e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-25135
Bank of Commerce Holdings
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California
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94-2823865 |
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(State or jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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1901 Churn Creek Road Redding, California
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96002 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (530) 722-3955
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definition of
accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act.
(Check One)
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act)
Yes o No þ
Outstanding shares of Common Stock, no par value, as of June 30, 2009: 8,711,495
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index to Form 10-Q
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PAGE NUMBER |
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PART I |
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Item 1 |
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4 |
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Item 2 |
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25 |
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25 |
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27 |
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30 |
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30 |
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32 |
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32 |
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32 |
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32 |
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33 |
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33 |
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34 |
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34 |
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35 |
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37 |
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37 |
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37 |
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38 |
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38 |
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39 |
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40 |
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43 |
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44 |
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45 |
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45 |
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46 |
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47 |
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48 |
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50 |
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2
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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Dollars in thousands |
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June 30, 2009 |
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Dec. 31,2008 |
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June 30, 2008 |
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ASSETS |
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Cash and due from banks, non interest bearing |
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$ |
36,352 |
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$ |
10,216 |
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$ |
16,660 |
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Interest bearing due from banks |
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27,512 |
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23,500 |
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0 |
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Federal funds sold and securities purchased under
agreements to resell |
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15,140 |
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51,475 |
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11,585 |
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Cash and cash equivalents |
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79,004 |
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85,191 |
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28,245 |
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Securities available-for-sale, at fair value (including
pledged collateral of $60,678 at June 30, 2009, $68,735
at December 31, 2008 and $68,165 at June 30, 2008) |
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75,480 |
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131,687 |
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66,728 |
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Securities held-to-maturity, at cost (estimated fair
value of $0 at June 30, 2009, $0 at December 31, 2008 and
$10,285 at June 30, 2008) |
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10,385 |
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Portfolio Loans, net of the allowance for loan losses of
$8,496 at June 30, 2009, $8,429 at December 31, 2008 and
$5,017 at June 30, 2008 (includes estimated fair value of
ITIN loans of $80,671 at June 30, 2009, $0 at December
31, 2008 and $0 at June 30, 2008) |
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587,637 |
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518,946 |
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507,651 |
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Mortgages held for sale, at fair value |
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20,225 |
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Bank premises and equipment, net |
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10,586 |
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10,672 |
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11,068 |
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Goodwill |
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2,927 |
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Other real estate owned |
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3,229 |
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2,934 |
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Other assets |
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28,031 |
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24,784 |
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22,531 |
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TOTAL ASSETS |
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$ |
807,119 |
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$ |
774,214 |
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$ |
646,608 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Demand noninterest bearing |
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69,957 |
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$ |
79,988 |
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$ |
68,625 |
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Demand interest bearing |
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142,210 |
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143,871 |
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128,994 |
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Savings accounts |
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59,432 |
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67,136 |
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52,453 |
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Certificates of deposit |
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295,508 |
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264,287 |
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218,303 |
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Total deposits |
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567,107 |
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555,282 |
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468,375 |
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Securities sold under agreements to repurchase |
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10,843 |
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13,853 |
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14,343 |
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Federal Home Loan Bank and Federal Reserve Bank borrowings |
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120,000 |
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120,000 |
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95,000 |
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Mortgage warehouse lines of credit |
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17,512 |
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Other liabilities |
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9,344 |
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7,036 |
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7,396 |
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Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
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15,465 |
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15,465 |
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15,465 |
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Total Liabilities |
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740,271 |
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711,636 |
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600,579 |
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Commitments and contingencies
Stockholders Equity: |
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Preferred stock (liquidation preference of $1,000 per
share; issued 2008) 2,000,000 authorized; 17,000 shares
issued and outstanding in 2009, and December 31, 2008,
none outstanding at June 30, 2008 |
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16,596 |
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16,551 |
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Common stock , no par value, 50,000,000 shares
authorized; 8,711,495 shares
issued and outstanding at June 30, 2009, December 31,
2008 and at June 30, 2008 |
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9,688 |
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9,650 |
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9,590 |
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Common Stock Warrant |
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449 |
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449 |
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Retained earnings |
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37,922 |
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36,009 |
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37,344 |
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Accumulated other comprehensive income (loss), net of tax |
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30 |
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(81 |
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(905 |
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Total Equity Bank of Commerce Holdings |
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64,685 |
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62,578 |
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46,029 |
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Non controlling interest in subsidiary |
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2,163 |
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Total stockholders equity |
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66,848 |
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62,578 |
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46,029 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
807,119 |
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$ |
774,214 |
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$ |
646,608 |
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See accompanying notes to condensed consolidated financial statements.
4
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three and Six Months Ended June 30, 2009 and June 30, 2008
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For Three Months Ended: |
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For Six Months Ended: |
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Amounts in thousands, except for per share data |
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June 30, 2009 |
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June 30, 2008 |
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June 30, 2009 |
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June 30, 2008 |
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Interest income: |
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Interest and fees on loans |
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$ |
9,272 |
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$ |
8,171 |
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$ |
17,321 |
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$ |
17,302 |
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Interest on tax-exempt securities |
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|
279 |
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302 |
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575 |
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576 |
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Interest on U.S. government securities |
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954 |
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533 |
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2,146 |
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|
1,014 |
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Interest on federal funds sold and
securities purchased under agreements to resell |
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5 |
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90 |
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30 |
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|
148 |
|
Interest on other securities |
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|
131 |
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|
23 |
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|
248 |
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|
45 |
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Total interest income |
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10,641 |
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9,119 |
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20,320 |
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19,085 |
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Interest expense: |
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|
|
|
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Interest on demand deposits |
|
|
239 |
|
|
|
498 |
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|
546 |
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|
1,248 |
|
Interest on savings deposits |
|
|
238 |
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|
|
360 |
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|
519 |
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|
|
650 |
|
Interest on certificates of deposit |
|
|
1,900 |
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|
|
2,238 |
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|
|
3,781 |
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|
|
4,614 |
|
Securities sold under agreements to repurchase |
|
|
11 |
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|
|
35 |
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|
|
25 |
|
|
|
119 |
|
Interest on FHLB and other borrowings |
|
|
539 |
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|
|
781 |
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|
|
1,120 |
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|
1,512 |
|
Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust |
|
|
216 |
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|
|
161 |
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|
431 |
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|
476 |
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Total interest expense |
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3,143 |
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|
|
4,073 |
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6,422 |
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8,619 |
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Net interest income |
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7,498 |
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|
5,046 |
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|
13,898 |
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|
10,466 |
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Provision for loan and lease losses |
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|
3,056 |
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|
1,000 |
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|
4,481 |
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|
1,600 |
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Net interest income after provision for loan losses |
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|
4,442 |
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|
|
4,046 |
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|
|
9,417 |
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|
8,866 |
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Noninterest income: |
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|
|
|
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|
|
|
|
|
|
|
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Service charges on deposit accounts |
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|
96 |
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|
|
50 |
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|
188 |
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|
112 |
|
Payroll and benefit processing fees |
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|
104 |
|
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|
99 |
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|
238 |
|
|
|
228 |
|
Earnings on cash surrender value -
Bank owned life insurance |
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|
117 |
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|
|
85 |
|
|
|
203 |
|
|
|
168 |
|
Net gain on sale of securities available-for-sale |
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|
1,074 |
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|
|
194 |
|
|
|
1,478 |
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|
|
436 |
|
Net gain on transfer of financial assets |
|
|
340 |
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|
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|
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|
340 |
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|
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Net loss on sale of derivative swap transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225 |
) |
Merchant credit card service income, net |
|
|
75 |
|
|
|
97 |
|
|
|
149 |
|
|
|
180 |
|
Mortgage brokerage fee income |
|
|
1,302 |
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|
5 |
|
|
|
1,302 |
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|
|
15 |
|
Other income |
|
|
87 |
|
|
|
187 |
|
|
|
162 |
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,195 |
|
|
|
717 |
|
|
|
4,060 |
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|
|
1,282 |
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|
|
|
|
|
|
|
|
|
|
|
|
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Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and related benefits |
|
|
2,644 |
|
|
|
1,892 |
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|
|
4,771 |
|
|
|
3,841 |
|
Occupancy and equipment expense |
|
|
730 |
|
|
|
640 |
|
|
|
1,302 |
|
|
|
1,284 |
|
FDIC insurance premium |
|
|
301 |
|
|
|
113 |
|
|
|
574 |
|
|
|
171 |
|
Data processing fees |
|
|
68 |
|
|
|
65 |
|
|
|
179 |
|
|
|
143 |
|
Professional service fees |
|
|
295 |
|
|
|
133 |
|
|
|
454 |
|
|
|
251 |
|
Payroll and benefit fees |
|
|
27 |
|
|
|
27 |
|
|
|
61 |
|
|
|
60 |
|
Deferred compensation expense |
|
|
123 |
|
|
|
113 |
|
|
|
242 |
|
|
|
224 |
|
Stationery and supplies |
|
|
26 |
|
|
|
80 |
|
|
|
79 |
|
|
|
142 |
|
Postage |
|
|
76 |
|
|
|
38 |
|
|
|
157 |
|
|
|
72 |
|
Directors expense |
|
|
120 |
|
|
|
94 |
|
|
|
157 |
|
|
|
142 |
|
Other expenses |
|
|
483 |
|
|
|
418 |
|
|
|
877 |
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
4,893 |
|
|
|
3,613 |
|
|
|
8,853 |
|
|
|
7,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,744 |
|
|
|
1,150 |
|
|
|
4,624 |
|
|
|
2,971 |
|
Provision for income taxes |
|
|
1,027 |
|
|
|
244 |
|
|
|
1,637 |
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,717 |
|
|
|
906 |
|
|
|
2,987 |
|
|
|
2,136 |
|
Less: Net income attributable to non-controlling interest |
|
|
101 |
|
|
|
|
|
|
|
101 |
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
1,616 |
|
|
$ |
906 |
|
|
$ |
2,886 |
|
|
$ |
2,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: preferred dividend and accretion on preferred stock |
|
|
235 |
|
|
|
|
|
|
|
472 |
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,381 |
|
|
$ |
906 |
|
|
$ |
2,414 |
|
|
$ |
2,136 |
|
Basic earnings per share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
Weighted average shares basic |
|
|
8,711 |
|
|
|
8,748 |
|
|
|
8,711 |
|
|
|
8,714 |
|
Diluted earnings per share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Weighted average shares diluted |
|
|
8,712 |
|
|
|
8,751 |
|
|
|
8,712 |
|
|
|
8,732 |
|
Cash Dividends declared |
|
$ |
0.00 |
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
0.16 |
|
See accompanying notes to condensed consolidated financial statements.
