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| CWBC > SEC Filings for CWBC > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-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 provided under "Item
1 - Financial Statements" above, 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.
Overview of Earnings Performance
For the second quarter of 2012 ("2Q12"), net loss was $591,000 compared to a net loss of $221,000 for 2Q11.
The significant factors impacting net income for 2Q12 were:
· A decline in interest income of $1.1 million resulting from a combination of lower average earning assets, $551.2 million for 2Q12 compared to $620.8 million for 2Q11 and lower yields on earning assets of 5.86% for 2Q12 compared to 5.90% for 2Q11.
· A provision for loan losses of $1.9 million for 2Q12 compared to $3.2 million for 2Q11, a decline of $1.3 million.
· Net interest margin increased for 2Q12 to 4.78% compared to 4.58% for 2Q11. The decline in rates paid on funding sources from 1.52% for 2Q11to 1.24% for 2Q12 were partially offset by lower yields on interest-earning assets.
· Non-interest expenses were $5.8 million in 2Q12 compared to $5.1 million in 2Q11. The increase was partly due to the FHLB advance prepayment fee of $431,000 in 2Q12.
Recent Regulatory Actions
Office of the Comptroller of the Currency
On January 26, 2012, the Bank, entered into a consent agreement with the Comptroller of the Currency ("OCC"), the Bank's primary banking regulator, which requires the Bank to take certain corrective actions to address certain deficiencies in the operations of the Bank, as identified by the OCC (the "OCC Agreement"). In accordance with the terms of the OCC Agreement, the Bank has taken the following actions:
Article I of the OCC Agreement requires the formation of a compliance committee. The Bank established a Board Regulatory Compliance Committee ("Compliance Committee") on January 26, 2012. The Compliance Committee meets and reports to the Bank's Board of Directors on a monthly basis. The Compliance Committee's reports to the Bank's Board of Directors include information concerning the status of actions taken or needed to be taken to achieve full compliance with the OCC Agreement, the personnel of the Bank primarily responsible for implementing such action and the expected timing of such actions.
Article II of the OCC Agreement requires an updated strategic plan covering at least a three-year period. The Bank has adopted and submitted for approval to the OCC a three-year strategic plan, which includes, among other things, strategic goals, objectives, key financial performance indicators and risk tolerances, identification and prioritization of initiatives and opportunities including timeframes, a management employment and succession program, assignment of responsibilities and accountability for the strategic planning process, and a description of systems designed to monitor the Bank's progress in meeting the goals set forth in the strategic plan.
Article III of the OCC Agreement requires a capital plan and requires that the Bank achieve and maintain a Tier 1 Leverage Capital ratio of 9% and Total Risk-Based Capital ratio of 12% on or before May 25, 2012. The Bank's Board of Directors has incorporated a three-year capital plan into the Bank's strategic plan. The Bank successfully met the minimum capital requirements as of May 25, 2012. Notwithstanding that the Bank has achieved the required minimum capital ratios required by the OCC Agreement, the existence of a requirement to maintain a specific capital level in the OCC Agreement means that the Bank may not be deemed "well capitalized" under applicable banking regulations.
In connection with the capital plan, the Bank has taken a number of steps to streamline its balance sheet and enhance its capital position, including:
? Closed remaining out-of-state (CO, OR, UT and WA) 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 in March 2012 at a net gain of $121,000.
? Sold $3.0 million in REO and repossessed assets in 1Q12 and another $4.3 million in 2Q12;
The Bank's Board of Directors prepares a written evaluation of the Bank's performance against the capital plan on a quarterly basis, including a description of actions the Bank will take to address any shortcomings, which is documented in Board meeting minutes.
Article IV of the OCC Agreement requires the Bank to take steps to improve the management and oversight of the Bank. In that regard, the Bank has recently appointed several key officers, including the Bank's appointment of its President and Chief Executive Officer, the appointment of a new Chief Credit Officer; and several other officers in key areas of the Bank. The Bank believes that these changes in management have facilitated the establishment of clearer lines of responsibility and authority. At its monthly meetings, the Compliance Committee reviews the Bank's processes, personnel and control systems to ensure they are adequate.
