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| BBNK > SEC Filings for BBNK > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
In addition to the historical information, this quarterly report contains
certain forward-looking information 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, and which are subject to the "Safe Harbor" created by
those sections. The reader of this quarterly report should understand that all
such forward-looking statements are subject to various uncertainties and risks
that could affect their outcome. The Company's actual results could differ
materially from those suggested by such forward-looking statements. Such risks
and uncertainties include, among others, (1) competitive pressure in the banking
industry increases significantly; (2) changes in interest rate environment
reduces margin; (3) general economic conditions, either nationally or regionally
are less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (4) changes in the regulatory environment; (5)
changes in business conditions and inflation; (6) costs and expenses of
complying with the internal control provisions of the Sarbanes-Oxley Act and our
degree of success in achieving compliance; (7) changes in securities markets;
(8) future credit loss experience; (9) civil disturbances of terrorist threats
or acts, or apprehension about possible future occurrences of acts of this type;
and (10) the involvement of the United States in war or other
hostilities. Therefore, the information in this quarterly report should be
carefully considered when evaluating the business prospects of the Company.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure that valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Loan Losses: The allowance for loan losses represents management's
best estimate of losses inherent in the existing loan portfolio. The allowance
for loan losses is increased by the provision for loan losses charged to expense
and reduced by loans charged off, net of recoveries. The provision for loan
losses is determined based on management's assessment of several factors:
reviews and evaluation of specific loans, changes in the nature and volume of
the loan portfolio, current economic conditions and the related impact on
specific borrowers and industry groups, historical loan loss experiences, the
level of classified and nonperforming loans and the results of regulatory
examinations.
Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.
The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when, in the opinion of management, there is significant doubt as to the collectability of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection.
The Company has the ability and the intent to sell all or a portion of certain SBA loans in the loan portfolio and, as such, carries the saleable portion of these loans at the lower of aggregate cost or fair value. At September 30, 2009 and December 31, 2008, the fair value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried at aggregate cost.
In calculating gain on the sale of SBA loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company's assumptions are validated by reference to external market information.
Available-for-sale securities: the fair value of most securities classified as available-for-sale is based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.
Supplemental Employee Retirement Plan: The Company has entered into supplemental employee retirement agreements with certain executive and senior officers. The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement, and expected benefit levels. Should these estimates prove materially wrong, we could incur additional or reduced expense to provide the benefits.
Selected Financial Data
The following table reflects selected financial data and ratios as of and for
the quarters and nine months ended September 30, 2009 and 2008.
(dollars in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
Statement of Operations Data: 2009 2008 2009 2008
Interest income $ 10,515 $ 14,258 $ 33,951 $ 45,227
Interest expense 1,523 3,271 5,616 10,484
Net interest income 8,992 10,987 28,335 34,743
Provision for credit losses 650 19,000 8,300 27,570
Net interest income after provision
for credit losses 8,342 (8,013 ) 20,035 7,173
Other income 1,689 1,955 8,019 5,341
Other expenses 9,202 9,802 28,008 28,049
Income (loss) before income taxes 829 (15,860 ) 46 (15,535 )
Income taxes 290 (6,655 ) 16 (6,525 )
Net income (loss) $ 539 $ (9,205 ) $ 30 $ (9,010 )
Preferred dividends 1,064 - 3,138 -
Net income available to
common shareholders $ (525 ) $ (9,205 ) $ (3,108 ) $ (9,010 )
Per Share Data:
Basic earnings (loss) per share $ (0.08 ) $ (1.41 ) $ (0.47 ) $ (1.38 )
Diluted earnings (loss) per share $ (0.08 ) (1.41 ) (0.47 ) (1.38 )
Book value per common share 7.83 8.74 7.83 8.74
Cash dividend per common share - - - -
Balance Sheet Data:
Balance sheet totals:
Assets $ 834,828 $ 855,407
Loans, net 555,254 667,142
Deposits 692,059 738,739
Shareholders' equity 108,701 57,691
Average balance sheet amounts:
Assets $ 854,247 $ 858,555 $ 874,329 $ 814,683
Gross loans 589,343 705,402 630,354 684,690
Deposits 714,497 763,361 722,275 715,224
Shareholders' equity 109,160 67,222 110,933 68,017
Selected Ratios:
Return on average assets 0.25 % -4.27 % 0.00 % -1.48 %
Return on average equity 1.96 % -54.48 % 0.04 % -17.69 %
Efficiency ratio 86.15 % 75.74 % 77.04 % 69.98 %
Total risk based capital ratio 19.57 % 10.27 %
Net chargeoffs to average gross loans 0.30 % 2.31 % 1.58 % 2.69 %
Allowance for loan losses to total loans 2.95 % 2.59 %
Average equity to average assets 12.78 % 7.83 % 12.69 % 8.35 %
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Summary of Financial Results - Quarter ended September 30, 2009
The Company reported a net loss available to common shareholders of $(0.5) million, or $(0.08) per diluted common share, for the three months ended September 30, 2009 representing a decrease in net loss of $8.7 million, or 94.3%, compared to a net loss of $9.2 million, or $(1.41) per diluted common share, for the same period one year ago. The net loss available to common shareholders was impacted by preferred dividends of $1.1 million during the third quarter of 2009. There were no preferred dividends during the third quarter of 2008. The increase in earnings resulted primarily from a decrease in provision for credit losses.
