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| BBNK > SEC Filings for BBNK > Form 10-Q on 6-Nov-2012 | All Recent SEC Filings |
6-Nov-2012
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) unfavorable economic conditions, both nationally and
regionally, continues or worsens for an unknown period, resulting in, among
other things, continued or increased deterioration in credit quality;
(4) changes in the regulatory environment, including the Dodd-Frank legislation;
(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;
(10) the involvement of the United States in war or other hostilities; and (11)
governmental action or inaction in response to economic and political conditions
could have unpredictable consequences for the economy and the banking industry.
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. Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements. 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 using a discount rate appropriate to the loan's level of risk, 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.
Sale of SBA Loans: 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, 2012 and December 31, 2011, 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.
Investment securities: Our securities are classified as either available-for-sale or held-to-maturity. 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. Held-to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.
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 ended September 30, 2012 and 2011 (dollars in thousands, except per
share data).
Three months ended Nine months ended
September 30, September 30,
2012 2011 2012 2011
Statement of Operations Data:
Interest income $ 15,970 $ 13,180 $ 46,385 $ 37,191
Interest expense 573 529 1,601 1,716
Net interest income 15,397 12,651 44,784 35,475
Provision for credit losses 200 1,250 2,450 2,000
Net interest income after
provision for credit losses 15,197 11,401 42,334 33,475
Other income 3,785 3,257 9,300 7,314
Other expenses 11,584 10,923 34,020 31,365
Income before income taxes 7,398 3,735 17,614 9,424
Income taxes 3,034 1,532 7,234 3,865
Net income $ 4,364 $ 2,203 $ 10,380 $ 5,559
Preferred dividends - - - 200
Net income available to common
shareholders $ 4,364 $ 2,203 $ 10,380 $ 5,359
Per Share Data:
Basic earnings per share $ 0.30 $ 0.15 $ 0.72 $ 0.38
Diluted earnings per share 0.29 0.15 0.70 0.37
Shareholders' equity per share 9.02 8.33 9.02 8.33
Balance Sheet Data:
Balance sheet totals:
Assets $ 1,247,554 $ 1,093,983
Loans, net 858,032 699,045
Deposits 1,071,207 935,992
Shareholders' equity 142,051 126,045
Average balance sheet amounts:
Assets $ 1,217,074 $ 1,075,319 $ 1,178,455 $ 1,029,197
Loans, net 815,042 654,792 789,207 625,113
Deposits 1,041,394 918,346 994,400 866,106
Shareholders' equity 140,255 125,850 136,204 128,159
Selected Ratios:
Return on average assets 1.43 % 0.81 % 1.18 % 0.72 %
Return on average equity 12.38 % 6.94 % 10.18 % 5.80 %
Efficiency ratio 60.39 % 68.66 % 62.90 % 73.30 %
Risk based capital ratio 15.70 % 16.55 %
Net chargeoffs (recoveries) to
average gross loans -0.01 % -0.03 % 0.15 % -0.12 %
Allowance for loan losses to
total loans 2.25 % 2.54 %
Average equity to average assets 11.52 % 11.70 % 11.56 % 12.45 %
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Summary of Financial Results - Quarter ended September 30, 2012
The Company reported net operating income of $4.4 million for the three months ended September 30, 2012 representing an increase of $2.2 million, or 98.1%, compared to net operating income of $2.2 million for the same period one year ago. The Company reported earnings per diluted share of $0.29 for the current quarter compared to $0.15 per diluted share for the same quarter in 2011.
The increase in earnings during the period ended September 30, 2012 compared to the same period in 2011 resulted primarily from an increase in interest income related to loans and investment securities, an increase in non-interest income and a decrease in provision for credit losses, offset slightly by an increase in non-interest expense related to supporting growth and investments in new initiatives. See the specific sections below for details regarding these changes.
The table below highlights the changes in the nature and sources of income and expense.
