 30,
2009 2008
Weighted average loan portfolio yield (excluding discounts) 6.13 % 6.87 %
Weighted average securities available-for-sale portfolio yield 4.60 % 4.88 %
Weighted average cost of time deposits 2.76 % 3.45 %
Weighted average cost of deposits 2.27 % 2.75 %
Weighted average cost of total interest-bearing deposits 2.62 % 3.36 %
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Prepayment penalty income for second quarter 2009 and 2008 was $145 thousand and $580 thousand, respectively. Non-accrual interest income reversed was $169 thousand and $292 thousand for the second quarter ended June 30, 2009 and 2008, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for second quarter 2009 and 2008 was 2.94% and 3.92%, respectively.
Prepayment penalty income will vary with the level of loans paid off. Generally as interest rates decline, the level of pay-offs increase as fixed rate borrowers refinance their loans, which generate higher levels of prepayment penalty income. However, the deteriorating economic environment in recent years has slowed sales of properties and businesses causing lower loan pay-offs. It is difficult to determine the trend in prepayment penalty income given these two competing factors.
During the six months ended June 30, 2009, the net interest margin decreased 102 basis points to 3.04% from 4.06% for the same period of last year. The weighted average yield on the loan portfolio for the six months ended June 30, 2009 decreased 141 basis points to 6.11% from 7.52% for the same period of last year. The decrease was due to the reasons explained previously in the quarterly analysis. The weighted average yield on investment securities for the six months ended June 30, 2009 decreased 83 basis points to 4.20% from 5.03% for the same period in 2008.
The weighted average cost of deposits for the six months ended June 30, 2009 decreased 78 basis points to 2.38% from 3.16% for the same period last year. The cost of time deposits decreased 133 basis points to 2.78% from 4.11%, accounting for a substantial portion of the decrease.
Prepayment penalty income for the six months ended June 30, 2009 and 2008 was $292 thousand and $801 thousand, respectively. Non-accrual interest income reversed was $560 thousand and $133 thousand for the six months ended June 30, 2009 and 2008, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for the six months ended June 30, 2009 and 2008 was 3.06% and 4.00%, respectively.
The following table presents our condensed consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:
Three months ended Three months ended
June 30, 2009 June 30, 2008
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate * Balance Expense Rate *
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
Loans (1) (2) $ 2,092,809 $ 32,461 6.20 % $ 2,096,825 $ 37,699 7.19 %
Securities available for sale (3) 530,322 5,710 4.31 % 283,782 3,571 5.03 %
FRB and FHLB stock and other
investments 266,179 212 0.32 % 25,311 371 5.86 %
Federal funds sold 5,934 27 1.82 % 27,552 146 2.12 %
Total interest earning assets $ 2,895,244 $ 38,410 5.31 % $ 2,433,470 $ 41,787 6.87 %
INTEREST BEARING LIABILITITES:
Deposits:
Demand, interest-bearing $ 416,561 $ 2,417 2.32 % $ 263,094 $ 1,819 2.77 %
Savings 117,948 1,008 3.42 % 143,161 1,340 3.74 %
Time deposits:
$100,000 or more 679,064 4,109 2.42 % 769,301 7,046 3.66 %
Other 763,999 5,831 3.05 % 362,194 3,373 3.73 %
Total time deposits 1,443,063 9,940 2.76 % 1,131,495 10,419 3.68 %
Total interest bearing deposits 1,977,572 13,365 2.70 % 1,537,750 13,578 3.53 %
FHLB advances 350,000 3,263 3.73 % 365,379 3,413 3.74 %
Other borrowings 37,764 522 5.53 % 38,214 640 6.70 %
Total interest bearing liabilities 2,365,336 $ 17,150 2.90 % 1,941,343 $ 17,631 3.63 %
Non-interest bearing demand deposits 297,089 337,229
Total funding liabilities / cost of
funds $ 2,662,425 2.58 % $ 2,278,572 3.10 %
Net interest income/net interest
spread $ 21,260 2.41 % $ 24,156 3.24 %
Net interest margin 2.94 % 3.97 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) (4) 2.96 % 4.02 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) and prepayment fee
income (4) (5) 2.94 % 3.92 %
Cost of deposits:
Non-interest demand deposits $ 297,089 $ - $ 337,229 $ -
Interest bearing deposits 1,977,572 13,365 2.70 % 1,537,750 13,578 3.53 %
Total deposits $ 2,274,661 $ 13,365 2.35 % $ 1,874,979 $ 13,578 2.90 %
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* Annualized
(1) Interest income on loans includes loan fees and net interest settlement from interest rate swaps.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale.