5
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
Three and Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Subtotal |
|
|
Non |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comp- |
|
|
Bank of |
|
|
Controlling |
|
|
|
|
|
|
Comprehensive |
|
|
Preferred |
|
|
|
|
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
Income (Loss), |
|
|
Commerce |
|
|
Interest in |
|
|
|
|
Dollars in Thousands |
|
Income |
|
|
Amount |
|
|
Warrant |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
net of tax |
|
|
Holdings |
|
|
Subsidiary |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
|
|
|
$ |
16,551,268 |
|
|
$ |
448,732 |
|
|
|
8,711,495 |
|
|
$ |
9,649,672 |
|
|
$ |
36,008,866 |
|
|
|
($80,897 |
) |
|
$ |
62,577,641 |
|
|
$ |
0 |
|
|
$ |
62,577,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,270,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,270,015 |
|
|
|
|
|
|
|
1,270,015 |
|
|
|
|
|
|
|
1,270,015 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
securities, net of
reclassification
adjustment |
|
|
473,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification
adjustment for gains
included in net income,
net of tax |
|
|
(237,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
1,506,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,089 |
|
|
|
236,089 |
|
|
|
|
|
|
|
236,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred Stock |
|
|
|
|
|
|
22,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,437 |
|
|
|
|
|
|
|
22,437 |
|
Common cash dividends
($0.06 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(522,690 |
) |
|
|
|
|
|
|
(522,690 |
) |
|
|
|
|
|
|
(522,690 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214,861 |
) |
|
|
|
|
|
|
(214,861 |
) |
|
|
|
|
|
|
(214,861 |
) |
Compensation expense associated
with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,902 |
|
|
|
|
|
|
|
|
|
|
|
28,902 |
|
|
|
|
|
|
|
28,902 |
|
Balance at March 31, 2009 |
|
|
|
|
|
$ |
16,573,705 |
|
|
$ |
448,732 |
|
|
|
8,711,495 |
|
|
$ |
9,678,574 |
|
|
$ |
36,541,330 |
|
|
$ |
155,192 |
|
|
$ |
63,397,533 |
|
|
$ |
0 |
|
|
$ |
63,397,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,717,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615,771 |
|
|
|
|
|
|
|
1,615,771 |
|
|
|
101,249 |
|
|
|
1,717,020 |
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
securities, net of
reclassification
adjustment |
|
|
506,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification
adjustment for gains
included in net income,
net of tax |
|
|
(631,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
1,591,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other Comprehensive Income
non-controlling interest |
|
|
(101,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income BOCH |
|
|
1,490,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,176 |
) |
|
|
(125,176 |
) |
|
|
|
|
|
|
(125,176 |
) |
Accretion on Preferred Stock |
|
|
|
|
|
|
22,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212,500 |
) |
|
|
|
|
|
|
(212,500 |
) |
|
|
|
|
|
|
(212,500 |
) |
Compensation expense associated
with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,434 |
|
|
|
|
|
|
|
|
|
|
|
9,434 |
|
|
|
|
|
|
|
9,434 |
|
Cash distribution to non
controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061,812 |
|
|
|
2,061,812 |
|
|
|
Balance at June 30, 2009 |
|
|
|
|
|
$ |
16,596,142 |
|
|
$ |
448,732 |
|
|
|
8,711,495 |
|
|
$ |
9,688,008 |
|
|
$ |
37,922,164 |
|
|
$ |
30,016 |
|
|
$ |
64,685,062 |
|
|
$ |
2,163,061 |
|
|
$ |
66,848,123 |
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
Dollars in thousands |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,886 |
|
|
$ |
2,136 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
4,481 |
|
|
|
1,600 |
|
Provision for depreciation and amortization |
|
|
592 |
|
|
|
598 |
|
Compensation expense associated with stock options |
|
|
38 |
|
|
|
57 |
|
Gain on transfer of financial assets |
|
|
(340 |
) |
|
|
0 |
|
Gain on sale of securities available-for-sale |
|
|
(1,478 |
) |
|
|
(436 |
) |
Amortization of investment premiums and accretion of discounts, net |
|
|
(61 |
) |
|
|
18 |
|
Loss on sale of derivative swap transaction |
|
|
0 |
|
|
|
225 |
|
Loss (Gain) on sale of fixed assets |
|
|
1 |
|
|
|
(5 |
) |
Deferred income taxes |
|
|
(809 |
) |
|
|
(707 |
) |
Increase in cash surrender value of bank owned life policies |
|
|
(1,379 |
) |
|
|
(141 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(1,578 |
) |
|
|
(860 |
) |
Deferred compensation |
|
|
216 |
|
|
|
219 |
|
Deferred loan fees |
|
|
167 |
|
|
|
(31 |
) |
Other liabilities |
|
|
(1,546 |
) |
|
|
(378 |
) |
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
1,190 |
|
|
|
2,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities and payments of available-for-sale securities |
|
|
19,734 |
|
|
|
4,071 |
|
Proceeds from sales of available-for-sale securities |
|
|
54,427 |
|
|
|
26,616 |
|
(Purchases) of available-for-sale securities |
|
|
(16,004 |
) |
|
|
0 |
|
Purchases of ITIN loan portfolio |
|
|
(66,696 |
) |
|
|
0 |
|
Investment in bank owned life policies |
|
|
0 |
|
|
|
(30,052 |
) |
Loan origination, net of principal repayments |
|
|
(18,292 |
) |
|
|
(22,938 |
) |
Purchases of Bank premises and equipment, net |
|
|
(326 |
) |
|
|
(697 |
) |
Cash acquired in merger, net of cash consideration paid |
|
|
4,825 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Net cash used from investing activities |
|
|
(22,332 |
) |
|
|
(23,000 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
11,802 |
|
|
|
(5,255 |
) |
Net (decrease) in securities sold under agreement to repurchase |
|
|
(3,009 |
) |
|
|
(1,170 |
) |
Net change in FHLB advances |
|
|
(20,000 |
) |
|
|
35,000 |
|
Net change in other short term borrowings |
|
|
27,809 |
|
|
|
0 |
|
Cash dividends paid on common stock |
|
|
(1,220 |
) |
|
|
(1,396 |
) |
Cash dividends paid on preferred stock |
|
|
(427 |
) |
|
|
0 |
|
Proceeds from stock options exercised |
|
|
0 |
|
|
|
41 |
|
Common stock repurchased |
|
|
0 |
|
|
|
(504 |
) |
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
14,955 |
|
|
|
26,716 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(6,187 |
) |
|
|
6,011 |
|
Cash and cash equivalents, beginning of period |
|
|
85,191 |
|
|
|
22,234 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
|
79,004 |
|
|
$ |
28,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,132 |
|
|
$ |
|
|
Interest |
|
$ |
6,474 |
|
|
|
8,970 |
|
Transfer of loans to other real estate owned |
|
$ |
3,229 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Consolidation and Basis of Presentation
Bank of Commerce Holdings is a financial services company providing banking, investments and
mortgage banking through branch locations, the internet and other distribution channels. The
unaudited condensed consolidated financial statements include the accounts of Bank of Commerce
Holdings (the Holding Company) and its wholly owned subsidiaries Redding Bank of Commerce and
Roseville Bank of Commerce (BOC or the Bank) and its majority owned subsidiary, Bank of
Commerce Mortgage (collectively the Company). All significant inter-company balances and
transactions have been eliminated. The condensed consolidated balance sheet as of December 31,
2008, which has been derived from audited financial statements audited by Moss Adams, LLP, a
registered public accounting firm, as indicated in their report not included herein, and the
unaudited condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial information contained in this
report reflects all adjustments that in the opinion of management are necessary for a fair
presentation of the results of the interim periods. All such adjustments are of a normal recurring
nature. Certain reclassifications have been made to the prior period condensed consolidated
financial statements to conform to the current financial statement presentation with no effect on
previously reported equity and net income.
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and general practices within the banking industry. In
preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from
those estimates.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes contained in Bank of
Commerce Holdings 2008 Annual Report on Form 10-K. The results of operations and cash flows for the
2009 interim periods shown in this report are not necessarily indicative of the results for any
future interim period or the entire fiscal year. For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase
agreements. Generally, federal funds are sold for a one-day period and securities purchased under
agreements to resell are for no more than a 90-day period. Balances held in federal funds sold may
exceed FDIC insurance limits.
2. Business Combinations
A business combination occurs when an entity acquires net assets that constitute a business, or
acquires equity interests in one or more other entities that are businesses and obtains control
over those entities. Business combinations may be effected through the transfer of consideration
such as cash, other financial or non-financial assets, debt, or common or preferred shares. The
assets and liabilities of an acquired entity or business are recorded at their respective fair
values as of the closing date of the transaction. The results of operations of an acquired entity
are included in our consolidated results from the closing date of the transaction, and prior
periods are not restated. All business combinations are accounted for using the acquisition method.
The Company will regularly explore opportunities to acquire financial services companies and
businesses. Public announcements about an acquisition opportunity are not made until a definitive
agreement has been signed. In the second quarter 2009, the Company entered into a stock purchase
agreement with Simonich Corporation d.b.a. BWC Mortgage Services to acquire 51% of the capital
stock of Simonich Corporation. Simonich Corporation d.b.a. BWC Mortgage Services is a successful
state of the art mortgage broker of residential real estate loans with ten offices in three
different states and licenses in California, Oregon, Idaho and Nevada. The business was formed in
1984 and the corporate offices are located in San Ramon, California. The business funds over $1.0
billion of first mortgages per year. The Corporate offices are located in San Ramon, California.
The agreement was dated May 15, 2009. The total consideration paid by the Company was $2.5 million,
with $1.5 million paid at closing and the additional $1.0 million to be earned-out over a period of
three years based upon delivering an established level of profits. Fair market value is considered
to represent a value at which a willing seller and willing buyer both being informed of the
relevant facts about the business, could reasonable conduct a transaction, neither party acting
under compulsion to do so. Fair market value estimates include the tangible and intangible assets
of the business including the quality of the management team, the customer referral network, the
current set of leases, infrastructure, market research and other intangibles. The Companys
acquisition of 51% majority ownership interest was measured at fair value based on the total
consideration transferred. The fair value of the non-controlling interest was estimated through a
valuation of the acquired company. Two approaches were used to value the business, the market and
income approaches. The total estimated fair value of the acquired company was $4.2 million. This
value represents the following change in control transaction multiples: 13.27 times trailing twelve
months earnings, 29.21% price to trailing twelve months gross revenues and 436.70% of total
shareholders equity. The estimated fair value of $2.06 million of the non-controlling interest was
derived using the total fair value of $4.2 million and the 49% non-controlling interest.