The table below highlights the changes in the nature and sources of income and expense.
Three months ended
September 30, Increase
(dollars in thousands) 2009 2008 (Decrease)
Interest income $ 10,515 $ 14,258 $ (3,743 )
Interest expense 1,523 3,271 (1,748 )
Net interest income 8,992 10,987 (1,995 )
Provision for credit losses 650 19,000 (18,350 )
Net interest income after provision for credit losses 8,342 (8,013 ) 16,355
Other income 1,689 1,955 (266 )
Other expenses 9,202 9,802 (600 )
Income (loss) before income taxes 829 (15,860 ) 16,689
Income taxes 290 (6,655 ) 6,945
Net income (loss) $ 539 $ (9,205 ) $ 9,744
Preferred dividends 1,064 0 1,064
Net income (loss) available to common shareholders $ (525 ) $ (9,205 ) $ 8,680
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Net Interest Income and Margin
Net interest income, the difference between interest earned on loans and investments and interest paid on deposits is the principal component of the Company's earnings. Net interest income is affected by changes in the nature and volume of earning assets held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities.
Net interest income for the quarter ended September 30, 2009 was $9.0 million, which was comprised of $10.5 million in interest income and $1.5 million in interest expense. Net interest income for the quarter ended September 30, 2008 was $11.0 million, which was comprised of $14.3 million in interest income and $3.3 million in interest expense. Net interest income for the quarter ended September 30, 2009 represented a decrease of $2.0 million or 18.2% from the same period one year earlier.
The composition of the average balance sheet impacts growth in net interest income. For the quarter ended September 30, 2009 average earning assets of $813.6 million represented a decrease of $7.6 million, or 0.9%, compared to $821.2 million for the same period in 2008. The Company's loan-to-deposit ratio, a measure of leverage, averaged 82.48% during the quarter ended September 30, 2009, which represented a decrease compared to an average of 92.41% for the same quarter of 2008 as a result of slower loan growth relative to deposit funding.
Changes in short-term interest rates also impact growth in net interest income as the interest rate earned on a majority of the Company's assets, specifically the loan portfolio, adjust with changes in short-term market rates. As such, the nature of the Company's balance sheet is that, over time as short-term interest rates change, income on interest earning assets has a greater impact on net interest income than interest paid on liabilities. The Company's prime rate averaged 3.25% in the quarter ended September 30, 2009 compared to 5.00% in the same period one year earlier.
The Company's net interest margin (net interest income divided by average earning assets) for the quarter ended September 30, 2009 was 4.38% compared to 5.32% in the same period one year earlier. The decrease in net interest margin from 2008 to 2009 was primarily a result of the decrease in short term interest rates, a decrease in income from interest rate swaps, and an increased level of nonperforming assets. During the quarter ended September 30, 2009, the net settlement from interest rate swaps contributed $135,000 to support net interest income compared to $550,000 for the quarter ended September 30, 2008. The increased level of nonperforming assets resulted in a negative impact on the Company's net interest margin of 29 basis points in the third quarter of 2009 from reversed or foregone interest.
The following table details the average balances, interest income and expense and the effective yields/rates for earning assets and interest-bearing liabilities for the quarters ended September 30, 2009 and 2008.
