Commonwealth Business Bank Reports 2016 Second Quarter Results

Commonwealth Business Bank Reports 2016 Second Quarter Results

Second Quarter 2016 Financial Highlights:

• Net income of $3.1 million, or $0.34 per diluted share.
• Total assets increased to $825.5 million, a 2.5% increase for the quarter.
• Gross loans, net, increased to $700.4 million, a 6.4% quarter-over-quarter increase.
• Return on average equity was 13.21% and return on average assets was 1.56% annualized.
• Net interest margin was 4.20% and cost of funds was 0.79% annualized.

Commonwealth Business Bank (“CBB” or “Bank”) (OTCQB: CWBB) today announced net income of $3.1 million for the second quarter, compared to $3.1 million for the first quarter of 2016 and $3.0 million for the second quarter of 2015. Diluted earnings per share were $0.34 for the second quarter, compared to $0.34 for the first quarter of 2016 and $0.33 for the second quarter of 2015.

For the first six months of 2016, net income increased 7.7% to $6.2 million, or $0.68 per diluted share, compared to $5.8 million, or $0.63 per diluted share, for the first six months of 2015.

“As our second quarter results indicate, we continue to be a top performing bank.” said Joanne Kim, President and CEO. “In order to maintain this level of performance in light of a continued low interest rate environment and competitive pressures, we will continue our efforts to lower our cost of funds, increase fee income and control expenses.” added Ms. Kim.

Net Interest Income and Net Interest Margin

Net interest income was $8.2 million for the second quarter of 2016, a decrease of $86,000, or (1.0%), compared to $8.3 million for the prior quarter and an increase of $1.0 million, or 14.4%, compared to $7.2 million for the year ago quarter. The quarter-over-quarter decrease was primarily due to the absence of $275,000 of interest income recognized in the prior quarter when a nonaccrual loan was paid off, which was partially offset by a $151,000 increase in discount accretion from higher levels of SBA loan prepayments. The quarterly year-over-year increase was primarily due to a $79.1 million increase in average loan balances and a 12 basis point increase in the yield on loans.

Net interest income was $16.6 million for the first six months of 2016, an increase of $2.9 million, or 21.1%, compared to $13.7 million for the same period last year. The annual year-over-year increase was primarily attributable to an $85.3 million increase in average loan balances and a 30 basis point increase in the yield on loans.

The net interest margin declined to 4.20% for the current quarter, from 4.46% in the prior quarter and from 4.21% in the year ago quarter. The quarter-over-quarter decrease was primarily due to a 29 basis point decrease in the yield on interest-earning assets to 4.91% from 5.20% for the prior quarter and the year-over-year quarterly decrease was primarily due to a 1 basis point increase in our cost of funds. For the six months ended June 30, 2016, the net interest margin was 4.33%, an increase of 20 basis points compared to 4.13% for the same period last year. This increase was primarily driven by a 23 basis point increase in the yield on interest-earning assets.

Our cost of funds was 0.79% for the current quarter, a decrease of 3 basis points from 0.82% in the prior quarter and an increase of 1 basis point from 0.78% for the year ago quarter. The decrease in cost of funds compared to the prior quarter was primarily due to a decrease in the percentage of higher-cost retail time deposits to total deposits. The Bank’s cost of funds for the six months ended June 30, 2016 was 0.81%, up 4 basis points from 0.77% for the same period last year.

Provision for Loan Losses

The Bank recorded a $400,000 provision for loan losses in the second quarter of 2016, no change from the $400,000 recorded in the prior quarter and an increase of $400,000 from no provision being recorded in the same quarter last year. For the first six months of 2016, the Bank recorded an $800,000 provision for loan losses, an increase of $800,000 from no provision being recorded in the same period in 2015.

Noninterest Income

For the current quarter, noninterest income totaled $3.1 million, increases of $178,000 and $221,000 from the prior and year ago quarters, respectively. The quarter-over-quarter increase was primarily due to an $88,000 increase in gains on sales of SBA loans, a $44,000 increase in loan fees, and a $39,000 increase in service charges on deposits. The year-over-year quarterly increase was primarily due to a $118,000 increase in gains on sales of SBA loans and a $75,000 increase in service charges on deposits. For the six months ended June 30, 2016, noninterest income increased $455,000 to $6.0 million from $5.6 million in the same period last year. The increase was primarily due to a $346,000 increase in gains on sales of SBA loans and a $139,000 increase in service charges on deposits, which were partially offset by a $103,000 decrease in SBA loan servicing fee income. The decline in SBA loan servicing fee income was primarily due to an increase in SBA loan prepayments.