Article V of the OCC Agreement requires the Bank to have a written program designed to ensure that the risks associated with the Bank's loan portfolio are properly reflected and accounted for on the Bank's books and records. The Bank's Board of Directors has adopted such a written program, including with respect to risk grading and valuation of loans, that losses are charged off, as appropriate, and that current information is gathered and maintained regarding loans and collateral. The Bank has submitted written information regarding the foregoing to the OCC. The Bank's Board of Directors and management will continue to review this program and take steps, as appropriate, to ensure the Bank complies with the requirements of the OCC Agreement.
Article VI of the OCC Agreement requires the Bank to have a written program to ensure compliance with applicable financial accounting standards. The Bank's Board of Directors has adopted such a program, which includes specific measures for monitoring of loans, and identification of, and accounting for, loan impairment, loss recognition and troubled debt restructurings.
Article VII of the OCC Agreement requires that the Bank employ an external firm, acceptable to the OCC, to perform a semi-annual review of the Bank's loan portfolio. The Bank has done so, and a review for the first two quarters of 2012 has been performed, and the preliminary findings from this review were considered by the Bank in performing an assessment of the Bank's loan portfolio and related allowance for loan losses for the first two quarters of 2012.
Article VIII of the OCC Agreement requires the Bank to have a program to monitor assets which have been criticized by internal or external loan reviews or by the OCC. As so required, the Bank maintains a Criticized Assets Report, which reports the status of assets that have been identified by the Bank as evidencing a higher degree of risk of loss. The report is updated at least monthly.
Article IX of the OCC Agreement requires the Bank to have a program for the maintenance of an adequate allowance for loan and lease losses. The Bank's Board of Directors has adopted such a written plan, which is designed to ensure that the Bank's allowance for loan and lease losses is consistent with all regulatory and financial accounting requirements. The Bank has submitted the plan to an external firm for review, and has also submitted a copy of the plan to the OCC.
Article X of the OCC Agreement requires the Bank to review and revise the Bank's other real estate owned (OREO) section of the Bank's loan policy. The Bank's Board of Directors has adopted an updated policy concerning other real estate owned (OREO), which has been incorporated into the Bank's three-year strategic plan. The OREO policy reflects updates to ensure compliance with applicable regulatory and financial accounting requirements, including procedures to ensure that periodic, appropriate appraisals and valuations are performed.
Article XI of the OCC Agreement requires the Bank to adhere to and implement the Bank's liquidity risk management program. The Bank has adopted and implemented a liquidity risk management program, which is designed to address current and projected funding needs, ensure the Bank has sufficient liquidity to meet such needs, reduce reliance on high cost and wholesale funding sources, and comply with applicable restrictions on brokered deposits. The Bank's Board of Directors reviews its compliance with this policy on a monthly basis, and provides quarterly reports to the OCC, as required by the OCC Agreement.
Article XII of the OCC Agreement requires that the Bank take steps to correct all violations of law, rules or regulations identified by the OCC. The Bank's Board of Directors and Compliance Committee monitor the Bank's progress on a monthly basis.
The OCC Agreement requires that the Bank furnish periodic written progress reports to the OCC detailing the form and manner of any actions taken to secure compliance with the OCC Agreement. The Bank has submitted such progress reports on a monthly basis, as required by the OCC Agreement.
While the Bank believes that it is in substantial compliance with the OCC Agreement, no assurance can be given that the OCC will concur with the Bank's assessment. Failure to comply with the provisions of the OCC Agreement may subject the Bank to further regulatory action, including but not limited to, being deemed undercapitalized for purposes of the OCC Agreement, and the imposition by the OCC of prompt corrective action measures or civil money penalties.