8
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The agreement allows the Company to penetrate into the Mortgage Brokerage Services market through
our retail outlets and to share in the income on transactions produced from other locations.
Effective July 1, 2009 the Company changed its name to Bank of Commerce Mortgage. At June 30, 2009
the Company had no pending business combinations.
Purchase Price and Goodwill
The following table summarizes the purchase and resulting goodwill:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cash paid at fair value |
|
$ |
1,500 |
|
Earn out payable at fair value |
|
|
965 |
|
Fair value of non-controlling interest |
|
|
2,062 |
|
|
|
|
|
Total Consideration at fair value |
|
$ |
4,527 |
|
|
|
|
|
|
Net acquisition date fair value of assets acquired |
|
|
($1,600 |
) |
|
|
|
|
|
|
Goodwill |
|
$ |
2,927 |
|
|
No assets or liabilities arose out of contingencies. Goodwill totaling $2.9 million is not being
amortized for book purposes under current accounting guidelines. Goodwill is not deductible for tax
purposes. Goodwill will be reviewed for impairment on an annual basis. No other intangible assets
were recorded as a result of the business combination.
The following balance sheet summarizes the amount assigned for each major asset category of
Simonich Corporation d.b.a. BWC Mortgage Services at the date of acquisition, May 15, 2009. The
carrying amount of the acquired assets and liabilities approximated fair value. Accordingly, no
fair value adjustments to the acquired assets and liabilities were recorded.
|
|
|
|
|
Cash and Cash Equivalents |
|
$ |
1,764,691 |
|
Restricted Cash |
|
|
800,000 |
|
Accounts Receivable |
|
|
10,447 |
|
Other Receivables |
|
|
436,533 |
|
Loans held for sale, net of deferred income |
|
|
12,005,417 |
|
Prepaid Expenses |
|
|
57,430 |
|
Notes Receivable |
|
|
414,294 |
|
|
|
|
|
Total Current Assets: |
|
|
15,488,812 |
|
Fixed Assets |
|
|
155,148 |
|
Other Assets |
|
|
13,310 |
|
|
|
|
|
TOTAL ASSETS |
|
|
15,657,270 |
|
|
|
|
|
Accounts Payable |
|
|
98,697 |
|
Accrued Expenses |
|
|
232,378 |
|
Branch Payables |
|
|
191,117 |
|
|
|
|
|
Total Payables: |
|
|
522,192 |
|
Current portion Capital Lease |
|
|
39,276 |
|
Impounds payable |
|
|
66,644 |
|
Mortgage warehouse lines of credit |
|
|
11,810,238 |
|
|
|
|
|
Total Other Current Liabilities: |
|
|
11,916,158 |
|
Total Current Liabilities: |
|
|
12,438,350 |
|
Long Term Capital Lease Payable |
|
|
14,888 |
|
Due to stockholder |
|
|
224,032 |
|
Notes Payable |
|
|
1,380,000 |
|
|
|
|
|
Total Long Term Liabilities: |
|
|
1,618,920 |
|
TOTAL LIABILITIES |
|
|
14,057,270 |
|
Net Assets |
|
$ |
1,600,000 |
|
|
|
|
|
9
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table represents the pro-forma income statement as if the acquisition had occurred on
January 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
Pro-Forma Income Statement |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
20,165 |
|
|
|
|
|
|
|
182 |
|
|
|
(27 |
) |
|
|
20,320 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
6,015 |
|
|
|
3 |
|
|
|
431 |
|
|
|
(27 |
) |
|
|
6,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
14,150 |
|
|
|
(3 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
13,898 |
|
Provision for loan and lease losses |
|
|
4,475 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
4,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
|
9,675 |
|
|
|
(9 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
9,417 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
8 |
|
|
|
3,939 |
|
|
|
|
|
|
|
|
|
|
|
3,947 |
|
Other noninterest income |
|
|
2,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,766 |
|
|
|
3,930 |
|
|
|
(249 |
) |
|
|
(27 |
) |
|
|
6,705 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
4,148 |
|
|
|
1,959 |
|
|
|
65 |
|
|
|
|
|
|
|
6,172 |
|
Occupancy and equipment expense |
|
|
1,215 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
1,664 |
|
Other noninterest expense |
|
|
2,420 |
|
|
|
699 |
|
|
|
98 |
|
|
|
|
|
|
|
3,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,783 |
|
|
|
3,107 |
|
|
|
163 |
|
|
|
|
|
|
|
11,053 |
|
Income before provision for income taxes |
|
|
4,658 |
|
|
|
823 |
|
|
|
(412 |
) |
|
|
|
|
|
|
5,069 |
|
Provision for income taxes |
|
|
1,466 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
3,192 |
|
|
|
650 |
|
|
|
(412 |
) |
|
|
|
|
|
|
3,430 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
3,192 |
|
|
$ |
331 |
|
|
$ |
(412 |
) |
|
|
|
|
|
$ |
3,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on preferred stock |
|
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
|
|
|
|
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
3,192 |
|
|
$ |
331 |
|
|
$ |
(884 |
) |
|
|
= |
|
|
$ |
2,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
Pro-Forma Income Statement |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
18,959 |
|
|
|
|
|
|
|
146 |
|
|
|
(20 |
) |
|
|
19,085 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
8,173 |
|
|
|
|
|
|
|
466 |
|
|
|
(20 |
) |
|
|
8,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
10,786 |
|
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
10,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
|
9,186 |
|
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
8,866 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
15 |
|
|
|
2,861 |
|
|
|
|
|
|
|
|
|
|
|
2,876 |
|
Other noninterest income |
|
|
1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
1,282 |
|
|
|
2,861 |
|
|
|
|
|
|
|
|
|
|
|
4,149 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
3,776 |
|
|
|
1,401 |
|
|
|
65 |
|
|
|
|
|
|
|
5,242 |
|
Occupancy and equipment expense |
|
|
1,284 |
|
|
|
587 |
|
|
|
|
|
|
|
|
|
|
|
1,871 |
|
Other noninterest expense |
|
|
1,942 |
|
|
|
1,062 |
|
|
|
110 |
|
|
|
|
|
|
|
3,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,002 |
|
|
|
3,050 |
|
|
|
175 |
|
|
|
|
|
|
|
10,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
3,466 |
|
|
|
(189 |
) |
|
|
(495 |
) |
|
|
|
|
|
|
2,782 |
|
Provision for income taxes |
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
2,631 |
|
|
|
(189 |
) |
|
|
(495 |
) |
|
|
|
|
|
|
1,947 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,631 |
|
|
$ |
(97 |
) |
|
$ |
(495 |
) |
|
|
|
|
|
$ |
2,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
2,631 |
|
|
$ |
(97 |
) |
|
$ |
(495 |
) |
|
|
= |
|
|
$ |
2,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
3. Recent Accounting pronouncements
In June 2009, SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Principles, a Replacement of FASB Statement No. 162 was issued and established
the FASB Accounting Standards Codification (Codification) as the source of authoritative U. S.
generally accepted accounting principles recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretative releases of the SEC under authority of federal securities laws
are also sources of authoritative guidance for SEC registrants. All non-grandfathered, non-SEC
accounting literature not included in the Codification will become non-authoritative. The
pronouncement and the Codification will be effective in the period ending September 30, 2009 and is
not expected to have a significant impact on the Companys financial statements.
On May 28, 2009, the FASB issued FAS 165, Subsequent Events. FAS 165 establishes general
standards of accounting for the disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. FAS 165 specifically outlines
the period, circumstances, and disclosures that should be evaluated and recognized after the
balance sheet date. The pronouncement is effective date for interim or annual financial periods
ending after June 15, 2009 with prospective application. The adoption of FAS 165 did not have a
material impact on our consolidated financial statements.
On October 10, 2008, the FASB issued FAS 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active. FAS 157-3 is a FASB Staff Position that clarifies
the application of FASB Statement No. 157, Fair Value Measurements, for a non-active market and
provides an illustrative example of key considerations in determining the fair value of financial
assets under such conditions. The adoption of FAS 157-3 did not have a material impact on our
consolidated financial statements.
SFAS No. 160 requires that non-controlling interests (previously referred to as minority interests)
be reported as a component of equity in the balance sheet. Prior to adoption of FAS 160, they were
to be classified outside of equity. This new standard also changes the way a non-controlling
interest is presented in the income statement such that a parents consolidated income statement
includes amounts attributable to both the parents interest and the non-controlling interest. SFAS
No. 160 requires a parent to recognize a gain or loss when a subsidiary is deconsolidated. The
remaining interest is initially recorded at fair value. Other changes in ownership interest where
the parent continues to have a majority ownership interest in the subsidiary are accounted for as
capital transactions. SFAS No. 160 was effective for the Company on January 1, 2009.
Our Company holds a controlling interest in Bank of Commerce Mortgage. Simonich Corporation holds
the non-controlling interest. In connection with the adoption of SFAS No. 160 on January 1, 2009,
Simonich Corporations non-controlling interest is classified in the consolidated statement of
stockholders equity.
In April 2009, the FASB issued the following three FSPs intended to provide additional application
guidance and enhance disclosures regarding fair value measurements and impairments of securities:
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides
additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and
level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is not orderly. The
provisions of FSP FAS 157-4 are effective for the Companys interim period ending on June 30, 2009.
The adoption of FAS 157-4 did not have a material impact on our consolidated financial statements.
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Companys interim
period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure
requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS
107-1 and APB 28-1 did not affect the Companys statements of income and condition.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,
amends current other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Companys interim
period ending on June 30, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a
material impact on our consolidated financial statements.
11
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
4. Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the
issuance of common stock that subsequently shared in the earnings of the entity. Net income
available to common stockholders is based on the net income attributable to Bank of Commerce
Holdings adjusted for dividend payments and accretion associated with Preferred Stock. The
following table displays the computation of earnings per share for the three and six months ended
June 30, 2009 and 2008.