As the following table indicates, during the second quarter of 2016, the Bank sold $32.1 million of SBA loans, compared to $31.4 million in the first quarter of 2016 and $27.1 million in the second quarter of 2015. For the six months ended June 30, 2016, the Bank sold $63.5 million of SBA loans, compared to $52.8 million in the same period last year. The quarterly average premium on sales of SBA loans for the current quarter was 10.17% compared to 9.88% in the prior quarter and 11.62% in the year ago quarter. The average premium on sales of SBA loans for the six months ended June 30, 2016 was 10.03% compared to 11.36% in the same period last year. The amount of SBA loan sales varies based on the volume of loans we originate, our liquidity needs and market conditions.

Noninterest Expense

Noninterest expense for the second quarter of 2016 was $5.6 million, an increase of $75,000, or 1.4%, from $5.5 million in the prior quarter and an increase of $691,000, or 14.0%, from $4.9 million in the year ago quarter. The quarter-over-quarter increase was primarily due to a $143,000 increase in marketing expense and a $41,000 increase in professional expense, which were partially offset by a $118,000 decrease in data processing expense. The year-over-year quarterly increase was primarily due to a $629,000 increase in salaries and employee benefits. The increase in salaries and employee benefits was due to a 13 person increase in the average number of full time equivalent employees (“FTEs”) to 128 during the current quarter from 115 during the year ago quarter. The increase in average FTEs in 2016 compared to 2015 was due to a Bank-wide initiative to add experienced personnel to support business expansion and enable us to achieve our strategic objectives.

For the six months ended June 30, 2016, noninterest expense was $11.2 million, an increase of $1.8 million, or 19.6%, from $9.3 million for the same period last year. The increase was primarily due to a $1.5 million, or 24.9%, increase in salaries and employee benefits and a $282,000, or 119.5%, increase in data processing expense. The increase in salaries and employee benefits was due to a 19 person increase in the average number of FTEs to 129 in the first six months of 2016 from 110 in the same period of 2015. The increase in data processing expense was due to core system conversion related expenses.

Income Tax Expense

The income tax expense was $2.2 million for the quarter, or an effective tax rate of 41.06%, compared to $2.2 million, or an effective tax rate of 41.55%, for the prior quarter and $2.1 million, or an effective tax rate of 41.37%, for the year ago quarter. For the six months ended June 30, 2016, the provision for income taxes was $4.4 million, or an effective tax rate of 41.31%, compared to $4.1 million, or an effective tax rate of 41.61% in the same period last year.

Pre-Tax, Pre-Provision Income

For the second quarter of 2016, the Bank’s pre-tax, pre-provision (“PTPP”) income was $5.7 million, an increase of $17,000, or 0.3%, from $5.7 million for the prior quarter and an increase of $568,000, or 11.0%, from $5.2 million for the same quarter a year ago. Annualized PTPP income to average assets decreased to 2.84% for the current quarter, compared to 2.98% and 2.94% for the prior and year ago quarters, respectively. For the six months ended June 31, 2015, PTPP income was $11.4 million, an increase of $1.5 million, or 15.2%, from $9.9 million in the same period last year. PTPP income to average assets for the six months ended June 30, 2016 decreased 1 basis point to 2.91% from 2.92% in the same period last year.

BALANCE SHEET

At June 30, 2016, the Bank had total assets of $825.5 million, an increase of $20.5 million, or 2.5%, from $805.0 million at March 31, 2016 and an increase of $81.5 million, or 10.9%, from $744.0 million at June 30, 2015. Earning assets totaled $802.5 million at June 30, 2016, an increase of $18.3 million, or 2.3%, from $784.2 million at March 31, 2015 and an increase of $74.8 million, or 10.3%, from $727.7 million at June 30, 2015.

The quarter-over-quarter increase in earning assets was primarily due to a $41.9 million increase in loans, and a $20.5 million increase in investment securities, which were partially offset by a $46.7 decrease in cash and cash equivalents. The year-over-year increase in earning assets was primarily due to a $103.4 million increase in loans and a $17.1 million increase in investment securities, which were partially offset by a $27.3 million decrease in cash and cash equivalents and a $5.2 million decrease time deposits at other banks. The year-over-year increase in total assets was partially funded by a $66.9 million increase in deposits.

Investment Securities

Total investment securities were $24.8 million at the current quarter end, an increase of $20.5 million, or 475.2%, compared to $4.3 million at the end of the prior quarter and an increase of $17.1 million, or 224.0%, compared to $7.6 million at the end of the year ago quarter.

Loans Receivable

The following table details loans by type at the dates indicated:

At June 30, 2016, gross loans, net, including loans held-for-sale were $714.2 million, an increase of $46.1 million, or 6.9%, from $668.1 million at March 31, 2016 and an increase of $91.9 million, or 14.8%, from $622.2 million at June 30, 2015. During the second quarter of 2016, total new loan production, including revolving lines of credit, was $113.1 million, compared to $76.2 million for the prior quarter and $99.7 million for the same quarter last year. For the six months ended June 30, 2016, total new loan production, including revolving lines of credit, was $189.3 million, compared to $171.8 million for the same period last year.

