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| NARA > SEC Filings for NARA > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-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 nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
(Dollars in thousands, except share and per share data)
Income Statement Data:
Interest income $ 41,706 $ 41,690 $ 116,175 $ 127,837
Interest expense 17,473 16,937 50,243 54,318
Net interest income 24,233 24,753 65,932 73,519
Provision for loan losses 8,500 6,180 43,170 20,825
Net interest income after provision
for loan losses 15,733 18,573 22,762 52,694
Non-interest income 4,894 4,011 13,044 11,935
Non-interest expense 14,668 13,991 46,738 43,262
Income (loss) before income tax
provision (benefit) 5,959 8,593 (10,932 ) 21,367
Income tax provision (benefit) 2,018 3,611 (5,685 ) 8,759
Net income (loss) $ 3,941 $ 4,982 $ (5,247 ) $ 12,608
Dividends and discount accretion on
preferred stock $ (1,069 ) $ - $ (3,206 ) $ -
Net income (loss) available to common
stockholders $ 2,872 $ 4,982 $ (8,453 ) $ 12,608
Per Share Data:
Earnings (loss) per common share -
basic $ 0.11 $ 0.19 $ (0.32 ) $ 0.48
Earnings (loss) per common share -
diluted $ 0.11 $ 0.19 $ (0.32 ) $ 0.48
Book value, period end $ 11.02 $ 8.80 $ 11.02 $ 8.80
Common shares outstanding 26,316,576 26,201,560 26,316,576 26,201,560
Weighted average shares - basic 26,290,656 26,199,455 26,266,144 26,196,066
Weighted average shares - diluted 26,360,505 26,443,893 26,266,144 26,431,197
Statement of Financial Condition Data
- at Period End:
Assets $ 3,212,690 $ 2,597,652 $ 3,212,690 $ 2,597,652
Securities available for sale 744,044 313,393 744,044 313,393
Gross loans, net of deferred loan
fees and costs * - -
(excludes loans held for sale) 2,131,333 2,097,333 2,131,333 2,097,333
Deposits 2,487,070 1,946,843 2,487,070 1,946,843
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 290,015 230,513 290,015 230,513
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At or for the Three Months At or for the Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
(Dollars in thousands)
Average Balance Sheet Data:
Assets $ 3,208,774 $ 2,573,286 $ 2,972,856 $ 2,532,671
Securities available for sale and held
to maturity 737,471 290,641 565,059 288,909
Gross loans, including loans held for
sale * 2,117,910 2,113,917 2,106,172 2,088,851
Deposits 2,474,788 1,919,584 2,238,457 1,855,448
Stockholders' equity 284,676 232,918 288,928 231,133
Selected Performance Ratios:
Return on average assets (1) (7) 0.49 % 0.77 % -0.24 % 0.66 %
Return on average stockholders' equity
(1) (7) 5.54 % 8.56 % -2.42 % 7.27 %
Non-interest expense to average assets
(1) 1.83 % 2.17 % 2.10 % 2.28 %
Efficiency ratio (2) 50.36 % 48.64 % 59.18 % 50.63 %
Net interest margin (3) * 3.14 % 4.02 % 3.08 % 4.05 %
Regulatory Capital Ratios (4)
Leverage capital ratio (5) 9.95 % 10.42 % 9.95 % 10.42 %
Tier 1 risk-based capital ratio 13.51 % 11.84 % 13.51 % 11.84 %
Total risk-based capital ratio 14.77 % 13.08 % 14.77 % 13.08 %
Tangible common equity ratio (8) 6.81 % 8.72 % 6.81 % 8.72 %
Asset Quality Ratios: *
Allowance for loan losses to gross
loans, excluding loans held for sale 2.49 % 1.33 % 2.49 % 1.33 %
Allowance for loan losses to
non-performing loans 149.16 % 91.16 % 149.16 % 91.16 %
Total non-performing loans to gross
loans 1.67 % 1.45 % 1.67 % 1.45 %
Total non-performing assets to total
assets (6) 2.64 % 1.42 % 2.64 % 1.42 %
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* Excludes the guaranteed portion of delinquent SBA loans
(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 $67.8 million and $0 at September 30, 2009 and September 30 2008, respectively.