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
Earnings Per Share |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
attributable to Bank of Commerce Holdings |
|
$ |
1,616 |
|
|
$ |
906 |
|
|
$ |
2,886 |
|
|
$ |
2,136 |
|
Less: dividend on Preferred Stock |
|
|
213 |
|
|
|
|
|
|
|
427 |
|
|
|
|
|
Less: accretion on Preferred Stock |
|
|
22 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,381 |
|
|
$ |
906 |
|
|
$ |
2,414 |
|
|
$ |
2,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,711 |
|
|
|
8,748 |
|
|
|
8,711 |
|
|
|
8,714 |
|
Basic earnings per Share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
attributable to Bank of Commerce Holdings |
|
$ |
1,616 |
|
|
$ |
906 |
|
|
$ |
2,886 |
|
|
$ |
2,136 |
|
Less: dividend on Preferred Stock |
|
|
213 |
|
|
|
|
|
|
|
427 |
|
|
|
|
|
Less: accretion on Preferred Stock |
|
|
22 |
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,381 |
|
|
$ |
906 |
|
|
$ |
2,414 |
|
|
$ |
2,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
8,711 |
|
|
|
8,748 |
|
|
|
8711 |
|
|
|
8,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus incremental shares from assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
18 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,712 |
|
|
|
8,751 |
|
|
|
8,712 |
|
|
|
8,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.28 |
|
|
$ |
0.24 |
|
Anti-dilutive options not included in EPS Calculation |
|
|
188,400 |
|
|
|
146,167 |
|
|
|
188,400 |
|
|
|
146,167 |
|
Anti-dilutive warrants not included in EPS Calculation |
|
|
405,405 |
|
|
|
|
|
|
|
405,405 |
|
|
|
|
|
|
Vested stock options totaling 609,305 at an average exercise price of $7.01 were outstanding as of
June 30, 2009.
5. Stock Option Plans
For the first six months of 2009, stock option compensation expense charged against income was
$38,336 compared to $56,799 at June 30, 2008. At June 30, 2009, there was $209,984 of total
unrecognized compensation costs related to non-vested share based payments which is expected to be
recognized over a period of 3.6 years. One option of 4,000 shares was granted during the first six
months of 2009 and no options were granted during the first six months of 2008. The fair value of
the option granted during 2009 is $1.91, on the date of the grant using a Black-Sholes option
pricing model with the following assumptions: daily volatility of 0.6760%, risk-free interest rate
of 2.07%, expected dividends of $0.24 per share per year, assumed forfeiture rate of zero and an
expected life of seven years.
During the six months ended June 30, 2009 and 2008 the Company received cash of $0 and $41,506
respectively, upon exercise of stock-based compensation arrangements.
12
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
6. Securities Portfolio
The Companys available-for-sale securities consists of both debt and marketable equity securities.
The portfolio is comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed
securities, and obligations of states and political subdivisions. Securities classified as
available-for-sale are recorded at fair value. Unrealized gains and losses, after applicable income
taxes, are reported in cumulative other comprehensive income. The Company uses the most current
market quotations to estimate the fair value of these securities.
The Company does not include federal funds sold as securities. These investments are included in
cash and cash equivalents. Debt securities in the securities available-for-sale portfolio provide
asset liquidity, in addition to the immediately liquid resources of cash and due from banks and
federal funds sold.
Total available-for-sale securities decreased $56.2 million or 42.7% at June 30, 2009 compared to
December 31, 2008. As of June 30, 2009, the Company has pledged a total of $60.7 million of
securities for treasury, tax and loan accounts; public funds collateral; collateralized repurchase
agreements and Federal Home Loan Bank borrowings.
The following table summarizes the amortized cost of the Companys available-for-sale securities
at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. government & agencies |
|
$ |
25,269 |
|
|
$ |
657 |
|
|
|
($45 |
) |
|
$ |
25,881 |
|
Obligations of state and political subdivisions |
|
|
28,381 |
|
|
|
113 |
|
|
|
(836 |
) |
|
|
27,658 |
|
Mortgage backed securities |
|
|
19,332 |
|
|
|
286 |
|
|
|
(31 |
) |
|
|
19,587 |
|
Asset backed securities |
|
|
2,463 |
|
|
|
|
|
|
|
(109 |
) |
|
|
2,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,445 |
|
|
$ |
1,056 |
|
|
$ |
(1,021 |
) |
|
$ |
75,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. government & agencies |
|
$ |
16,006 |
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
16,076 |
|
Obligations of state and political subdivisions |
|
|
32,178 |
|
|
|
146 |
|
|
|
(1,303 |
) |
|
|
31,021 |
|
Mortgage backed securities |
|
|
83,657 |
|
|
|
1,278 |
|
|
|
(345 |
) |
|
|
84,590 |
|
Asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,841 |
|
|
$ |
1,493 |
|
|
$ |
(1,648 |
) |
|
$ |
131,687 |
|
|
The amortized cost and estimated fair value of available-for-sale securities at June 30, 2009 are
shown below.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Due in one year or less |
|
$ |
1,005 |
|
|
$ |
1,015 |
|
Due after one year through five years |
|
|
1,806 |
|
|
|
1,813 |
|
Due after five years through ten years |
|
|
6,388 |
|
|
|
6,308 |
|
Due after ten years |
|
|
66,246 |
|
|
|
66,344 |
|
|
|
|
|
|
|
|
Total |
|
|
75,445 |
|
|
|
75,480 |
|
An investment is impaired if the fair value of the investment is less than its cost adjusted for
accretion, amortization and Other Than Temporarily Impaired (OTTI), otherwise defined as an
unrealized loss. When an investment is impaired, we assess whether to sell the security, or it is
more likely than not that we will be required to sell the security before recovery of its amortized
cost basis less any current-period credit losses. For debt securities, that are considered other
than temporarily impaired and that we do not intend to sell and will not be required to sell prior
to recovery of our amortized cost basis, we separate the amount of the impairment into the amount
that is credit related (credit loss component) and the amount due to all other factors. The credit
loss component is recognized in earnings and is calculated as the difference between the
investments amortized cost basis and the present value of its expected future cash flows. The
remaining difference between the investments fair value and the present value of future expected
cash flows is deemed to be due to factors that are not credit related and is recognized in other
comprehensive income. Significant judgment is required in the determination of whether an OTTI has
occurred for an investment. The Company follows a consistent and systematic process for determining
and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI
process. The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates
both quantitative and qualitative information.
13
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The ALCO Committee considers a number of factors including, but not limited to: (a) the length of
time and the extent to which the fair value has been less than amortized cost, (b) the financial
condition and near term prospects of the issuer, (c) the intent and ability of the Company to
retain its investment for a period of time sufficient to allow for an anticipated recovery in
value, (d) whether the debtor is current on interest and principal payments and (e) general market
conditions and industry or sector specific outlook. Management has evaluated all securities at June
30, 2009 and has determined that no securities are other than temporarily impaired.
We do not have the intent to sell the investments that are temporarily impaired, and it is more
than likely than not that we will not have to sell those investments before recovery of the cost
basis. Additionally, we have evaluated the credit ratings of our investment securities and their
issuers and or insurers, if applicable. Based upon our evaluation, management has determined that
no investment security in our portfolio is other than temporarily impaired.
The following table presents the current fair value and associated unrealized losses on investments
with unrealized losses at June 30, 2009. The table represents 27 securities compared with 40
securities at December 31, 2008. The table also discloses whether these securities have had
unrealized losses for less than 12 months or for 12 months or longer. The unrealized losses are
primarily driven by changes in interest rates and not due to credit quality.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. government &
agencies |
|
$ |
2,954,365 |
|
|
|
($45,635 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,954,365 |
|
|
|
($45,635 |
) |
Obligations of state
and
political subdivisions |
|
|
12,359,048 |
|
|
|
(488,747 |
) |
|
|
4,688,605 |
|
|
|
(346,733 |
) |
|
|
17,047,653 |
|
|
|
(835,480 |
) |
Mortgage backed
securities |
|
|
2,748,884 |
|
|
|
(3,133 |
) |
|
|
2,142,523 |
|
|
|
(27,953 |
) |
|
|
4,891,407 |
|
|
|
(31,086 |
) |
Asset backed
securities |
|
|
2,354,076 |
|
|
|
(109,283 |
) |
|
|
|
|
|
|
|
|
|
|
2,354,076 |
|
|
|
(109,283 |
) |
Total temporarily
impaired securities |
|
$ |
20,416,373 |
|
|
|
($646,798 |
) |
|
$ |
6,831,128 |
|
|
|
($374,686 |
) |
|
$ |
27,247,501 |
|
|
|
($1,021,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury
securities and
Obligations of U.
S. Agencies |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Obligations of
state and political
subdivisions |
|
$ |
21,125,047 |
|
|
|
($1,140,217 |
) |
|
$ |
843,658 |
|
|
|
($162,412 |
) |
|
$ |
21,968,705 |
|
|
|
($1,302,628 |
) |
Mortgage-backed
securities |
|
$ |
16,666,493 |
|
|
|
($105,783 |
) |
|
$ |
5,375,203 |
|
|
|
($239,463 |
) |
|
$ |
22,041,696 |
|
|
|
($345,247 |
) |
Total temporarily
impaired securities |
|
$ |
37,791,540 |
|
|
|
($1,246,000 |
) |
|
$ |
6,218,861 |
|
|
|
($401,875 |
) |
|
$ |
44,010,401 |
|
|
|
($1,647,875 |
) |
7. Mortgages held for sale
Bank of Commerce Mortgage originates residential mortgage loans within Bank of Commerces
footprint and on a nationwide basis. Mortgage loans generally represent loans collateralized by
one-to-four family residential real estate and are made to borrowers in good credit standing. These
loans are typically sold to primary mortgage market aggregators (Fannie Mae, Freddie Mac, and
Ginnie Mae) and to third party investors including the servicing rights. Mortgages held for sale
are carried at the lower of cost or fair market value. Gains and losses on loan sales are recorded
in noninterest income, and direct loan origination costs and fees are deferred at origination of
the loan and are recognized in noninterest income upon sale of a loan.
14
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
8. Goodwill
Goodwill is recorded in business combinations under the acquisition method of accounting when the
purchase price is higher than the fair value of net assets, including identifiable intangible
assets. The Company will assess goodwill for impairment annually, and more frequently in certain
circumstances. Impairment exists when the carrying amount of the goodwill exceeds its implied fair
value. The Company will recognize impairment losses as a charge to noninterest expense (unless
related to discontinued operations) and an adjustment to the carrying value of the goodwill asset.
Subsequent reversals of goodwill impairment are prohibited.
As a result of the stock purchase agreement and acquisition of 51% of the capital stock of Simonich
Corporation, d.b.a. BWC Mortgage Services, the Company has recorded goodwill. (See note 2)
9. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust
During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory
business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued $5.0 million of
guaranteed preferred beneficial interests in Bank of Commerce Holdings junior subordinated
debentures (the trust notes) to the public and $155,000 common securities to the Company. These
debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.
The proceeds from the issuance of the trust notes were transferred from the grantor trust to the
Holding Company and from the Holding Company to the Bank as surplus capital. The trust notes accrue
and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (LIBOR) plus
3.30%. The rate at June 30, 2009 was 4.43%. The rate increase is capped at 2.75% annually and the
lifetime cap is 12.5%. The final maturity on the trust note is March 18, 2033, and the debt allows
for prepayment after five years on the quarterly payment date.