(3) Interest income and yields are not presented on a tax-equivalent basis.
(4) Non-accrual interest income reversed was $169 thousand and $292 thousand for the three months ended June 30, 2009 and 2008, respectively.
(5) Loan prepayment fee income excluded was $145 thousand and $580 thousand for the three months ended June 30, 2009 and 2008, respectively.
Six months ended Six months ended
June 30, 2009 June 30, 2008
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate * Balance Expense Rate *
(Dollars in thousands)
INTEREST EARNINGS ASSETS:
Loans (1) (2) $ 2,100,206 $ 64,133 6.11 % $ 2,076,180 $ 78,063 7.52 %
Securities available for sale (3) 477,424 10,030 4.20 % 288,033 7,239 5.03 %
FRB and FHLB stock and other
investments 158,692 278 0.35 % 24,126 686 5.69 %
Federal funds sold 4,110 28 1.36 % 14,529 159 2.19 %
Total interest earning assets $ 2,740,432 $ 74,469 5.43 % $ 2,402,868 $ 86,147 7.17 %
INTEREST BEARING LIABILITITES:
Deposits:
Demand, interest-bearing $ 379,905 $ 4,681 2.46 % $ 254,607 $ 3,730 2.93 %
Savings 114,609 2,016 3.52 % 139,878 2,648 3.79 %
Time deposits:
$100,000 or more 629,474 7,654 2.43 % 776,227 15,948 4.11 %
Other 700,963 10,839 3.09 % 314,677 6,459 4.11 %
Total time deposits 1,330,437 18,493 2.78 % 1,090,904 22,407 4.11 %
Total interest bearing deposits 1,824,951 25,190 2.76 % 1,485,389 28,785 3.88 %
FHLB advances 359,252 6,499 3.62 % 383,264 7,195 3.75 %
Other borrowings 37,985 1,081 5.69 % 37,917 1,401 7.39 %
Total interest bearing liabilities 2,222,188 $ 32,770 2.95 % 1,906,570 $ 37,381 3.92 %
Non-interest bearing demand deposits 293,384 337,636
Total funding liabilities / cost of
funds $ 2,515,572 2.61 % $ 2,244,206 3.33 %
Net interest income/net interest
spread $ 41,699 2.49 % $ 48,766 3.25 %
Net interest margin 3.04 % 4.06 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) (4) 3.08 % 4.07 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) and prepayment fee
income (4) (5) 3.06 % 4.00 %
Cost of deposits:
Non-interest demand deposits $ 293,384 $ - $ 337,636 $ -
Interest bearing deposits 1,824,951 25,190 2.76 % 1,485,389 28,785 3.88 %
Total deposits $ 2,118,335 $ 25,190 2.38 % $ 1,823,025 $ 28,785 3.16 %
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* Annualized
(1) Interest income on loans includes loan fees and net interest settlement from interest rate swaps.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale.
(3) Interest income and yields are not presented on a tax-equivalent basis.
(4) Non-accrual interest income reversed was $560 thousand and $133 thousand for the six months ended June 30, 2009 and 2008, respectively.
(5) Loan prepayment fee income excluded was $292 thousand and $801 thousand for the six months ended June 30, 2009 and 2008, respectively.
The following table illustrates the changes in our interest income, interest expense, and amounts attributable to variations in interest rates and volumes . . .
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