Overview
During the nine months ended September 30, 2009, we experienced strong growth in assets, primarily cash and cash equivalents and securities, supported by growth in deposits, especially during first half of the year. Our total assets grew by $540.6 million, or 20%, to $3.2 billion at September 30, 2009 from $2.7 billion at December 31, 2008. Our deposits grew $548.5 million, or $28%, to $2.5 billion at September 30, 2009 from $1.9 billion at December 31, 2008.
Net income (loss)
Our net income available to common stockholders for the three months ended September 30, 2009 was $2.9 million, or $0.11 per diluted share, compared to net income available to common stockholders of $5.0 million, or $0.19 per diluted share, for the same period of 2008, representing a decrease of $2.1 million, or 42%. The decrease in earnings is primarily due to the increases in provision for loan losses and dividends and discount accretion on preferred stock, partially offset by a decrease in income taxes.
Our net loss available to common stockholders for the nine months ended September 30, 2009 was ($8.5 million), or ($0.32) per diluted share, compared to net income available to common stockholders of $12.6 million, or $0.48 per diluted share, for the same period of 2008, representing a decrease of $21.1 million, or 167%. The decline in earnings during the period was due to the increases in provision for loan losses, non-interest expense and dividends and discount accretion on preferred stock as well as a decrease in net interest income, partially offset by a decrease in income taxes.
The annualized return on average assets was 0.49% for the third quarter of 2009, compared to 0.77% for the same period of 2008. The annualized return on average equity was 5.54% for the third quarter of 2009, compared to 8.56% for the same period of 2008. The efficiency ratio was 50.36% for the third quarter of 2009, compared to 48.64% for the same period of 2008.
The annualized return (loss) on average assets was (0.24%) for the nine months ended September 30, 2009, compared to 0.66% for the same period of 2008. The annualized return (loss) on average equity was (2.42%) for the nine months ended September 30, 2009, compared to 7.27% for the same period of 2008. The efficiency ratio was 59.18% for the nine months ended September 30, 2009, compared to 50.63% 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 $24.2 million for the three months ended September 30, 2009, a decrease of $520 thousand, or 2.1%, compared to $24.8 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 an increase in liquid assets and investment securities with lower yields resulting from the increase in deposits during 2009, offset by an increase in average interest earning assets.
Net interest income before provision for loan losses was $65.9 million for the nine months ended September 30, 2009, a decrease of $7.6 million, or 10.3%, compared to $73.5 million for the same period of 2008. The decrease was also 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 as previously noted.
Interest income for the third quarter of 2009 and 2008 was the same at $41.7 million. Interest income decreased $5.5 million due to a decrease in the average yield earned on average interest-earning assets (rate change). The decrease was offset by a $5.5 million increase in interest income due to an increase in the volume of average interest-earning assets (volume change).
Interest income for the nine months ended September 30, 2009 was $116.2 million, which represented a decrease of $11.7 million, or 9.1%, compared to $127.8 million for the same period of 2008. The decrease was the result of a $22.8 million decrease in interest income due to a decrease in the average yield earned on average interest-earning assets (rate change), offset by a $11.1 million increase in interest income due to an increase in the volume of average interest-earning assets (volume change).
Interest expense for the third quarter of 2009 was $17.5 million, a decrease of $536 thousand, or 3.2%, compared to interest expense of $16.9 million for the same quarter of 2008. The decrease was primarily the result of a $3.4 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities (rate change), offset by $3.9 million increase in interest expense due to an increase in the volume of average interest-bearing liabilities (volume change).
Interest expense for the nine months ended September 30, 2009 was $50.2 million, a decrease of $4.1 million, or 7.5%, compared to interest expense of $54.3 million for the same period of 2008. The decrease was primarily the result of a $13.1 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities (rate change), offset by $9.0 million increase in interest expense due to an increase in the volume of average interest-bearing liabilities (volume change).