On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private placement to
an institutional investor of $10 million of fixed rate trust preferred securities (the Trust
Preferred Securities); through a newly formed Delaware trust affiliate, Bank of Commerce Holdings
Trust II (the Trust). The Trust Preferred Securities mature on September 15, 2035, and are
redeemable at the Companys option on any March 15, June 15, September 15 or December 15 on or
after September 15, 2010.
In addition, the Trust Preferred Securities require quarterly distributions by the Trust to the
holder of the Trust Preferred Securities at a rate of 6.12%, until September 10, 2010 after which
the rate will reset quarterly to equal 3-Month LIBOR plus 1.58%. The Trust simultaneously issued
$310,000 of the Trusts common securities of beneficial interest to the Company.
The proceeds from the sale of the Trust Preferred Securities were used by the Trust to purchase
from the Company the aggregate principal amount of $10,310,000 of the Companys floating rate
junior subordinate notes (the Notes). The net proceeds to the Company from the sale of the
Notes to the Trust will be used by the Company for general corporate purposes, including funding
the growth of the Companys various financial services. During September 2008, $1,200,000 in
proceeds from the issuance of the trust notes was transferred from the Holding Company to the Bank
as surplus capital.
The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture), dated July
29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association, as trustee.
Like the Trust Preferred Securities, the Notes bear interest at a floating rate, at 6.12% until
September 10, 2010, after which the rate will reset on a quarterly basis to equal 3-Month LIBOR
plus 1.58%. The interest payments by the Company will be used to pay the quarterly distributions
payable by the Trust to the holder of the Trust Preferred Securities.
However, so long as no event of default, as described below, has occurred under the Notes, the
Company may, at any time and from time to time, defer interest payments on the Notes (in which
case the Trust will be entitled to defer distributions otherwise due on the Trust Preferred
Securities) for up to twenty (20) consecutive quarters.
The Notes are subordinated to the prior payment of other indebtedness of the Company that, by its
terms, is not similarly subordinated. Although the Notes will be recorded as a long term
liability on the Companys balance sheet, for regulatory purposes, the Notes are expected to be
treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve Board, the Companys
primary federal regulatory agency.
The Notes mature on September 15, 2035, but may be redeemed at the Companys option at any time on
or after September 15, 2010, or at any time upon certain events, such as a change in the
regulatory capital treatment of the Notes, the Trust being deemed to be an investment company or
the occurrence of certain adverse tax events. In each case, the Company may redeem the Notes for
their aggregate principal amount, plus accrued interest.
15
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
10. Preferred Stock and Warrants
The Company is authorized to issue two million shares of preferred stock. Preferred shares
outstanding rank senior to common shares both as to dividends and liquidation preference but have
no voting rights. Pursuant to a Letter Agreement dated November 14, 2008, and the Securities
Purchase Agreement Standard Terms the Company issued to the United States Department of the
Treasury (Treasury Department) 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate
Perpetual Preferred Stock, without par value (the Series A Preferred Stock), having a liquidation
amount per share equal to $1,000 for a total price of $17 million. The Series A Preferred Stock
pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a
rate of 9% per year. The Company may not redeem the Series A Preferred Stock during the first three
years except with the proceeds from a qualified equity offering (as defined in the Certificate of
Determination described in Item 5.03). After three years, the Company may, at our option, redeem
the Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred
Stock is generally non-voting. Prior to November 14, 2011, unless the Company has redeemed the
Series A Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock to
a third party, the consent of the Treasury Department will be required for the Company to increase
our common stock dividend or repurchase our common stock or other equity or capital securities,
other than in connection with benefit plans consistent with past practice and certain other
circumstances specified in the Securities Purchase Agreement. A consequence of the Series A
Preferred Stock purchase includes certain restrictions on executive compensation that could limit
the tax deductibility of compensation we pay to executive management.
As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant
(the Warrant) to purchase 405,405 shares of the Companys common stock at an initial per share
exercise price of $6.29. The Warrant provides for the adjustment of the exercise price and the
number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other assets to holders of
our common stock, and upon certain issuances of our common stock at or below a specified price
relative to the initial exercise price. The Warrant expires ten years from the issuance date. If,
on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less
than $17 million from qualified equity offerings announced after November 14, 2008, the number of
shares of common stock issuable pursuant to the Treasury Departments exercise of the Warrant will
be reduced by one-half of the original number of shares, taking into account all adjustments,
underlying the Warrant. Pursuant to the Securities Purchase Agreement, the Treasury Department has
agreed not to exercise voting power with respect to any shares of common stock issued upon exercise
of the Warrant.
Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1
capital. The Series A Preferred Stock and the Warrant were issued in a private placement exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the
request of the Treasury Department at any time, we have agreed to promptly enter into a deposit
arrangement pursuant to which the Series A Preferred Stock may be deposited and depositary shares
(Depositary Shares) may be issued. Neither the Series A Preferred Stock nor the Warrant will be
subject to any contractual restrictions on transfer, except that the Treasury Department may only
transfer or exercise an aggregate of one-half of the Warrant Shares prior to the earlier of the
redemption of 100% of the shares of Series A Preferred Stock and December 31, 2009.
In the Securities Purchase Agreement, the Company agreed that, until such time as the Treasury
Department ceases to own any securities acquired from us pursuant to the Securities Purchase
Agreement, the Company will take all necessary action to ensure that our benefit plans with respect
to our senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization
Act of 2008 (EESA) as implemented by any guidance or regulation under Section 111(b) of EESA that
has been issued and is in effect as of the date of issuance of the Series A Preferred Stock and the
Warrant and not adopt any benefit plans with respect to, or which cover, our senior executive
officers that do not comply with EESA. The applicable executives have consented to the foregoing.
Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of
the Treasury Department will be required for us to (1) declare or pay any dividend or make any
distribution on our common stock (other than regular quarterly cash dividends of not more than
$0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Companys
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreement.
The proceeds from Treasury were allocated based on the relative fair value of the warrants as
compared with the fair value of the preferred stock. The fair value of the warrants was determined
using a valuation model which incorporates assumptions including the Companys common stock price,
dividend yield, stock price volatility and the risk-free interest rate. The fair value of the
preferred stock is determined based on assumptions regarding the discount rate (market rate) on the
preferred stock which was estimated to be approximately 9% at the date of issuance. The discount on
the preferred stock will be accreted to par value over a five-year term, which is the expected life
of the preferred stock. Capital Purchase Plan participants may opt out by repaying the capital
without raising additional capital subject to consultation with the appropriate Federal regulator.
16
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
11. Commitments and contingent liabilities
Lease Commitments The Company leases certain facilities at
which it conducts its operations. Future minimum lease commitments
under all non-cancelable operating leases as of June 30, 2009 are
below:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Operating Leases |
|
|
|
|
|
2009 |
|
$ |
266 |
|
2010 |
|
|
524 |
|
2011 |
|
|
454 |
|
2012 |
|
|
279 |
|
2013 |
|
|
155 |
|
Thereafter |
|
|
606 |
|
|
|
|
|
Total |
|
$ |
2,284 |
|
|
|
|
|
Legal Proceedings The Company is involved in various pending and threatened legal actions
arising in the ordinary course of business. The Company maintains reserves for losses from
legal actions, which are both probable and estimable. In the opinion of management, the
disposition of claims, currently pending will not have a material adverse affect on the
Companys financial position or results of operations.
FHLB Advances The Company has advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $100,000,000 as of June 30, 2009 and $95,000,000 as of June 30, 2008. The
FHLB advances bear fixed interest rates ranging from 0.32% to 3.97%. Interest is payable
monthly and semiannually. The following table illustrates borrowings outstanding at the end
of the period:
|
|
|
|
|
Advance Amount |
|
Interest Rate |
|
Maturity |
|
|
|
|
|
$50,000,000
|
|
0.32%
|
|
08/31/2009 |
$15,000,000
|
|
3.41%
|
|
04/29/2011 |
$35,000,000
|
|
3.97%
|
|
11/23/2009 |
|
|
|
|
|
$100,000,000 |
|
|
|
|
These borrowings are secured by an investment in FHLB stock and certain real estate mortgage
loans which have been specifically pledged to the FHLB pursuant to their collateral
requirements. Based upon the level of FHLB advances, the Company was required to hold a
minimum investment in FHLB stock of $6,110,000 and to pledge $98,099,579 of its real estate
mortgage loans and $40,414,740 of its securities portfolio to the FHLB as collateral as of
June 30, 2009. At June, 2009, the Bank had available borrowing lines at the FHLB of
$38,514,319 and additional federal fund borrowing lines at a correspondent bank totaling
$10,000,000.
FRB TAF Advances The Company has an advance from the Federal Reserve Bank of San Francisco
(FRB) totaling $20,000,000 as of June 30, 2009 and $0 as of June 30, 2008. The advance is
under FRBs Term Auction Facility (TAF) and was originated on June 17, 2009, matures on
September 10, 2009, and bears a fixed rate of 0.25%. The FRBs TAF credit facility is an
auction based borrowing with terms limited to 28 and 84 day maturities. The Company has
pledged $74,215,075 in commercial and industrial loans as collateral as of June 30, 2009, and
had available borrowing lines at the FRB of $48,220,472.
Off-Balance
Sheet Financial Instruments In the ordinary course of business, the Company
enters various types of transactions, which involve financial instruments with off-balance
sheet risk. These instruments include commitments to extend credit and standby letters of
credit, which are not reflected in the accompanying consolidated balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk more than the
amount, if any recognized in the consolidated balance sheets. Commitments to extend credit
are agreements to lend to customers.
These commitments have specified interest rates and generally have fixed expiration dates but
may be terminated by the Company if certain conditions of the contract are violated.
Although currently subject to draw down, many of the commitments do not necessarily represent
future cash requirements. Collateral held relating to these commitments varies, but
generally includes real estate, securities and cash. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a customer to a
third party. Credit risk arises in these transactions from the possibility that a customer
may not be able to repay the Bank upon default of performance.
17
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Collateral held for standby letters of credit is based on an individual evaluation of each
customers creditworthiness, but may include cash and securities. Commitments to extend
credit and standby letters of credit bear similar credit risk characteristics as outstanding
loans.
