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| CWBC > SEC Filings for CWBC > Form 10-Q on 13-Nov-2009 | All Recent SEC Filings |
13-Nov-2009
Quarterly Report
This discussion is designed to provide insight into management's assessment of significant trends related to the Company's consolidated financial condition, results of operations, liquidity, capital resources and interest rate sensitivity. It should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this report.
Forward Looking Statements
This Report on Form 10-Q contains statements that constitute forward-looking statements 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. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. The Company does not undertake any obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above.
Overview of Earnings Performance
For the third quarter 2009, net income was $69,000 compared to $675,000 for the third quarter 2008.
The significant factors impacting net income for the third quarter 2009 were:
· The provision for loan losses increased to $2.6 million for third quarter 2009 compared to $652,000 for the same quarter in 2008. Charge-offs of $2.7 million, primarily in the commercial, SBA and manufactured housing portfolios, continued to impact the loan portfolio.
· The decline in interest income from $11.3 million for the third quarter 2008 to $10.4 million for the same period 2009 continued to reflect the target fed funds rate which has been maintained at a range of 0% to .25% since the reduction from 4.25% at December 31, 2007 to a range of 0% to .25% as of December 31, 2008.
· Interest expense declined $2.1 million to $3.5 million for the third quarter 2009 compared to $5.6 million for the same period of 2008. This improvement resulted from a decline in rates paid on deposits and borrowings to 2.38% for the third quarter 2009 compared to 3.96% for the third quarter 2008.
· The decline in rates paid on deposits and borrowing contributed to a continued improvement in the margin which increased to 4.12% for the third quarter 2009 compared to 3.60% for the same period of 2008.
· The strategic decision in the first quarter 2009 to discontinue SBA lending east of the Rocky Mountains contributed to a decline in salaries and employee benefits to $2.8 million for the third quarter 2009 from $3.3 million for the same period 2008, a reduction of $500,000.
· An increase of $301,000 in the FDIC assessment for third quarter 2009 compared to the same period 2008 resulting from higher assessment rates.
Critical Accounting Policies
A number of critical accounting policies are used in the preparation of the Company's consolidated financial statements. These policies relate to areas of the financial statements that involve estimates and judgments made by management. These include: the provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company's 2008 10-K with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
Results of Operations - Third Quarter Comparison
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
Three Months Ended
September 30, Increase
2009 2008 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 10,378 $ 11,336 $ (958 )
Interest expense 3,467 5,562 (2,095 )
Net interest income 6,911 5,774 1,137
Provision for loan losses 2,592 652 1,940
Net interest income after provision for loan losses 4,319 5,122 (803 )
Non-interest income 966 1,198 (232 )
Non-interest expenses 5,165 5,154 11
Income before provision for income taxes 120 1,166 (1,046 )
Provision for income taxes 51 491 (440 )
Net income $ 69 $ 675 $ ( 606 )
Preferred stock dividends 261 - 261
Net income (loss) available to common shareholders $ (192 ) $ 675 $ (867 )
Earnings (loss) per common share:
Basic $ (.03 ) $ . 11 $ (.14 )
Diluted $ (.03 ) $ .11 $ (.14 )
Dividends per common share $ - $ . $ -
Comprehensive income $ 63 $ 692 $ (629 )
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The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
Three Months Ended
September 30,
2009 versus 2008
Total Change due to
change Rate Volume
(in thousands)
Loans, net $ (784 ) $ (1,137 ) $ 353
Investment securities (116 ) (127 ) 11
Other (58 ) (57 ) (1 )
Total interest-earning assets (958 ) (1,321 ) 363
Deposits (1,769 ) (1,641 ) (128 )
Other borrowings (326 ) (377 ) 51
Total interest-bearing liabilities (2,095 ) (2,018 ) (77 )
Net interest income $ 1,137 $ 697 $ 440
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Net Interest Income
Net interest income increased by $1.1 million for the third quarter 2009
compared to the same period in 2008. Total interest income declined by $1.0
million. While average interest earning assets grew to $664.9 million for the
third quarter 2009 compared to $637.3 million for the same period in 2008, an
increase of $27.6 million, yields declined to 6.19% from 7.08%. The decline in
interest income due to rates of $1.3 million was partly offset by the increase
of $363,000 due to volume growth.