Net Interest Margin
During the third quarter ended September 30, 2009, our net interest margin decreased 88 basis points to 3.14% from 4.02% for the same quarter of last year. The weighted average yield on the loan portfolio for the third quarter 2009 decreased 87 basis points to 6.28% from 7.15% 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 third quarter 2008. The decrease in net interest margin was also attributable to higher levels of lower yielding investment securities and other short-term investments, such as overnight federal funds sold or interest-earning cash reserves on deposit at the Federal Reserve Bank 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 third quarter 2009 decreased 25 basis points to 4.37% from 4.62% for the same quarter 2008. The decrease was primarily due to downward repricing of variable rate agency CMO investment securities tied to one month LIBOR, as such rates declined over the past 12 months, and the rebalancing our investment portfolio to shorter duration securities to mitigate against interest rate risk. The variable rate agency CMO portfolio was $67.5 million at September 30, 2009, yielding 2.72%, compared to $112.9 million at September 30, 2008, yielding 4.12%.
The weighted average cost of deposits for third quarter 2009 decreased 50 basis points to 2.20% from 2.70% for the same quarter last year. The cost of time deposits decreased 64 basis points to 2.71% from 3.35%, accounting for a substantial portion of the decrease.
Following are selected weighted average data on a spot rate basis at September 30, 2009 and 2008:
September 30, September 30,
2009 2008
Weighted average loan portfolio yield (excluding
discounts) 6.19 % 6.87 %
Weighted average securities available-for-sale
portfolio yield 4.35 % 4.89 %
Weighted average cost of deposits 2.06 % 2.69 %
Weighted average cost of total interest-bearing
deposits 2.38 % 3.29 %
Weighted average cost of FHLB advances 3.67 % 3.78 %
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Prepayment penalty income for the third quarter of 2009 and 2008 was $173 thousand and $434 thousand, respectively. Non-accrual interest income reversed was $328 thousand and $273 thousand for the third quarter ended September 30, 2009 and 2008, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for third quarter 2009 and 2008 was 3.16% and 4.00%, 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 generates higher levels of prepayment penalty income. However, the deteriorating economic environment in recent years has slowed sales of properties and businesses resulting in lower loan pay-offs. It is difficult to determine the trend in prepayment penalty income given these two competing factors.
During the nine months ended September 30, 2009, the net interest margin decreased 97 basis points to 3.08% from 4.05% for the same period of last year. The weighted average yield on the loan portfolio for the nine months ended September 30, 2009 decreased 124 basis points to 6.16% from 7.40% for the same period of last year. The decrease was due to the reasons previously explained in the quarterly analysis. The weighted average yield on investment securities for the nine months ended September 30, 2009 decreased 62 basis points to 4.27% from 4.89% for the same period in 2008.
The weighted average cost of deposits for the nine months ended September 30, 2009 decreased 69 basis points to 2.31% from 3.00% for the same period last year. The cost of time deposits decreased 110 basis points to 2.75% from 3.85%, accounting for a substantial portion of the decrease.
Prepayment penalty income for the nine months ended September 30, 2009 and 2008 was $465 thousand and $1.2 million, respectively. Non-accrual interest income reversed was $888 thousand and $406 thousand for the nine months ended September 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 nine months ended September 30, 2009 and 2008 was 3.10% 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
September 30, 2009 September 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) $ 2,117,910 $ 33,242 6.28 % $ 2,113,917 $ 37,801 7.15 %
Securities available for sale (3) 737,471 8,063 4.37 % 290,641 3,358 4.62 %