The Companys commitments to extend credit are illustrated below:
|
|
|
|
|
|
|
|
|
Credit Commitments |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments |
|
$ |
144,214,872 |
|
|
$ |
150,784,540 |
|
Standby letters of credit |
|
|
5,732,853 |
|
|
|
6,074,834 |
|
Guaranteed commitments outstanding |
|
|
1,324,799 |
|
|
|
1,357,724 |
|
|
|
|
|
|
$ |
151,272,524 |
|
|
$ |
158,217,098 |
|
|
|
|
12. Accounting for Income Tax Uncertainties (FIN 48)
In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN
48), an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies
the accounting and reporting for income taxes where interpretation of the law is uncertain. FIN 48
prescribes a comprehensive model for the financial statement recognition, measurement, presentation
and disclosure of income tax uncertainties with respect to positions taken or expected to be taken
in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company adopted this Statement on January 1, 2007. As a result of the implementation of
Interpretation 48, it was not necessary for the Company to recognize any increase in the liability
for unrecognized tax benefits. Additionally, there were no unrecognized tax liabilities or
benefits as of June 30, 2009.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and
California state jurisdiction and the
Company recognizes interest and penalties accrued related to unrecognized tax benefits in income
tax expense.
13. Fair Value Measurement
SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and
expands disclosures about fair value measurement. Effective January 1, 2008 the Company adopted
SFAS No. 157, which enhances the disclosures about financial instruments carried at fair value.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to access. Fair values
determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and
inputs other than quoted prices that are observable for the asset or liability, such as interest
rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are
unobservable inputs for the asset or liability, and include situations where there is little, if
any, market activity for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level input that is
significant to the fair value measurement in its entirety.
The Companys assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment, and considers factors specific to the asset or liability. The
following table presents information about the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2009, and indicate the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair value.
18
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At June 30, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
June 30, 2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Available-for-sale securities |
|
$ |
75,480 |
|
|
$ |
0 |
|
|
$ |
75,480 |
|
|
$ |
0 |
|
Mortgages held for sale |
|
$ |
20,225 |
|
|
$ |
20,225 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
95,705 |
|
|
$ |
20,225 |
|
|
$ |
75,480 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair
value |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
The following methods were used to estimate the fair value of each class of financial instrument
above:
Securities
available-for-sale Securities classified as available-for-sale are reported at fair
value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements
from an independent pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bonds
terms and conditions among other things.
Mortgages held for sale Mortgages held for sale represent new prime residential originations,
for which an active secondary market and readily available market prices existed to reliably
support fair value pricing models used for these loans. Valuation is based upon quoted prices for
identical instruments traded in active markets.
Assets and Liabilities Recorded at Fair Value on a Non Recurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a non
recurring basis in accordance with U.S. generally accepted accounting principles. These include
assets that are measured at the lower of cost or market that were recognized at fair value below
cost at the end of the period. Assets measured at fair value on a non recurring basis are included
in the table below.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At June 30, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
Gains |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
(Losses) |
|
Description |
|
June 30, 2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
During period |
|
Impaired Loans |
|
$ |
7,680 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,680 |
|
|
|
($1,715 |
) |
Total assets measured at fair value |
|
$ |
7,680 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
7,680 |
|
|
|
($1,715 |
) |
Liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total liabilities measured at fair
value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
19
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Impaired loans When available, we use observable market data, including pricing on recent closed
market transactions, to value loans. The Company does not record loans at fair value on a recurring
basis. However, from time to time, a loan is considered impaired and an allowance for loan losses
is established. Loans for which it is probable that payment of interest and principal will not be
made in accordance with the contractual terms of the loan agreement are considered impaired. Once a
loan is identified as individually impaired, management measures impairment in accordance with SFAS
114, Accounting by Creditors for Impairment of a Loan, (SFAS 114).
The fair value of impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the fair value of the
expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2009,
substantially all of the total impaired loans were collateral dependent and were evaluated based on
the fair value of the collateral.
In accordance with SFAS 157, impaired loans where an allowance is established based on the fair
value of collateral require classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value, the Company records
the impaired loan as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Method for determining fair values
The following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash
and cash equivalents The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents are a reasonable estimate of fair value.
Securities Fair values for securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market prices of comparable
instruments. Securities available-for-sale are carried at their aggregate fair value, while
securities held-to-maturity are carried at amortized cost.
Portfolio loans For variable-rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. The fair values for fixed rate loans are
estimated using discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued
interest receivable approximates its fair value.
Mortgages held for sale Mortgages held for sale represent new prime residential originations,
for which an active secondary market and readily available market prices existed to reliably
support fair value pricing models used for these loans. Valuation is based upon quoted prices for
identical instruments traded in active markets.
Commitments to extend credit and standby letters of credit The fair value of commitments is
generally only the loan fee.
Federal
Home Loan Bank borrowings The fair value of borrowed funds is based on carrying amounts
due to the short term nature of the borrowing.
Junior subordinated debt payable to unconsolidated subsidiary grantor trust The fair value of
variable rate junior subordinated debt payable to subsidiary grantor trust is based on carrying
amounts.
Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and noninterest
checking, passbook savings, and money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). The fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits. For variable-rate certificates of deposit that reprice
frequently, fair values are based on carrying values. The carrying amount of accrued interest
payable approximates its fair value.
Securities sold under agreements to repurchase The fair value of securities purchased under
agreements to resell is estimated by discounting the contractual cash flows under outstanding
borrowings at rates prevailing in the marketplace today for similar borrowings, rates and
collateral.
Limitations Fair value estimates are made at a specific point in time, based on relevant market
information and other information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Companys entire
holdings of a particular financial instrument.
20
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Because no market exists for a significant portion of the Companys financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on current on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include deferred tax assets and
liabilities, and property, plant and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
The estimated fair values of the Companys financial instruments are approximately as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Contract |
|
Carrying |
|
|
|
|
Amount |
|
Amount |
|
Fair Value |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
$ |
79,004 |
|
|
$ |
79,004 |
|
Securities |
|
|
|
|
|
|
75,480 |
|
|
|
75,480 |
|
Portfolio Loans, net |
|
|
|
|
|
|
587,637 |
|
|
|
595,454 |
|
Mortgages held for sale, at fair value |
|
|
|
|
|
|
20,225 |
|
|
|
20,225 |
|
Accrued interest on loans |
|
|
|
|
|
|
2,527 |
|
|
|
2,527 |
|
Accrued interest on securities |
|
|
|
|
|
|
603 |
|
|
|
603 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and savings |
|
|
|
|
|
$ |
271,599 |
|
|
$ |
271,599 |
|
Fixed rate certificates |
|
|
|
|
|
|
292,144 |
|
|
|
294,179 |
|
Variable certificates |
|
|
|
|
|
|
3,364 |
|
|
|
3,364 |
|
Accrued interest payable |
|
|
|
|
|
|
491 |
|
|
|
491 |
|
Securities sold under agreements to repurchase |
|
|
|
|
|
|
10,843 |
|
|
|
10,843 |
|
Federal Home Loan Borrowings |
|
|
|
|
|
|
120,000 |
|
|
|
120,000 |
|
Junior subordinated debt payable to
unconsolidated subsidiary grantor trust |
|
|
|
|
|
|
15,465 |
|
|
|
15,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
144,215 |
|
|
|
|
|
|
$ |
|
|
Standby letters of credit |
|
|
5,733 |
|
|
|
|
|
|
|
57 |
|
Guaranteed commitments outstanding |
|
|
1,325 |
|
|
|
|
|
|
|
13 |
|
14. Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. On April 17, 2009, the Company
completed a loan swap transaction accounted for as a transfer of financial assets, which
included the purchase of a pool of Individual Tax Identification Number (ITIN) residential
mortgage loans with an estimated fair value of $80,671,104. The ITIN portfolio (portfolio) was
purchased from a private equity firm in exchange for a combination of approximately $14.0
million in carrying value of certain non-performing loans and cash of approximately $67.0
million.
The transaction was completed under SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Under SFAS 140, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred as proceeds of the transfer,
derecognizes financial assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 140 furthers requires that the transferee (the Company) to initially recognize
all assets obtained and any liabilities incurred at fair value.
21
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The difference between the fair value and carrying value of the assets received is amortized or
accreted over the life of the asset as an adjustment to the yield. Additionally, the transferee is
to recognize a gain or loss from the transfer in the statement of income as a result of this
transfer of financial assets. The Company recorded a gain of $340,000, which is included as a
component of non-interest income.
The fair value of the ITIN loan portfolio obtained in the loan swap was determined under SFAS 157,
Fair Value Measurements. The current market for ITIN loans is illiquid. Given the lack of level 1
and 2 fair value indications, a level 3 valuation approach was adopted. The Company engaged an
independent third party to conduct the level 3 valuation of the portfolio utilizing observable
market rates and credit characteristics for similar instruments. In its analysis, the Company used
characteristics market participants generally considered factors specific to (a) the asset, (b) the
principal (or most advantageous) market for the asset, and (c) market participants with whom the
Company would transact in that market. The net estimated discount rate utilized in the discounted
cash flow was 7.39% in conjunction with a constant prepayment rate (CPR) of 6.0%. The non-recurring
fair value of the portfolio was determined to be 100.37% of par or $80.7 million as of April 17,
2009.
15. Segment Reporting
The Company has two reportable segments: Commercial banking and mortgage brokerage services. The
Company conducts a general commercial banking business in the counties of El Dorado, Placer,
Shasta, Tehama and Sacramento, California. The principal commercial banking activities include a
full array of deposit accounts and related services and commercial lending for businesses,
professionals and their interests.
Mortgage brokerage services are performed by Bank of Commerce Mortgage subsidiary. Mortgage
brokerage services offers residential real estate loans with ten offices in three different states
and licenses in California, Oregon, Idaho and Nevada. Mortgages that are originated are sold,
servicing included, in the secondary market or directly to correspondent financial institutions.