Three months ended
September 30, Increase
(dollars in thousands) 2012 2011 (Decrease)
Interest income $ 15,970 $ 13,180 $ 2,790
Interest expense 573 529 44
Net interest income 15,397 12,651 2,746
Provision for credit losses 200 1,250 (1,050 )
Net interest income after provision for
credit losses 15,197 11,401 3,796
Other income 3,785 3,257 528
Other expenses 11,584 10,923 661
Income before income taxes 7,398 3,735 3,663
Income taxes 3,034 1,532 1,502
Net income $ 4,364 $ 2,203 $ 2,161
Net income available to common shareholders $ 4,364 $ 2,203 $ 2,161
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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, 2012 was $15.4 million, which was comprised of $16.0 million in interest income and $573,000 in interest expense. Net interest income for the quarter ended September 30, 2011 was $12.7 million, which was comprised of $13.2 million in interest income and $529,000 in interest expense. Net interest income for the quarter ended September 30, 2012 represented an increase of $2.7 million or 21.7% from the same period one year earlier. The increase in net interest income from the same period one year ago was primarily attributable to an increase in average earning assets as a result of loan growth, combined with a decrease in average nonperforming loans.
The composition of the average balance sheet impacts growth in net interest income. For the quarter ended September 30, 2012 average earning assets of $1.16 billion represented an increase of $149.3 million, or 14.7%, compared to $1.01 billion for the same period in 2011. The Company's loan-to-deposit ratio, a measure of leverage, averaged 80.43% during the quarter ended September 30, 2012, which represented an increase compared to an average of 73.33% for the same quarter of 2011 as a result of higher loan growth relative to deposit funding.
The Company's net interest margin (net interest income divided by average earning assets) for the quarter ended September 30, 2012 was 5.26% compared to 4.95% in the same period one year earlier. The increase in net interest margin was primarily due to increased balance sheet leverage, a more favorable mix in average earning assets and increased recurring loan fees related to overall growth of the loan portfolio. The positive impact on the net interest margin from increased loan fees for the three months ended September 30, 2012 compared to the same period last year was 34 basis points.
The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters ended September 30, 2012 and 2011.
Three months ended September 30,
2012 2011
Yields Interest Yields Interest
Average or Income/ Average or Income/
(dollars in thousands) Balance Rates Expense Balance Rates Expense
ASSETS
Interest earning
assets (2):
Loans (1) $ 837,574 6.9 % $ 14,467 $ 673,464 6.8 % $ 11,615
Federal funds sold 99,726 0.2 % 59 107,063 0.2 % 64
Investment securities 225,775 2.5 % 1,444 233,202 2.6 % 1,501
Other 335 0.0 % - 335 0.0 % -
Total interest earning
assets 1,163,410 5.5 % 15,970 1,014,064 5.2 % 13,180
Noninterest-earning
assets:
Cash and due from
banks 23,232 25,066
All other assets (3) 30,432 36,189
TOTAL $ 1,217,074 $ 1,075,319
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Deposits: Demand $ 5,475 0.0 % - $ 7,115 0.1 % $ 1 Savings 295,646 0.3 % 237 324,282 0.3 % 220 Time 45,370 0.6 % 63 32,948 0.5 % 38 Other 19,592 5.5 % 273 17,527 6.1 % 270 Total interest bearing liabilities 366,083 0.6 % 573 381,872 0.5 % 529 Noninterest-bearing liabilities: Demand deposits 694,903 554,001 Accrued expenses and other liabilities 15,833 13,596 Shareholders' equity 140,255 125,850 TOTAL $ 1,217,074 $ 1,075,319 Net interest income and margin 5.3 % $ 15,397 4.9 % $ 12,651 |
The following table shows the effect of the interest differential of volume and rate changes for the quarters ended September 30, 2012 and 2011. 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.
Three months ended September 30,
2012 vs. 2011
Increase (decrease)
due to change in
Average Average Total
(dollars in thousands) Volume Rate Change
Interest income:
Loans $ 2,803 $ 49 $ 2,852
Federal funds sold (4 ) (0 ) (4 )
Investment securities (52 ) (5 ) (57 )
Total interest income 2,747 43 2,790
Interest expense:
Demand - (1 ) (1 )
Savings (23 ) 41 17
Time 17 8 25
Other 28 (25 ) 3
Total interest expense 22 22 44
Change in net interest income $ 2,725 $ 21 $ 2,746
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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 $16.0 million in the quarter ended September 30, 2012 represented an increase of $2.8 million, or 21.2%, from $13.2 million in the same quarter one year earlier. The average yield on earning assets was 5.46% for the quarter ended September 30, 2012 compared to 5.16% for the quarter ended September 30, 2011. The increase in interest income was primarily due to an increase in earning assets and a decrease in non-performing loans.