The decline in rates benefited the Bank in a reduction in interest expense of $2.1 million for the third quarter 2009 compared to the same period in 2008. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was an increase in the margin from 3.60% for the third quarter of 2008 to 4.12% for the third quarter 2009.
Provision for Loan Losses
The provision for loan losses increased to $2.6 million for the third quarter
2009 compared to $652,000 for 2008. Charge-offs of $2.7 million, primarily in
the commercial, SBA and manufactured housing portfolios, contributed to the
increased provision in the third quarter 2009.
The following schedule summarizes the provision, charge-offs and recoveries for
the third quarter of 2009 by loan category:
Three Months Ended
September 30, 2009
(in thousands)
Allowance Allowance
06/30/09 Provision Charge-offs Recoveries Net Charge-offs 09/30/09
Real estate $ 3,143 $ (91 ) $ (88 ) $ 1 $ (87 ) $ 2,965
Manufactured housing 2,306 561 (649 ) - (649 ) 2,218
Commercial 3,873 1,147 (1,144 ) 3 (1,141 ) 3,879
SBA 3,907 960 (861 ) - (861 ) 4,006
Other installment 190 15 - 1 1 206
Total $ 13,419 $ 2,592 $ (2,742 ) $ 5 $ (2,737 ) $ 13,274
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Included in the Company's held-to-maturity portfolio is the category "Other installment" which consists primarily of home equity lines of credit (HELOC) loans. Recent guidance issued by the SEC characterized these types of loans as higher-risk. The HELOC portfolio of $17.3 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties. In the third quarter, there were no actual loan losses in this portfolio. As of September 30, 2009, 2% of the portfolio is past due and 0.9% is on non-accrual status. The Company believes that, overall, this portfolio is adequately supported by real estate collateral.
In response to continuing challenges in the commercial, SBA and manufactured housing portfolios, the Company has increased the allowance for loan losses for loans held-for-investment from 1.61% at December 31, 2008 to 2.62% at September 30, 2009.
The percentage of net non-accrual loans to the total loan portfolio has remained relatively steady, increasing modestly to 2.93% as of September 30, 2009 from 2.87% at December 31, 2008.
Non-Interest Income
Non-interest income includes gains from sale of loans, loan document fees,
service charges on deposit accounts, loan servicing fees and other revenues not
derived from interest on earning assets. Total non-interest income decreased by
$232,000, or 19.4%, for the third quarter 2009 compared to the same period in
2008. Gain on loan sales declined by $314,000 as no SBA loans were sold in the
third quarter 2009 compared to $9.6 million in loans sales for the same period
in 2008. Other loan fees also declined by $170,000 for the third quarter 2009
compared to 2008 primarily due to lower referral fees on SBA 504 loans. These
declines were partly offset by an increase in loan servicing income of $109,000
due to lower amortization associated with the servicing asset and adjustments to
the valuation of the I/O strip.
Non-Interest Expenses
Non-interest expenses remained flat for the third quarter 2009 compared to the
same period 2008. Declines in personnel expenses of $498,000 and occupancy of
$95,000 were offset by an increase in the FDIC assessment of $301,000 and other
expenses of $337,000.
