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| CWBC > SEC Filings for CWBC > Form 10-Q on 14-May-2012 | All Recent SEC Filings |
14-May-2012
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 Company's unaudited interim consolidated financial statements and notes thereto the audited consolidated financial statement and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and the other financial information appearing elsewhere in this report.
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 1Q12, net income was $819,000 compared to net income of $595,000 for 1Q11.
The significant factors impacting net income for 1Q12 were:
· Sale of $10.1 million in SBA loans resulting in a gain of $973,000 in 1Q12. There were no SBA loan sales in 1Q11.
· Provision for loan losses of $2.0 million for 1Q12 compared to $1.0 million for 1Q11 as net charge-offs increased to $2.5 million for 1Q12 from $1.1 million for 1Q11.
· A decline in interest income of $1.0 million resulting from a combination of lower average earning assets, $586.4 million for 1Q12 compared to $633.2 million for 1Q11 and lower yields on earning assets of 5.71% for 1Q12 compared to 5.98% for 1Q11.
· Margin declined for 1Q12 to 4.48% compared to 4.53% for 1Q11. The decline in rates paid on funding sources from 1.64% for 1Q11 to 1.37% for 1Q12 partially offset the lower yields on interest earning assets.
· Closed remaining (CO, OR, UT and WA) out-of-state SBA lending operations in February 2012.
· Sold $4 million of investment securities at a net gain of $121,000.
Recent Regulatory Actions
Office of the Comptroller of the Currency
As previously announced, the Board of Directors of the Bank signed an Agreement (OCC Agreement) with the Office of the Comptroller of the Currency (OCC), its primary regulator, on January 26, 2012. The Agreement includes, among other things, the following requirements:
· Achieving and maintaining a Tier 1 Leverage Capital ratio of 9.00% and Total Risk-Based Capital ratio of 12.00%;
· Writing a 3-year strategic plan, which would incorporate the capital component;
· Continue to improve on the Bank's credit quality and administration thereof, including the monitoring of problem assets and the allowance for loan losses;
· Continue to adhere to and implement the Bank's liquidity risk management program.
Federal Reserve Bank of San Francisco
On April 23, 2012, the Company entered into a written agreement, (FRB Agreement) with the Federal Reserve Bank of San Francisco. Without admitting or denying any of the alleged charges of unsafe or unsound banking practices and any violations of law, the Company has agreed to take the following corrective actions to address certain alleged violations of law and/or regulation:
· Take appropriate steps to fully utilize the Company's financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure the Bank's compliance with the OCC Agreement issued to it by the Comptroller of the Currency, effective as of January 26, 2012, and any other supervisory action taken by the Bank's federal and state regulators;
· Refrain from declaring or paying dividends absent prior regulatory approval;
· Refrain from taking dividends or any form of payment from the Bank representing a reduction in the Bank's capital absent prior regulatory approval;
· Refrain from incurring, increasing or guaranteeing any debt or repurchasing or redeeming any shares of its stock absent prior regulatory approval;
· Develop and submit for regulatory approval a written capital plan to maintain sufficient capital on a consolidated basis, which capital plan should, at a minimum, address, consider and include current and future capital requirements on a consolidated basis and compliance with federal regulations and guideline; the adequacy of the Bank's capital, the sources and timing of funds necessary to fulfill future capital requirements; and the requirements of federal law that the Company serve as a source of strength to the Bank;
· Develop and submit for regulatory approval a cash flow projection of the Company's planned sources and uses of cash for debt service, operating expenses and other purposes;
· Comply with appropriate regulatory notice and approval requirements when appointing any new directors or senior executive officers or changing the responsibilities of any senior executive officer and comply with the limitations on indemnification and severance payments set forth in Section 18(k) of the Federal Deposit Insurance Act (12 USC 1828(i)) and Part 359 of the FDIC's implementing regulations; and
· Furnish written progress reports to the FRB detailing the form and manner of any actions taken to secure compliance with the Regulatory Agreement.
In accordance with the FRB Agreement, the Company requested the Reserve Bank's approval to pay the dividend due on May 15, 2012, on the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value having a liquidation preference of $1,000 per share (Preferred Shares). That request was denied. Consequently, the Company will not pay that dividend. As indicated in the FRB Agreement, all future dividends are subject to regulatory approval.
Since the appointment of a new Chief Executive Officer and Chief Credit Officer, the Bank has maintained an intense focus on addressing the areas of concern that have been raised by the regulators. As a result, many of the prudent actions required in the Agreements have been addressed, or will be addressed in the near future.