Average gross loans were $837.6 million for three months ended September 30, 2012, an increase of $164.1 million or 24.4% from $673.5 million for the same period one year earlier. Average loans comprised 72.0% of average earning assets in the three months ended September 30, 2012 compared to 66.4% in the third quarter of 2011.
Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $325.8 million for the quarter ended September 30, 2012, a decrease of $14.8 million or 4.3% from $340.6 million for the three months ended September 30, 2011.
Interest Expense
Interest expense was $573,000 for the quarter ended September 30, 2012, which represented an increase of $44,000, or 8.3% from $529,000 for the comparable period of 2011. The increase in interest expense was primarily due to an increase in average time accounts and other interest bearing liabilities combined with an increase in yield on savings and time accounts to 35 basis points in the third quarter of 2012 compared to 29 basis points in the same period in 2011. Average interest-bearing liabilities were $366.1 million for the three months ended September 30, 2012, a decrease of $15.8 million, or 4.1%, from $381.9 million for the same period one year earlier.
Average interest bearing deposits were $346.5 million for the quarter ended September 30, 2012, which represented 33.3% of total average deposits and was a decrease of $17.9 million, or 4.9%, from $364.3 million representing 39.7% of total average deposits in the third quarter of 2011.
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 $19.6 million in the three months ended September 30, 2012 and $17.5 million for the comparable period of 2011.
The average rate paid on interest-bearing liabilities was 0.62% and 0.55% in the quarters ended September 30, 2012 and 2011, respectively.
Credit Risk and Provision for Credit Losses
The Company maintains an allowance for credit losses which is based, in part, on the Company's 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 charged-off $17,000 during the three months ended September 30, 2012 compared to $280,000 during the three months ended September 30, 2011. Loan recoveries of $67,000 were recognized during the third quarter of 2012 compared to $450,000 for the three months ended September 30, 2011.
The Company recorded a provision for credit losses of $200,000 for the three months ended September 30, 2012 due to the significant amount of new credit funding in the quarter. This compares to $1.3 million recorded for the quarter ending September 30, 2011.
The following schedule provides an analysis of the allowance for credit losses for the quarters ended September 30, 2012 and 2011, respectively:
Analysis of the allowance for credit losses:
Three months ended
September 30,
(dollars in thousands) 2012 2011
Balance, beginning of period $ 19,541 $ 16,872
Provision for credit losses 200 1,250
Charge-offs (17 ) (280 )
Recoveries 67 450
Balance, end of period $ 19,791 $ 18,292
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The allowance for loan losses was $19.8 million, or 2.25% of total loans, at September 30, 2012, compared to $18.3 million, or 2.54% of total loans, at September 30, 2011. The increase in the allowance for loan losses from September 30, 2011 to September 30, 2012 is primarily attributable to the growth of the loan portfolio.
Based on an evaluation of 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, 2012 and December 31, 2011:
September 30, 2012 December 31, 2011
Percent of Percent of
ALLL in each ALLL in each
category to category to
(dollars in thousands) Amount gross loans Amount gross loans
Commercial $ 6,003 0.7 % $ 5,545 0.7 %
Real estate construction 765 0.1 % 1,220 0.2 %
Land loans 362 0.0 % 613 0.1 %
Real estate other 6,232 0.7 % 6,111 0.8 %
Factoring and asset based 3,567 0.4 % 2,381 0.3 %
SBA 2,758 0.3 % 2,567 0.3 %
Other 104 0.0 % 103 0.0 %
$ 19,791 2.2 % $ 18,540 2.4 %
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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.
By September 30, 2012, the Company's land development portfolio was reduced to $5.3 million with just $1.4 million remaining exposure outside of the primary market area. Further, over 70% of the remaining loans in this category are underwritten to amortizing term structures supported by cash flow from liquidity of the borrowers.
Construction loans at September 30, 2012 were $39.0 million with $4.9 million remaining on projects outside of the primary market area. In addition, at that date $18.5 million, or 47.0%, were loans to finance commercial projects while none were to finance residential projects of five or more units.
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