Three months ended September 30,
(dollars in thousands) 2009 2008
Yields Interest Yields Interest
Average or Income/ Average or Income/
Balance Rates Expense Balance Rates Expense
ASSETS
Interest earning assets
(2):
Loans (1) $ 589,343 6.9 % $ 10,181 $ 705,402 7.7 % $ 13,632
Federal funds sold 167,480 0.3 % 106 104,909 1.9 % 512
Investment securities 35,161 1.3 % 117 5,419 5.1 % 69
Other 21,591 2.0 % 111 5,481 3.3 % 45
Total interest earning
assets 813,575 5.1 % 10,515 821,211 6.9 % 14,258
Noninterest-earning assets:
Cash and due from banks 15,185 18,154
All other assets (3) 25,487 19,190
TOTAL $ 854,247 $ 858,555
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Deposits: Demand $ 4,349 0.1 % $ 1 $ 5,340 0.2 % $ 3 Savings 280,640 0.6 % 435 420,900 2.0 % 2,083 Time 137,139 2.4 % 826 99,290 3.6 % 894 Other 17,527 5.9 % 261 21,386 5.4 % 291 Total interest bearing liabilities 439,655 1.4 % 1,523 546,916 2.4 % 3,271 Noninterest-bearing liabilities: Demand deposits 292,370 237,831 Accrued expenses and other liabilities 13,062 6,586 Shareholders' equity 109,160 67,222 TOTAL $ 854,247 $ 858,555 Net interest income and margin 4.4 % $ 8,992 5.3 % $ 10,987 |
(1) Loan fee amortization of $833,000 and $1.2 million, respectively, is included in interest income. Nonperforming loans have been included in average loan balances.
(2) Interest income is reflected on an actual basis, not a fully taxable equivalent basis. Yields are based on amortized cost.
(3) Net of average allowance for credit losses of $17.7 million and $15.8 million, respectively.
The following table shows the effect of the interest differential of volume and rate changes for the quarters ended September 30, 2009 and 2008. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(dollars in thousands) Three months ended September 30,
2009 vs. 2008
Increase (decrease)
due to change in
Average Average Total
Volume Rate Change
Interest income:
Loans $ (2,005 ) $ (1,446 ) $ (3,451 )
Federal funds sold 40 (446 ) (406 )
Investment securities 99 (51 ) 48
Other 83 (17 ) 66
Total interest income (1,784 ) (1,959 ) (3,743 )
Interest expense:
Demand (0 ) (2 ) (2 )
Savings (217 ) (1,431 ) (1,648 )
Time 228 (296 ) (68 )
Other (57 ) 27 (30 )
Total interest expense (47 ) (1,701 ) (1,748 )
Change in net interest income $ (1,736 ) $ (259 ) $ (1,995 )
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Net interest income is the principal source of the Company's operating earnings. Significant factors affecting net interest income are: rates, volumes and mix of the loan, investment and deposit portfolios. Due to the nature of the Company's lending markets, in which the majority of loans are generally tied to prime rate, it is believed that an increase in interest rates should positively affect the Company's future earnings, while a decline should have a negative impact. However, it is not feasible to provide an accurate measure of such a change because of the many factors (many of them uncontrollable) influencing the result.
Interest Income
Interest income of $10.5 million in the quarter ended September 30, 2009 represented a decrease of $3.7 million, or 26.3%, from $14.3 million in the same quarter one year earlier. The decrease in interest income was primarily due to a decrease in interest rates, a decrease in income from interest rate swaps, and an increased level of nonperforming assets.
Average gross loans were $589.3 million for three months ended September 30, 2009, a decrease of $116.1 million or 16.5% from $705.4 million for the same period one year earlier. Average loans comprised 72.4% of average earning assets in the three months ended September 30, 2009 compared to 85.9% in the third quarter of 2008.
The average yield on earning assets was 5.13% for the quarter ended September 30, 2009 and 6.91% for the quarter ended September 30, 2008. As noted above, the majority of the Company's earning assets, including a majority of loans, are priced to adjust with movements in short-term interest rates, particularly the prime rate, and the decrease in yield was primarily due to decreases in the prime rate during 2009 and the later part of 2008 and interest reversed or foregone on nonperforming assets offset, in part, by income from interest rate swaps.
Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $224.2 million for the quarter ended September 30, 2009, an increase of $108.4 million or 93.6% from $115.8 million for the three months ended September 30, 2008.