The Bank completed the following actions within the last 90 days to streamline the balance sheet and enhance its capital position:
· Closed remaining (CO, OR, UT and WA) out-of-state SBA lending operations in February 2012.
· Sold $10.1 million of guaranteed SBA loans in March 2012, generating a net gain of $973,000.
· Prepaid $5 million of FHLB advances in March 2012 and another $17 million in April 2012.
· Sold $4 million of investment securities at a net gain of $121,000.
· As of April 30, 2012, achieved Tier 1 capital ratio of 9.06% and total risk-based capital ratio of 12.44%.
The Board and Management will continue to work closely with the OCC and FRB to achieve compliance with the terms of the Agreements and to improve the Company's and Bank's strength, security and performance.
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 provision and allowance for loan losses and servicing rights. These critical accounting policies are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 with a description of how the estimates are determined and an indication of the consequences of an over or under estimate.
Results of Operations - First Quarter Comparison
The following table sets forth for the periods indicated, certain items in the
consolidated statements of income of the Company and the related changes between
those periods:
Three Months Ended
March 31, Increase
2012 2011 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 8,321 $ 9,330 $ (1,009 )
Interest expense 1,793 2,261 (468 )
Net interest income 6,528 7,069 (541 )
Provision for loan losses 1,983 983 1,000
Net interest income after provision for loan losses 4,545 6,086 (1,541 )
Non-interest income 1,888 738 1,150
Non-interest expenses 5,614 5,809 (195 )
Income before provision for income taxes 819 1,015 (196 )
Provision for income taxes - 420 (420 )
Net income $ 819 $ 595 $ 224
Preferred stock dividends 262 262 -
Net income applicable to common shareholders $ 557 $ 333 $ 224
Earnings per common share:
Basic $ 0.09 $ 0.06 $ 0.03
Diluted $ 0.08 $ 0.05 $ 0.03
Dividends per common share $ - $ - $ -
Comprehensive income (loss) $ 671 $ 560 $ 111
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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
March 31,
2012 versus 2011
Total Changes due to
change Rate Volume
(in thousands)
Loans, net $ (962 ) $ (223 ) $ (739 )
Investment securities and other (47 ) (36 ) (11 )
Total interest-earning assets (1,009 ) (259 ) (750 )
Deposits (405 ) (280 ) (125 )
Other borrowings (63 ) (17 ) (46 )
Total interest-bearing liabilities (468 ) (297 ) (171 )
Net interest income $ (541 ) $ 38 $ (579 )
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Net Interest Income
Net interest income declined by $541,000 for 1Q12 compared to 1Q11. Total
interest income declined by $1.0 million. Of this decline, $750,000 was due to
the decline in average earning assets from $633.2 million for 1Q11 to $586.4
million for 1Q12. The yield on interest earning assets also declined from 5.98%
for 1Q11 to 5.71% for 1Q12.
The decline in interest expense of $468,000 resulted from both lower rates paid on interest bearing liabilities, 1.37% for 1Q12 compared to 1.64% for 1Q11, and a decline in the average balance of interest-bearing liabilities from $560.4 million for 1Q11 to $527.5 million for 1Q12. The net impact of the decline in yields on interest earning assets and the decline in rates on interest-bearing liabilities was a decline in the margin from 4.53% for 1Q11 to 4.48% for 1Q12.
Provision for Loan Losses
The provision for loan losses was $2.0 million for 1Q12 compared to $1.0 million
for 1Q11. Net charge-offs increased to $2.5 million for 1Q12 compared to $1.1
million for 1Q11.