Actions required of the Bank in response to the OCC Agreement have prompted the Bank to reassess future financial results and financial forecasts. In addition, financial results are subject to many external factors, including the interest rate environment, loan demand, deposit pricing and the economy as a whole, both locally and nationally. The Bank does not currently expect future financial results to be significantly impacted by specific responses to, or actions taken pursuant to, the OCC Agreement. However, the Bank is implementing a number of measures to mitigate any potential impact that such external factors could have on the Bank's future financial results in the future, which measures have been incorporated into the Bank's ongoing risk management and strategic planning processes. In that regard, the Bank does not currently expect credit quality trends to be significantly impacted by the actions required of the Bank pursuant to the OCC Agreement. However, in connection with the Bank's risk management process, the allowance for loan losses requires continuous oversight to ensure its adequacy and responsiveness to changes in risk within the Bank's credit portfolio. The Bank has not made changes to its methodology for calculating the allowance for loan losses in specific response to the OCC Agreement. However, from time to time, in connection with the Bank's periodic evaluation of the credit portfolio and related allowance for loan losses methodology, the Bank may make changes as the Bank deems appropriate. Any significant changes to the Bank's allowance for loan losses methodology will be appropriately disclosed, including any material impact to CWBC's financial statements.
Federal Reserve Bank of San Francisco
On April 23, 2012, the Company entered into a written agreement, ("FRB Agreement") with the FRB. 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 OCC, 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 guidelines; 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 Series A Preferred Stock. That request was denied. Consequently, the Company did not pay that dividend although dividends remain as accrued. Most recently, approval for the payment of the dividend due on August 15, 2012 was also denied. As a result, 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 in November 2011 and Chief Credit Officer in July 2011, 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 OCC Agreement and FRB Agreement have been addressed, or will be addressed in the near future.
The Board and Management will continue to work closely with the OCC and FRB to achieve compliance with the terms of the OCC Agreement and the FRB Agreement and to improve the Company's and Bank's strength, security and performance. The Bank's Total Risk-Based capital ratio was 13.41% and Tier-1 Leverage ratio was 9.38% at June 30, 2012. Under the OCC Agreement, ratios of 12% and 9%, respectively, are required to be maintained.
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 - Second 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
June 30, Increase
2012 2011 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 8,034 $ 9,135 $ (1,101 )
Interest expense 1,477 2,050 (573 )
Net interest income 6,557 7,085 (528 )
Provision for loan losses 1,900 3,157 (1,257 )
Net interest income after provision for loan losses 4,657 3,928 729
Non-interest income 513 815 (302 )
Non-interest expenses 5,761 5,115 646
Income before provision for income taxes (591 ) (372 ) (219 )
Provision (benefit) for income taxes - (151 ) 151
Net loss $ (591 ) $ (221 ) $ (370 )
Dividends and accretion on preferred stock 268 262 6
Net loss applicable to common shareholders $ (859 ) $ (483 ) $ (376 )
Loss per common share:
Basic $ (0.14 ) $ (0.08 ) $ (0.06 )
Diluted (0.14 ) (0.08 ) (0.06 )
Comprehensive loss $ (547 ) $ (229 ) $ (318 )
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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
June 30,
2012 versus 2011
Total Change due to
change Rate Volume
(in thousands)
Loans, net $ (1,035 ) $ 13 $ (1,048 )
Investment securities and other (66 ) (16 ) (50 )
Total interest-earning assets (1,101 ) (3 ) (1,098 )
Deposits (420 ) (287 ) (133 )
Other borrowings (153 ) 95 (248 )
Total interest-bearing liabilities (573 ) (192 ) (381 )
Net interest income $ (528 ) $ 189 $ (717 )
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Net Interest Income
Net interest income declined by $528,000 for 2Q12 compared to 2Q11. Total
interest income declined by $1.1 million. This decline was primarily due to the
decline in average earning assets from $620.8 million for 2Q11 to $551.2 million
for 2Q12. The yield on interest-earning assets also declined from 5.90% for 2Q11
to 5.86% for 2Q12.