The following table represents financial information about the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
17,166 |
|
|
|
|
|
|
$ |
155 |
|
|
|
|
|
|
$ |
17,321 |
|
Interest on tax-exempt securities |
|
|
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
576 |
|
Interest on U.S. government securities |
|
|
2,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146 |
|
Interest on federal funds sold and
securities purchased under
agreements to resale |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Interest on other securities |
|
|
248 |
|
|
|
|
|
|
|
27 |
|
|
|
(27 |
) |
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
20,165 |
|
|
|
|
|
|
|
182 |
|
|
|
(27 |
) |
|
|
20,320 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546 |
|
Interest on savings deposits |
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519 |
|
Interest on certificates of deposit |
|
|
3,808 |
|
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
3,781 |
|
Securities sold under agreements to
repurchase |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
Interest on FHLB and other borrowings |
|
|
1,117 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,120 |
|
Interest on junior subordinated debt payable
to unconsolidated subsidiary
grantor trust |
|
|
|
|
|
|
|
|
|
|
431 |
|
|
|
|
|
|
|
431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
6,015 |
|
|
|
3 |
|
|
|
431 |
|
|
|
(27 |
) |
|
|
6,422 |
|
Net interest income |
|
|
14,150 |
|
|
|
(3 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
13,898 |
|
Provision for loan and lease losses |
|
|
4,475 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
4,481 |
|
Net interest income after provision for
loan losses |
|
|
9,675 |
|
|
|
(9 |
) |
|
|
(249 |
) |
|
|
|
|
|
|
9,417 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188 |
|
Payroll and benefit processing fees |
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
Earnings on
cash surrender value
Bank owned life insurance |
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
22
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement (continued) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
Net gain on sale of loans |
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340 |
|
Merchant credit card service income, net |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149 |
|
Mortgage brokerage fee income |
|
|
8 |
|
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
1,302 |
|
Other income |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,766 |
|
|
|
1,294 |
|
|
|
|
|
|
|
|
|
|
|
4,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
4,148 |
|
|
|
558 |
|
|
|
65 |
|
|
|
|
|
|
|
4,771 |
|
Occupancy and equipment expense |
|
|
1,215 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
1,302 |
|
FDIC insurance premium |
|
|
574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574 |
|
Data processing fees |
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Professional service fees |
|
|
347 |
|
|
|
43 |
|
|
|
64 |
|
|
|
|
|
|
|
454 |
|
Payroll and benefit fees |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
Deferred compensation expense |
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242 |
|
Stationery and supplies |
|
|
75 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
79 |
|
Postage |
|
|
67 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Directors expense |
|
|
140 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
157 |
|
Other expenses |
|
|
735 |
|
|
|
210 |
|
|
|
17 |
|
|
|
|
|
|
|
664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,783 |
|
|
|
907 |
|
|
|
163 |
|
|
|
|
|
|
|
8,853 |
|
Income before provision for income taxes |
|
|
4,658 |
|
|
|
378 |
|
|
|
(412 |
) |
|
|
|
|
|
|
4,624 |
|
Provision for income taxes |
|
|
1,466 |
|
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
1,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
3,192 |
|
|
|
207 |
|
|
|
(412 |
) |
|
|
|
|
|
|
2,987 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
3,192 |
|
|
$ |
106 |
|
|
$ |
(412 |
) |
|
|
|
|
|
$ |
2,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in thousands |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks, non interest bearing |
|
$ |
34,514 |
|
|
$ |
1,819 |
|
|
$ |
372 |
|
|
|
($353 |
) |
|
$ |
36,352 |
|
Interest bearing due from banks |
|
|
27,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,512 |
|
Federal funds sold and securities purchased
under agreements to resell |
|
|
15,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
77,166 |
|
|
|
1,819 |
|
|
|
372 |
|
|
|
(353 |
) |
|
|
79,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale at fair value
(including pledged collateral of $60,678 at
June 30, 2009) |
|
|
75,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,480 |
|
Portfolio loans |
|
|
596,530 |
|
|
|
|
|
|
|
2,903 |
|
|
|
(3,300 |
) |
|
|
596,133 |
|
Allowance for loan and lease losses |
|
|
(8,451 |
) |
|
|
(6 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
(8,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans net of allowance |
|
|
588,079 |
|
|
|
(6 |
) |
|
|
2,864 |
|
|
|
(3,300 |
) |
|
|
587,637 |
|
Mortgages held for sale, at fair value, net
of deferred income |
|
|
|
|
|
|
20,225 |
|
|
|
|
|
|
|
|
|
|
|
20,225 |
|
Bank premises and equipment, net |
|
|
10,357 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
10,586 |
|
Investment in Bank of Commerce Mortgage |
|
|
|
|
|
|
|
|
|
|
2,572 |
|
|
|
(2,572 |
) |
|
|
|
|
Investment in Trust |
|
|
|
|
|
|
|
|
|
|
465 |
|
|
|
(465 |
) |
|
|
|
|
Investment in Bank |
|
|
|
|
|
|
|
|
|
|
74,862 |
|
|
|
(74,862 |
) |
|
|
|
|
Goodwill |
|
|
|
|
|
|
2,927 |
|
|
|
|
|
|
|
|
|
|
|
2,927 |
|
Other real estate owned |
|
|
3,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,229 |
|
Other assets |
|
|
27,399 |
|
|
|
968 |
|
|
|
86 |
|
|
|
(423 |
) |
|
|
28,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
781,710 |
|
|
$ |
26,161 |
|
|
$ |
81,221 |
|
|
|
(81,973 |
) |
|
$ |
807,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand noninterest bearing |
|
|
71,111 |
|
|
|
|
|
|
|
|
|
|
|
(1,154 |
) |
|
|
69,957 |
|
Demand interest bearing |
|
|
142,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,210 |
|
Savings accounts |
|
|
59,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,432 |
|
Certificates of deposit |
|
|
295,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
568,261 |
|
|
|
|
|
|
|
|
|
|
|
(1,154 |
) |
|
|
567,107 |
|
Securities sold under agreements to repurchase |
|
|
10,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,843 |
|
Federal Home Loan Bank and Federal Reserve Bank
borrowings |
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000 |
|
Mortgage warehouse lines of credit |
|
|
|
|
|
|
20,812 |
|
|
|
|
|
|
|
|
|
|
|
20,812 |
|
Other liabilities |
|
|
7,744 |
|
|
|
615 |
|
|
|
1,048 |
|
|
|
(3,386 |
) |
|
|
6,021 |
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
|
|
|
|
|
|
|
|
15,465 |
|
|
|
|
|
|
|
15,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
706,848 |
|
|
|
21,427 |
|
|
|
16,513 |
|
|
|
(4,540 |
) |
|
|
740,248 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock (liquidation preference of $1,000
per share; issued 2008) 2,000,000 authorized;
17,000 shares issued and outstanding in 2009, and
December 31, 2008, none outstanding at June 30,
2008 |
|
|
13,000 |
|
|
|
|
|
|
|
16,596 |
|
|
|
(13,000 |
) |
|
|
16,596 |
|
Common stock , no par value, 50,000,000 shares
authorized; 8,711,495 shares issued and
outstanding at June 30, 2009 |
|
|
2,341 |
|
|
|
|
|
|
|
9,688 |
|
|
|
(2,341 |
) |
|
|
9,688 |
|
Common Stock Warrant |
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
449 |
|
Retained earnings |
|
|
59,491 |
|
|
|
2,571 |
|
|
|
37,945 |
|
|
|
(62,062 |
) |
|
|
37,945 |
|
Accumulated other comprehensive income, net of tax |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
(30 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Bank of Commerce Holdings |
|
|
74,862 |
|
|
|
2,571 |
|
|
|
64,708 |
|
|
|
(77,433 |
) |
|
|
64,708 |
|
Non controlling interest in subsidiary |
|
|
|
|
|
|
2,163 |
|
|
|
|
|
|
|
|
|
|
|
2,163 |
|
Total stockholders equity |
|
|
74,862 |
|
|
|
4,734 |
|
|
|
64,708 |
|
|
|
(77,433 |
) |
|
|
66,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
781,710 |
|
|
$ |
26,161 |
|
|
$ |
81,221 |
|
|
|
($81,973 |
) |
|
$ |
807,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
The Company has evaluated subsequent events through August 14, 2009, the date the financial
statements were issued, and has determined that there were no recognized or non-recognized
subsequent events that require recognition or disclosure.
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements and Risk Factors
An investment in the Company has risk. The discussion below and elsewhere in this Report and in
other documents the Company files with the SEC incorporates various risk factors that could cause
the Companys financial results and condition to vary significantly from period to period.
Information in the accompanying financial statements contains certain forward-looking statements,
which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. We caution the investor that such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those stated. These risks and
uncertainties include the Companys ability to maintain or expand its market share and net interest
margins, or to implement its marketing and growth strategies. Further, actual results may be
affected by the Companys ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; and general trends in the banking
and the regulatory environment, as they relate to the Companys cost of funds and return on assets.
The reader is advised that this list of risks is not exhaustive and should not be construed as any
prediction by the Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements.
For additional information concerning risks and uncertainties related to the Company and its
operations please refer to the Companys Annual Report on Form 10-K for the year ended December 31,
2008 under the heading Risk factors that may affect results. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of any revision to these
forward-looking statements to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
The following sections discuss significant changes and trends in the financial condition, capital
resources and liquidity of the Company from December 31, 2008 to June 30, 2009. Also discussed are
significant trends and changes in the Companys results of operations for the three and six months
ended June 30, 2009, compared to the same period in 2008. The consolidated financial statements and
related notes appearing elsewhere in this report are condensed and unaudited. The following
discussion and analysis is intended to provide greater detail of the Companys financial condition
and results.
Company Overview
Bank of Commerce Holdings (the Holding Company) is a corporation organized under the laws of
California and a financial holding company (FHC) registered under the Bank Holding Company Act of
1956, as amended (BHC Act). The Holding Companys principal business is to serve as a holding
company for Redding Bank of Commerce, Roseville Bank of Commerce, and Bank of Commerce
Mortgage, and for other banking or banking-related subsidiaries which the Holding Company may
establish or acquire (collectively the Company). The Holding Company also has two unconsolidated
subsidiaries, Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust II. The Company
is listed on the NASDAQ National Market under the trading symbol BOCH (Bank of Commerce Holdings).
The Bank was incorporated as a California banking corporation on November 25, 1981, and received
its certificate of authority to begin banking operations on October 22, 1982. The Bank operates
four full service facilities in three diverse markets in Northern California. Bank of Commerce is
proud of its reputation as Northern Californias premier bank for business. During 2007, the
Company re-branded Bank of Commerce| Bank of Choice reflecting a renewed commitment to making
Bank of Commerce the bank of choice for local businesses with a fresh focus on family and personal
finances.
The Company will regularly explore opportunities to acquire financial services companies and
businesses. Public announcements about an acquisition opportunity are not made until a definitive
agreement has been signed. In the second quarter 2009, the Company entered into a stock purchase
agreement with Simonich Corporation d.b.a. BWC Mortgage Services to acquire 51% of the capital
stock of Simonich Corporation. Simonich Corporation d.b.a. BWC Mortgage Services is a successful
state of the art mortgage broker of residential real estate loans with ten offices in three
different states and licenses in California, Oregon, Idaho and Nevada. The business was formed in
1984 and the corporate offices are located in San Ramon, California. The business funds over $1.0
billion of first mortgages per year. The Corporate offices are located in San Ramon, California.
The agreement allows the Company to penetrate into the Mortgage Brokerage Services market at our
current retail locations and to share in the income on mortgage transactions nationwide. On July 1,
2009 the company changed its name to Bank of Commerce Mortgage.
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company will provide free of charge upon request, or through links to publicly available
filings accessed through its Internet website, the Companys annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon
as reasonably practical after such reports have been filed with the Securities and Exchange
Commission. The Internet addresses of the Company are www.bankofcommerceholdings.com,
www.reddingbankofcommerce.com, www.rosevillebankofcommerce.com, and
www.bankofcommercemortgage.com. Reports may also be obtained through the Securities and
Exchange Commissions website at www.sec.gov.