As discussed earlier, during the current quarter we sold $32.1 million of SBA loans, compared to sales of $31.4 million in the prior quarter and sales of $27.1 million in the year ago quarter.

Deposits

The following table details deposits by category at the dates indicated:

Total deposits were $711.5 million at the current quarter end, an increase of $15.6 million, or 2.2%, compared to $696.0 million at the end of the prior quarter and an increase of $66.9 million, or 10.4, compared to $644.6 million at the end of the year ago quarter. Noninterest-bearing deposits declined $602,000, or (0.4%), to $155.4 million at the end of the current quarter and increased $15.1 million, or 10.8%, compared to $140.3 million at the end of the year ago quarter. Noninterest-bearing deposits to total deposits were 21.8%, 22.4% and 21.8% at the end of the current, prior and year ago quarters, respectively. The Bank’s cost of deposits decreased 3 basis points to 0.78% in the current quarter from 0.81% in the prior quarter and increased 2 basis points from 0.76% in the same quarter last year. The quarter-over-quarter decrease in the cost of deposits was primarily due to replacing maturing higher-cost retail time deposits with lower-cost wholesale time deposits.

ASSET QUALITY

Loans 30 to 89 days past due and on accrual status at the end of the current quarter were $354,000, a decrease of $1.9 million compared to $2.3 million at the end of the prior quarter, and an increase of $262,000 from $92,000 at the end of the same quarter a year ago. Nonaccrual loans increased $1.4 million to $3.3 million at the end of the current quarter from $1.9 million at the end of the prior quarter and increased $1.3 million from $1.9 million at the end of the year ago quarter. The increase in nonaccrual loans was primarily due to three loans being placed on nonaccrual status. The three loans consisted of one $1.2 million past due loan and two loans to one borrower totaling $809,000.

Nonperforming assets at the end of current quarter were $8.4 million, or 1.03% of gross loans excluding loans held-for-sale, an increase of $1.0 million, compared to $7.3 million, or 0.94% of gross loans excluding loans held-for-sale, at March 31, 2016 and an increase of $815,000 from $7.5 million, or 1.26% of gross loans excluding loans held-for-sale, at June 30, 2015.

The allowance for loan losses at the end of current quarter was $9.3 million, or 1.33% of gross loans excluding loans held-for-sale, compared to $9.0 million, or 1.37% of gross loans excluding loans held-for-sale, at March 31, 2016, and $9.0 million, or 1.51% of gross loans excluding loans held-for-sale, at June 30, 2015.

CAPITAL

At June 30, 2016, the Bank continued to exceed all regulatory capital requirements to be classified as a “well-capitalized” institution, and maintained a capital conservation buffer in excess of the minimum required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments. The minimum capital conservation buffer requirement is 0.625% in 2016 and there was no capital conservation buffer requirement in 2015. The capital conservation buffer is calculated as the smallest excess of a bank’s common equity tier 1, tier 1 risk-based and total risk-based capital ratios and the regulatory “adequately” capitalized minimum ratios of 4.50%, 6.00% and 8.00%, respectively. The minimum capital conservation buffer will increase an additional 0.625% in each of the subsequent three years, reaching the fully phased-in minimum of 2.500% in 2019. The Bank’s regulatory capital ratios and capital conservation buffer at the dates indicated are summarized below:

ABOUT COMMONWEALTH BUSINESS BANK (“CBB BANK”)

Commonwealth Business Bank is a full-service commercial bank also doing business as “CBB Bank,” and specializes in small-to medium-sized businesses. CBB has six full service branches in Los Angeles, Orange, and Dallas Counties and five loan production offices in Texas, Georgia, Colorado, and Washington.

For additional information, please visit CBB’s website at www.cbb-bank.com.

NON-GAAP FINANCIAL MEASURES

CBB may use certain non-GAAP financial measures to provide meaningful supplemental information regarding CBB’s operational performance and to enhance investors’ overall understanding of such financial performance. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under the GAAP.

FORWARD-LOOKING STATEMENTS

This release may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include, but are not necessarily limited to, fluctuations in interest rates, inflation, government regulations and general economic conditions, and competition within the business areas in which Commonwealth Business Bank is conducting its operations, including the real estate market in California, and other factors beyond Commonwealth Business Bank’s control. Such risks and uncertainties could cause results for subsequent interim periods or for the entire year to differ materially from those indicated. Readers should not place undue reliance on the forward-looking statements, which reflect management’s view only as of the date hereof. Commonwealth Business Bank undertakes no obligation to revise these forward-looking statements publicly to reflect subsequent events or circumstances.