Results of Operations -Nine-Month Comparison
The following table sets forth for the periods indicated, certain items in the
consolidated income statements of the Company and the related changes between
those periods:
Nine Months Ended
September 30, Increase
2009 2008 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 30,795 $ 34,727 $ (3,932 )
Interest expense 11,887 16,989 (5,102 )
Net interest income 18,908 17,738 1,170
Provision for loan losses 15,890 3,856 12,034
Net interest income after provision for loan Losses 3,018 13,882 (10,864 )
Non-interest income 3,389 4,252 (863 )
Non-interest expenses 16,355 15,647 708
Income (loss) before provision for income taxes (9,948 ) 2,487 (12,435 )
Provision (benefit) for income taxes (4,088 ) 1,067 (5,155 )
Net income (loss) $ (5,860 ) $ 1,420 $ (7,280 )
Preferred stock dividends 784 - 784
Net income (loss) available to common Shareholders $ (6,644 ) $ 1,420 $ (8,064 )
Earnings (loss) per common share:
Basic $ (1.12 ) $ .24 $ (1.36 )
Diluted $ (1.12 ) $ .24 $ (1.36 )
Dividends per common share $ - $ .12 $ (.12 )
Comprehensive income (loss) $ (5,705 ) $ 1,458 $ (7,163 )
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The following table sets forth the changes in interest income and expense attributable to changes in rate and volume:
Nine Months Ended
September 30,
2009 versus 2008
Total Change due to
change Rate Volume
(in thousands)
Loans, net $ (3,366 ) $ (4,930 ) $ 1,564
Investment securities (385 ) (377 ) (8 )
Other (181 ) (183 ) 2
Total interest-earning assets (3,932 ) (5,490 ) 1,558
Deposits (4,295 ) (4,389 ) 94
Other borrowings (807 ) (997 ) 190
Total interest-bearing liabilities (5,102 ) (5,386 ) 284
Net interest income $ 1,170 $ (104 ) $ 1,274
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Net Interest Income
Net interest income increased by $1.2 million for the first nine months 2009
compared to the same period in 2008. Total interest income declined $3.9
million, or 11.3%, for the period ended September 30, 2009 compared to the same
period in 2008. Of this decline, $5.5 million was due to declines in interest
rates which were partly offset by an increase of $1.6 million due to growth in
volume. The average balance for interest earning assets was $661.1 million for
the first nine months 2009 compared to $623.4 for the same period in 2008, an
increase of $37.7 million, while the yield declined from 7.44% to 6.23%.
Interest expense also declined, primarily due to a reduction in rates paid on deposits and borrowings. Lower rates paid on deposits and borrowings have contributed to a slight improvement of the margin to 3.82% for the first nine months of 2009 compared to 3.80% for the same period in 2008.
Provision for Loan Losses
The provision for loan losses increased $12.0 million to $15.9 million for the
first nine months 2009 compared to $3.9 million for the same period of 2008
reflecting the detailed evaluation of its loan portfolio in the context of the
overall challenging economic environment which has persisted for the last
year. While a substantial part of the deterioration and downgrades to specific
loans in the portfolio was recognized in the first quarter 2009, there continues
to be ongoing credit issues primarily relating to business loans. This has
elevated the component of the allowance calculation related to historical loan
losses. In general, the Company has experienced elevated levels of loan losses
over the past year thereby resulting in a significantly higher allowance
requirement. The migration of the losses through the loan portfolio resulted in
a calculated increase in the allowance from $7.3 million at December 31, 2008 to
$13.3 million at September 30, 2009. This increase is directly related to the
effect of historical loan losses on our estimate of losses inherent in the
portfolio as of the balance sheet dates and does not necessarily reflect
expected future losses. In addition, non-accrual loans slightly increased from
$16.9 million at December 31, 2008 to $17.8 million at September 30, 2009.
The following schedule summarizes the provision, charge-offs and recoveries for the nine months ended September 30, 2009 by loan category:
Nine Months Ended September 30, 2009
(in thousands)
Allowance Allowance
12/31/08 Provision Charge-offs Recoveries Net Charge-offs 09/30/09
Real estate $ 1,583 $ 3,469 $ (2,093 ) $ 6 $ (2,087 ) $ 2,965
Manufactured housing 1,659 1,598 (1,039 ) - (1,039 ) 2,218
Commercial 1,428 5,902 (3,473 ) 22 (3,451 ) 3,879
SBA 2,556 4,715 (3,319 ) 54 (3,265 ) 4,006
Other installment 115 206 (117 ) 2 (115 ) 206
Total $ 7,341 $ 15,890 $ (10,041 ) $ 84 $ (9,957 ) $ 13,274
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Non-Interest Income
Non-interest income declined $863,000 for the first nine months 2009 to $3.4
million from $4.3 million for 2008. Gain on loan sales declined $756,000
compared to 2008. No SBA loans have been sold for 2009 compared to $19.7 million
guaranteed loans sales in the first nine months 2008. Other loan fees have
declined $411,000, primarily related to lower referral fees received on SBA 504
loans. Partly offsetting these declines was an increase of $380,000 in loan
servicing resulting from lower amortization of the servicing asset and valuation
adjustments to the I/O strip.