The following schedule summarizes the provision, charge-offs and recoveries by
loan category for the three months ended March 31, 2012:
Allowance Allowance
12/31/11 Provision Charge-offs Recoveries Net Charge-offs 3/31/12
(in thousands)
Manufactured housing $ 4,629 $ 1,205 $ (998 ) $ 1 $ (997 ) $ 4,837
Commercial real estate 3,528 162 (822 ) - (822 ) 2,868
Commercial 2,734 433 (629 ) 17 (612 ) 2,555
SBA 3,877 (261 ) (379 ) 340 (39 ) 3,577
HELOC 349 312 (2 ) 50 48 709
Single family real estate 150 133 (128 ) 2 (126 ) 157
Consumer 3 (1 ) - - - 2
Total $ 15,270 $ 1,983 $ (2,958 ) $ 410 $ (2,548 ) $ 14,705
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The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended March 31, 2011:
Allowance Allowance
12/31/10 Provision Charge-offs Recoveries Net Charge-offs 3/31/11
(in thousands)
Manufactured housing $ 4,168 $ 368 $ (281 ) $ 25 $ (256 ) $ 4,280
Commercial real estate 2,532 315 (18 ) 2 (16 ) 2,831
Commercial 2,094 98 (322 ) 10 (312 ) 1,880
SBA 3,753 (48 ) (423 ) 42 (381 ) 3,324
HELOC 547 36 - 1 1 584
Single family real estate 135 192 (150 ) 1 (149 ) 178
Consumer 73 22 - - - 95
Total $ 13,302 $ 983 $ (1,194 ) $ 81 $ (1,113 ) $ 13,172
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Included in the Company's held-to-maturity portfolio are home equity loans, "HELOC", which guidance issued by the SEC characterizes as higher-risk. The HELOC portfolio of $20.5 million consists of credits secured by residential real estate in Santa Barbara and Ventura counties. In 1Q12, there were $48,000 in charge-offs in this portfolio. As of March 31, 2012, $74,000 was past due in this portfolio. The allowance for loan losses for this portfolio is $709,000, or 3.5%. The Company monitors this portfolio to insure adequate support of the real estate collateral.
The percentage of net nonaccrual loans to the total loan portfolio has increased to 7.4% as of March 31, 2012 from 5.2% at December 31, 2011.
The allowance for loan losses compared to net nonaccrual loans has declined to 38.4% as of March 31, 2012 from 53.3% as of December 31, 2011.
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 increased by
$1.2 million, or 155.8%, for 1Q12 compared to 1Q11, due to the sale of $10.1
million in SBA loans with the resulting gain of $973,000 and the sale of $4.0
million of investment securities resulting in a gain of $121,000.
Non-Interest Expenses
The decline in non-interest expenses of $195,000, or 3.4%, for 1Q12 compared to
1Q11 resulted from reductions in several areas including salaries and employee
benefits which was $2.9 million for 1Q12 compared to $3.1 million for
1Q11. Partially offsetting the declines in expense was an increase of $124,000
in the FDIC assessment.
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 March 31,
2012 2011
Interest-earning assets: (dollars in thousands)
Federal funds sold and interest-earning deposits:
Average balance $ 3,039 $ 1,252
Interest income 2 3
Average yield 0.25 % 0.88 %
Investment securities:
Average balance $ 42,597 $ 44,758
Interest income 237 283
Average yield 2.23 % 2.56 %
Gross loans:
Average balance (includes non-accrual loans) $ 540,763 $ 587,193
Interest income 8,082 9,044
Average yield 6.01 % 6.25 %
Total interest-earning assets:
Average balance $ 586,399 $ 633,203
Interest income 8,321 9,330
Average yield 5.71 % 5.98 %
Interest-bearing liabilities:
Interest-bearing demand deposits:
Average balance $ 290,484 $ 274,485
Interest expense 627 800
Average cost of funds 0.87 % 1.18 %
Savings deposits:
Average balance $ 19,398 $ 20,743
Interest expense 83 108
Average cost of funds 1.71 % 2.12 %
Time certificates of deposit:
Average balance $ 151,454 $ 193,229
Interest expense 555 762
Average cost of funds 1.47 % 1.60 %
Convertible debentures:
Average balance $ 7,852 $ 7,930
Interest expense 176 176
Average cost of funds 9.00 % 9.00 %
Other borrowings:
Average balance $ 58,308 $ 64,000
Interest expense 352 415
Average cost of funds 2.43 % 2.63 %
Total interest-bearing liabilities:
Average balance $ 527,496 $ 560,387
Interest expense 1,793 2,261
Average cost of funds 1.37 % 1.64 %
Net interest income $ 6,528 $ 7,069
Net interest spread 4.34 % 4.34 %
Average net margin 4.48 % 4.53 %
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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 decreased by $41.0 million, or 6.1%, to $631.5 million at March 31, 2012 compared to $672.5 million at March 31, 2011. Average total equity declined by 18.3% to $51.2 million at March 31, 2012 from $62.6 million at March 31, 2011. Average total gross loans at March 31, 2012 decreased by $46.4 million, or 7.9%, to $540.8 million from $587.2 million at March 31, 2011. Average deposits also decreased from $534.0 million at March 31, 2011 to $511.6 million as of March 31, 2012.
The book value per common share was $6.01 at March 31, 2012 and $5.94 at December 31, 2011.
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