Interest Expense
Interest expense was $1.5 million for the quarter ended September 30, 2009, which represented a decrease of $1.7 million, or 53.4% from $3.3 million for the comparable period of 2008. The decrease in interest expense reflects lower interest rates paid on liabilities in 2009 compared to 2008. Average interest-bearing liabilities were $439.7 million for the three months ended September 30, 2009, a decrease of $107.3 million, or 19.6%, from $546.9 million for the same period one year earlier.
Average interest bearing deposits were $422.1 million for the quarter ended September 30, 2009, which represented 96.0% of total average deposits and was a decrease of $103.4 million, or 19.7%, from $525.5 million representing 96.1% of total average deposits in the third quarter of 2008.
Other (non-deposit) interest bearing liabilities are primarily comprised of junior subordinated debt securities issued by the Company and other borrowings. The junior subordinated debt is intended to supplement capital requirements of the Company at a rate of interest that is fixed for five years. Other interest bearing liabilities averaged $17.5 million and $21.4 million in the three months ended September 30, 2009 and 2008, respectively.
The average rate paid on interest-bearing liabilities of 1.37% in the quarter ended September 30, 2009 compared to 2.37% in the third quarter of 2008.
Credit Risk and Provision for Credit Losses
The Company maintains an allowance for credit losses which is based, in part, on the Company's and industry loss experience, the impact of economic conditions within the Company's market area and, as applicable, the State of California and/or national macroeconomic conditions, the value of underlying collateral, loan performance, and inherent risks in the loan portfolio. The allowance is reduced by charge-offs and increased by provisions for credit losses charged to operating expense and recoveries of previously charged-off loans.
The Company provided $0.7 million to the allowance for credit losses for the three months ended September 30, 2009, compared to $19.0 million for the same period in 2008.
The Company's loan charge-offs totaled $1.7 million during the third quarter ended September 30, 2009, compared to $15.9 million for the same period one year earlier. The Company recognized $11,000 and $34,000 in loan recoveries for the three months ended September 30, 2009 and 2008, respectively.
The following schedule provides an analysis of the allowance for credit losses for the quarter ended September 30, 2009 and 2008, respectively:
Three months ended
(dollars in thousands) September 30,
2009 2008
Balance, beginning of period $ 17,968 $ 14,608
Provision for credit losses 650 19,000
Charge-offs (1,707 ) (15,878 )
Recoveries 11 34
Balance, end of period $ 16,922 $ 17,764
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The decrease in the allowance for loan losses of $0.8 million from $17.8 million at September 30, 2008 to $16.9 million at September 30, 2009 is primarily attributable to (1) a decrease in total gross loans; and (2) a decrease in unidentified probable, estimable losses due to proactive loss recognition in the earlier periods of the fiscal year.
Based on an evaluation of the individual credits, historical credit loss experience by loan type, economic conditions, and the Company's reassessment of risks noted above, management has allocated the allowance for loan losses as follows for the periods ending September 30, 2009 and December 31, 2008:
(dollars in thousands) September 30, 2009 December 31, 2008
Percent of Percent of
ALLL in each ALLL in each
category to category to
Amount gross loans Amount gross loans
Commercial $ 7,374 1.29 % $ 6,179 0.88 %
SBA 1,125 0.20 % 1,673 0.24 %
Real estate construction 3,044 0.53 % 5,197 0.74 %
Land loans 970 0.17 % 1,592 0.23 %
Real estate other 3,411 0.59 % 2,495 0.36 %
Factoring/ABL 865 0.15 % 1,222 0.17 %
Other 133 0.02 % 196 0.03 %
$ 16,922 2.95 % $ 18,554 2.65 %
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Beginning in the second quarter of 2008, deterioration in economic conditions within the Company's market area and, as applicable, the State of California and/or national macroeconomic conditions resulted in increased stress to the loan portfolio, specifically construction and land development loans outside of the Company's primary market of Santa Clara County and contiguous portions of San Mateo and Alameda counties.
In response to the deteriorating market conditions, the Company undertook steps to aggressively reduce the exposure to construction and land development loans with particular emphasis on loans outside of its primary market. Management curtailed new loan origination, thoroughly reviewed collateral values of projects approaching maturity and conservatively evaluated the market prospects of collateral for indications of impairments.
At September 30, 2009, the Company's land development portfolio was reduced to $13.5 million with just $7.1 million remaining exposure outside of the primary market area. Further, over 50% of the remaining loans in this category are . . .
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