Non-Interest Expenses
Non-interest expenses increased $708,000, from $15.6 million for the first nine
months 2008 to $16.3 million for 2009. The FDIC assessment increased $950,000
due to higher rates and a special assessment in June 2009 of $306,000. Other
expenses increased $1.2 million, primarily due to an increase reserve on
undisbursed loans of $430,000, increased collection costs of $352,000 and losses
on the sale of foreclosed assets of $183,000. Partly offsetting these increases
was a reduction in salaries and employee benefits of $1.2 million, primarily
resulting from the discontinuation of SBA lending east of the Rockies. Occupancy
expense also declined $165,000 for the first nine months 2009 compared to the
same period for 2008.
Interest Rates and Differentials
The following table illustrates average yields on interest-earning assets and
average rates on interest-bearing liabilities for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Interest-earning assets: (dollars in thousands)
Interest-earning deposits in other
financial institutions:
Average balance $ 1,078 $ 1,016 $ 1,095 $ 1,008
Interest income 9 10 24 29
Average yield 3.42 % 3.81 % 2.88 % 3.78 %
Federal funds sold:
Average balance $ 11,410 $ 13,315 $ 11,183 $ 11,189
Interest income 10 67 28 204
Average yield 0.33 % 2.04 % 0.34 % 2.45 %
Investment securities:
Average balance $ 46,380 $ 45,336 $ 45,027 $ 45,310
Interest income 452 568 1,338 1,723
Average yield 3.86 % 4.98 % 3.97 % 5.08 %
Gross loans:
Average balance $ 606,066 $ 577,682 $ 603,802 $ 565,942
Interest income 9,907 10,691 29,405 32,771
Average yield 6.49 % 7.36 % 6.51 % 7.73 %
Total interest-earning assets:
Average balance $ 664,934 $ 637,349 $ 661,107 $ 623,449
Interest income 10,378 11,336 30,795 34,727
Average yield 6.19 % 7.08 % 6.23 % 7.44 %
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Interest-bearing liabilities: (dollars in thousands)
Interest-bearing demand deposits:
Average balance $ 135,254 $ 51,391 $ 99,876 $ 60,735
Interest expense 638 245 1,361 922
Average cost of funds 1.87 % 1.89 % 1.82 % 2.03 %
Savings deposits:
Average balance $ 16,557 $ 15,821 $ 17,108 $ 14,843
Interest expense 110 128 344 386
Average cost of funds 2.64 % 3.21 % 2.69 % 3.47 %
Time certificates of deposit:
Average balance $ 314,663 $ 387,457 $ 339,125 $ 362,121
Interest expense 1,824 3,968 7,165 11,857
Average cost of funds 2.30 % 4.07 % 2.82 % 4.37 %
Other borrowings:
Average balance $ 112,005 $ 104,550 $ 117,077 $ 109,695
Interest expense 895 1,221 3,017 3,824
Average cost of funds 3.17 % 4.65 % 3.45 % 4.66 %
Total interest-bearing liabilities:
Average balance $ 578,479 $ 559,219 $ 573,186 $ 547,394
Interest expense 3,467 5,562 11,887 16,989
Average cost of funds 2.38 % 3.96 % 2.77 % 4.15 %
Net interest income $ 6,911 $ 5,774 $ 18,908 $ 17,738
Net interest spread 3.81 % 3.12 % 3.46 % 3.29 %
Net interest margin 4.12 % 3.60 % 3.82 % 3.80 %
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In calculating interest rates and differentials:
· Average yields and rates are derived by dividing interest income by the average balances of interest-earning assets and by dividing interest expense by the average balances of interest-bearing liabilities for the periods indicated. Amounts outstanding are averages of daily balances during the applicable periods.
· Nonaccrual loans are included in the average balance of loans outstanding.
· Net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and other liabilities. The amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities.
· Net interest margin is net interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.
Financial Condition
Average total assets increased by $35.0 million, or 5.5%, to $673.8 million at September 30, 2009 compared to $638.8 million at September 30, 2008. Average total equity increased by 22.4% to $62.7 million at September 30, 2009 from $51.3 million at September 30, 2008. Average total gross loans at September 30, 2009 increased by $37.9 million, or 6.7%, to $603.8 million from $565.9 million at September 30, 2008. Average deposits also increased from $472.9 million at September 30, 2008 to $492.3 million as of September 30, 2009.
The book value per common share declined to $7.75 at September 30, 2009 from $8.84 at December 31, 2008.
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