FRB and FHLB stock and other
investments 202,131 277 0.55 % 23,052 369 6.40 %
Federal funds sold 30,870 124 1.61 % 32,626 162 1.99 %
Total interest earning assets $ 3,088,382 $ 41,706 5.40 % $ 2,460,236 $ 41,690 6.78 %
INTEREST BEARING LIABILITIES:
Deposits:
Demand, interest-bearing $ 549,991 $ 2,569 1.87 % $ 291,134 $ 2,121 2.91 %
Savings 134,998 1,040 3.08 % 140,295 1,229 3.50 %
Time deposits:
$100,000 or more 811,007 4,799 2.37 % 783,151 6,441 3.29 %
Other 670,465 5,230 3.12 % 362,804 3,157 3.48 %
Total time deposits 1,481,472 10,029 2.71 % 1,145,955 9,598 3.35 %
Total interest bearing deposits 2,166,461 13,638 2.52 % 1,577,384 12,948 3.28 %
FHLB advances 356,848 3,355 3.76 % 350,668 3,349 3.82 %
Other borrowings 37,769 480 5.08 % 37,741 640 6.78 %
Total interest bearing liabilities 2,561,078 $ 17,473 2.73 % 1,965,793 $ 16,937 3.45 %
Non-interest bearing demand deposits 308,327 342,200
Total funding liabilities / cost of
funds $ 2,869,405 2.44 % $ 2,307,993 2.94 %
Net interest income/net interest
spread $ 24,233 2.67 % $ 24,753 3.33 %
Net interest margin 3.14 % 4.02 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) (4) 3.18 % 4.07 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) and prepayment fee
income (4) (5) 3.16 % 4.00 %
Cost of deposits:
Non-interest demand deposits $ 308,327 $ - $ 342,200 $ -
Interest bearing deposits 2,166,461 13,638 2.52 % 1,577,384 12,948 3.28 %
Total deposits $ 2,474,788 $ 13,638 2.20 % $ 1,919,584 $ 12,948 2.70 %
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* Annualized
(1) Interest income on loans includes loan fees.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale, but excludes the guaranteed portion of delinquent SBA loans.
(3) Interest income and yields are not presented on a tax-equivalent basis.
(4) Non-accrual interest income reversed was $328 thousand and $273 thousand for the three months ended September 30, 2009 and 2008, respectively.
(5) Loan prepayment fee income excluded was $173 thousand and $434 thousand for the three months ended September 30, 2009 and 2008, respectively.
Nine months ended Nine months ended
September 30, 2009 September 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) $ 2,106,172 $ 97,375 6.16 % $ 2,088,851 $ 115,864 7.40 %
Securities available for sale (3) 565,059 18,093 4.27 % 288,909 10,597 4.89 %
FRB and FHLB stock and other
investments 173,315 555 0.43 % 23,765 1,056 5.92 %
Federal funds sold 13,128 152 1.54 % 20,605 320 2.07 %
Total interest earning assets $ 2,857,674 $ 116,175 5.42 % $ 2,422,130 $ 127,837 7.04 %
INTEREST BEARING LIABILITIES:
Deposits:
Demand, interest-bearing $ 437,224 $ 7,251 2.21 % $ 266,872 $ 5,851 2.92 %
Savings 121,480 3,056 3.35 % 140,018 3,877 3.69 %
Time deposits:
$100,000 or more 690,649 12,452 2.40 % 822,548 22,389 3.63 %
Other 690,686 16,069 3.10 % 286,841 9,616 4.47 %
Total time deposits 1,381,335 28,521 2.75 % 1,109,389 32,005 3.85 %
Total interest bearing deposits 1,940,039 38,828 2.67 % 1,516,279 41,733 3.67 %
FHLB advances 358,434 9,853 3.67 % 372,294 10,543 3.78 %
Other borrowings 37,920 1,562 5.49 % 37,882 2,042 7.19 %
Total interest bearing liabilities 2,336,393 $ 50,243 2.87 % 1,926,455 $ 54,318 3.76 %
Non-interest bearing demand
deposits 298,418 339,169
Total funding liabilities / cost of
funds $ 2,634,811 2.54 % $ 2,265,624 3.20 %
Net interest income/net interest
spread $ 65,932 2.55 % $ 73,519 3.28 %
Net interest margin 3.08 % 4.05 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) (4) 3.12 % 4.07 %
Net interest margin, excluding
effect of non-accrual loan
income(expense) and prepayment fee
income (4) (5) 3.10 % 4.00 %
Cost of deposits:
Non-interest demand deposits $ 298,418 $ - $ 339,169 $ -
Interest bearing deposits 1,940,039 38,828 2.67 % 1,516,279 41,733 3.67 %
Total deposits $ 2,238,457 $ 38,828 2.31 % $ 1,855,448 $ 41,733 3.00 %
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* Annualized
(1) Interest income on loans includes loan fees.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale, but excludes the guaranteed portion of delinquent SBA loans.
(3) Interest income and yields are not presented on a tax-equivalent basis. . . .
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