The decline in interest expense of $573,000 resulted from both lower rates paid on interest-bearing liabilities, 1.24% for 2Q12 compared to 1.52% for 2Q11, and a decline in the average balance of interest-bearing liabilities from $541.8 million for 2Q11 to $480.2 million for 2Q12. 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 4.58% for 2Q11 to 4.78% for 2Q12.
Provision for Loan Losses
The provision for loan losses was $1.9 million for 2Q12 compared to $3.2 million
for 2Q11. Net charge-offs increased to $1.2 million for 2Q12 compared to $1.1
million for 2Q11.
The following schedule summarizes the provision, charge-offs and recoveries by
loan category for the three months ended June 30, 2012:
Allowance Allowance
3/31/12 Provision Charge-offs Recoveries Net Charge-offs 6/30/12
(in thousands)
Manufactured housing $ 4,837 $ 1,206 $ (906 ) $ 50 $ (856 ) $ 5,187
Commercial real estate 2,868 776 (469 ) - (469 ) 3,175
Commercial 2,555 515 (27 ) 21 (6 ) 3,064
SBA 3,577 (719 ) 21 269 290 3,148
HELOC 709 (38 ) - - - 671
Single family real estate 157 152 (110 ) - (110 ) 199
Consumer 2 8 (8 ) - (8 ) 2
Total $ 14,705 $ 1,900 $ (1,499 ) $ 340 $ (1,159 ) $ 15,446
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The following schedule summarizes the provision, charge-offs and recoveries by loan category for the three months ended June 30, 2011:
\
Allowance Allowance
3/31/11 Provision Charge-offs Recoveries Net Charge-offs 6/30/11
(in thousands)
Manufactured housing $ 4,280 $ 281 $ (268 ) $ 2 $ (266 ) $ 4,295
Commercial real estate 2,831 2,012 (427 ) - (427 ) 4,416
Commercial 1,880 486 (145 ) 32 (113 ) 2,253
SBA 3,324 286 (355 ) 96 (259 ) 3,351
HELOC 584 65 - - - 649
Single family real estate 178 48 (38 ) 11 (27 ) 199
Consumer 95 (21 ) - - - 74
Total $ 13,172 $ 3,157 $ (1,233 ) $ 141 $ (1,092 ) $ 15,237
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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 2Q12, there were no charge-offs in this portfolio. As of June 30, 2012, $321,000 was past due in this portfolio. The allowance for loan losses for this portfolio is $671,000, or 3.3%. 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 6.7% as of June 30, 2012 from 5.2% at December 31, 2011.
The allowance for loan losses compared to net nonaccrual loans has declined to 47.1% as of June 30, 2012 from 53.3% as of December 31, 2011.
Total past dues declined to $12.1 million as of June 30, 2012 from $24.9 million as of December 31, 2011. Of these past due amounts, $5.5 million and $9.6 million were guaranteed by the SBA as of June 30, 2012 and December 31, 2012 respectively.
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
$302,000, or 37.1%, for 2Q12 compared to 2Q11, mostly due to adjustment for the
servicing asset and lower fee income for SBA lending.
Non-Interest Expenses
The increase in non-interest expenses of $646,000, or 12.6%, for 2Q12 compared
to 1Q12 primarily from the FHLB advance prepayment fee of $431,000 during 2Q12.
Results of Operations - Six-Month 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:
Six Months Ended
June 30, Increase
2012 2011 (Decrease)
(dollars in thousands, except per share amounts)
Interest income $ 16,355 $ 18,466 $ (2,111 )
Interest expense 3,270 4,311 (1,041 )
Net interest income 13,085 14,155 (1,070 )
Provision for loan losses 3,883 4,140 (257 )
Net interest income after provision for loan losses 9,202 10,015 (813 )
Non-interest income 2,401 1,553 848
Non-interest expenses 11,375 10,924 451
Income before provision for income taxes 228 644 (416 )
Provision for income taxes - 269 (269 )
Net income $ 228 $ 375 $ (147 )
. . .
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