The Holding Companys principal source of income is dividends from its subsidiaries. The Holding
Company conducts its corporate business operations at the administrative office of the Bank located
at 1901 Churn Creek Road, Redding, California. The Company conducts its business operations in two
geographic market areas, Redding and Roseville, California. The Company considers Northern
California to be the major market area of the Bank.
The Bank is principally supervised and regulated by the California Department of Financial
Institutions (DFI) and the Federal Deposit Insurance Corporation (FDIC), and conducts a general
commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento,
California. Through the Bank and mortgage subsidiaries, the Company provides a wide range of
financial services and products for business and consumer banking. The services offered by the Bank
include those traditionally offered by banks of similar size and character in California. Products
such as free checking, interest-bearing checking (NOW) and savings accounts, money market deposit
accounts, sweep arrangements, commercial, construction, term loans, travelers checks, safe deposit
boxes, collection services and electronic banking activities. The Bank is an affiliate of LPL
Financial and offers wealth management services through the affiliation.
The services offered by the Mortgage Company include brokerage mortgages for single and
multi-family residential new financing, refinancing and equity lines of credit which are then sold,
servicing included, on the secondary market or to correspondent relationships.
Most of the Banks customers are small to medium sized businesses, professionals and other
individuals with medium to high net worth, and most of the Banks deposits are obtained from such
customers. The primary business strategy of the Bank is to focus on its lending activities. The
Banks principal lines of lending are (i) commercial, (ii) real estate construction and (iii)
commercial real estate.
The majority of the loans of the Bank are direct loans made to individuals and small businesses in
the major market area of the Bank. The Mortgage Company provides residential real estate new
financing, refinancing and equity lines of credit, 100% sold in the secondary market. A relatively
small portion of the loan portfolio of the Bank consists of loans to individuals for personal,
family or household purposes. The Bank accepts the following as collateral for loans: real estate,
listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and
other general business assets such as accounts receivable and inventory.
The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and
intermediate term loans. The loans are generally made for working capital, asset acquisition,
business-expansion purposes, and are generally secured by a lien on the borrowers assets. The
Bank also makes unsecured loans to borrowers who meet the Banks underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its borrowers payment
performance and their respective financial condition, and makes periodic and appropriate
adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The primary
sources of repayment of the commercial loans of the Bank are the borrowers conversion of
short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor
and/or the liquidation of collateral are usually identified as a secondary source of repayment.
On April 17, 2009, the Company completed a Loan Swap transaction which included the purchase of a
portfolio of Individual Tax Identification Number (ITIN) residential mortgage loans with a fair
value of $80.6 million. The mortgage loan industry has long been able to adapt to changing market
conditions. As immigrants begin to comprise a larger and larger portion of our population, the
lending industry has begun to introduce loans that are tailored to an immigrant population that may
not have solid credit histories or social security numbers. ITIN loans are offered to immigrants
that do not have a social security number. The process of obtaining an ITIN is somewhat more
complicated than that of applying for a conventional mortgage. As a result, the usual underwriting
required in issuing such a loan is more complicated and more time consuming than a conventional
mortgage. For this reason, fees and interest rates tend to be higher than for other types of
conventional mortgage loans.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The ITIN portfolio was purchased from a private equity firm in exchange for a combination of
approximately $14.0 million in non-performing loans and cash of approximately $67.0 million. At the
settlement date, the mortgage loan pool contained 859 single family residential mortgages with an
average principle balance of approximately $96,596, a weighted average credit score of 647, a
weighted average loan to value ratio of 89%, a weighted average yield of 7.44% and all loans were
full documentation. The ITIN mortgage pool is geographically disbursed through out the United
States.
The principal factors affecting the Banks risk of loss from commercial lending include each
borrowers ability to manage its business affairs and cash flows, local and general economic
conditions and real estate values on a national level. The Bank manages risk through its
underwriting criteria, which includes strategies to match the borrowers cash flow to loan
repayment terms, and periodic evaluations of the borrowers operations. The Banks evaluations of
its borrowers are facilitated by managements knowledge of local market conditions and periodic
reviews by a consultant of the credit administration policies of the Bank.
The real estate construction loan portfolio of the Bank consists of a mix of commercial and
residential construction loans, which are principally secured by the underlying projects. The real
estate construction loans of the Bank are predominately made for projects, which are intended to be
owner occupied. The Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Banks construction loans are sale of the underlying
collateral or permanent financing provided by the Bank or another lending source. The principal
risks associated with real estate construction lending include project cost overruns that absorb
the borrowers equity in the project and deterioration of real estate values as a result of various
factors, including competitive pressures and economic downturns.
The Bank manages its credit risk associated with real estate construction lending by establishing
maximum loan-to-value ratios on projects on an as-completed basis, inspecting project status in
advance of controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of no more than 80% on single-family residential
construction loans.
The commercial and construction loan portfolio of the Bank consists of loans secured by a variety
of commercial and residential real property. The Mortgage Company makes real estate mortgage loans
for both owner-occupied properties and investor properties. The Mortgage Company brokers and sells
the residential real estate loans directly in the secondary market, servicing included. The Bank
does not provide for warehouse funding.
The specific underwriting standards of the Bank and methods for each of its principal lines of
lending include industry-accepted analysis and modeling, and certain proprietary techniques. The
Banks underwriting criteria is designed to comply with applicable regulatory guidelines, including
required loan-to-value ratios. The credit administration policies of the Bank contain mandatory
lien position and debt service coverage requirements, and the Bank generally requires a guarantee
from the owners of its private corporate borrowers.
The Company continuously searches for expansion possibilities, through internal growth, strategic
alliances, acquisitions or new office and product opportunities. Systematically, the Company will
reevaluate the short and long-term profitability of all lines of business, and will not hesitate to
reduce or eliminate unprofitable locations or lines of business. The Company remains a viable,
independent bank by enhancing stockholder value. This has been realized by proactive management and
commitment to staff, customers, and the markets served.
Risk Factors
Economic Conditions and Geographic Concentration
An economic slowdown could reduce demand for the Companys products and services and lead to lower
revenues and lower earnings. A change in the national economic and business conditions may
adversely affect the ability of our borrowers to repay their loans, causing us to incur higher
credit losses. The Company earns revenue from interest and fees charged on loans and financial
services. When the economy slows, the demand for these products and services may fall, reducing our
interest and fee income, and our earnings. In addition, during periods of economic slowdown or
recession, the Bank may experience a decline in collateral values and an increase in delinquencies
and defaults due to the borrowers ability to repay their loans. Several factors could cause the
economy to slow down or even recede, including higher energy costs, higher interest rates, reduced
consumer or corporate spending, a slowdown in housing, natural disasters, terrorist activities,
military conflicts, and the normal cyclical nature of the economy.
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Companys primary lending focus has historically been commercial real estate, commercial
lending and, to a lesser extent, construction lending. At June 30, 2009, all of the Companys real
estate mortgage, real estate construction loans, and commercial real estate loans, were secured
fully or in part by deeds of trust on underlying real estate. The Companys dependence on real
estate increases the risk of loss in the loan portfolio of the Company and its holdings of other
real estate owned if economic conditions in the nation deteriorate in the future. Deterioration of
the national real estate market has had an adverse effect on the Companys business, financial
condition and results of operations.
Current financial and credit market conditions may persist or worsen, making it more difficult to
access capital markets on favorable terms
Over the last year financial and credit markets have experienced unprecedented disruption and
volatility. These conditions may continue or even worsen, affecting the Companys ability to access
capital markets on favorable terms. We may raise additional capital through the issuance of common
stock, which could dilute existing stockholders, or reduce or eliminate our common stock dividend
to preserve capital or in order to raise additional capital.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the fair value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of when an other-than-temporary impairment has occurred. The ALCO Committee reviews the
investment portfolio on at least a quarterly basis, with ongoing analysis as new information
becomes available. Any decline that is determined to be other-than-temporary is recorded as an
other-than-temporary impairment (OTTI).
When an investment is impaired, we assess whether to sell the security, or it is more likely than
not that we will be required to sell the security before recovery of its amortized cost basis less
any current-period credit losses. For debt securities, that are considered other than temporarily
impaired and that we do not intend to sell and will not be required to sell prior to recovery of
our amortized cost basis, we separate the amount of the impairment into the amount that is credit
related (credit loss component) and the amount due to all other factors. The credit loss component
is recognized in earnings and is calculated as the difference between the investments amortized
cost basis and the present value of its expected future cash flows. The remaining difference
between the investments fair value and the present value of future expected cash flows is deemed
to be due to factors that are not credit related and is recognized in other comprehensive income.
Significant judgment is required in the determination of whether an OTTI has occurred for an
investment. The Company follows a consistent and systematic process for determining and recording
an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process. The
ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information.
Significant judgment is required in the determination of whether an OTTI has occurred for an
investment. The Company follows a consistent and systematic process for determining and recording
an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process.
The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information. The ALCO Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which the fair value has
been less than amortized cost, (b) the financial condition and near term prospects of the issuer,
(c) the intent and ability of the Company to retain its investment for a period of time sufficient
to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and
principal payments and (e) general market conditions and industry or sector specific outlook.
Changes in Interest Rates could reduce the Companys Net Interest Income and Earnings
The Companys net interest income is the interest earned on loans, debt securities and other assets
less the interest paid on deposits, long-term and short-term debt and other liabilities. Net
interest income reflects both our net interest margin the difference between the yield on
earning assets and the interest paid on deposits and other sources of funding and the amount
(volume) of earning assets we hold. As a result, changes in either the net interest margin or the
volume of earning assets could adversely affect our net interest income and earnings.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Changes in interest rates, up or down, could adversely affect the net interest margin. The yield we
earn on our deposits and our funding costs tend to move in the same direction in response to
changes in interest rates, one can rise or fall faster than the other (timing differences). A
significant portion of the Companys assets are tied to variable rate pricing and the Company is
considered to be asset sensitive. As a result, the Company is generally adversely affected by
declining interest rates. In addition, changes in monetary policy, including changes in interest
rates, influence the origination of loans, the purchase of investments and the generation of
deposits, thereby affecting the rates received on loans and securities and paid on deposits, which
could have a material adverse effect on the Companys business, financial condition and results of
operations. See Quantitative and Qualitative Disclosure about Market Risk.
Changes in the slope of the yield-curve, or the spread between short-term and long-term interest
rates could also reduce our net interest margin. Normally, the yield curve is upward sloping,
meaning that short-term rates are lower than long-term rates. Because our liabilities tend to be
shorter in duration than our assets, when the yield curve flattens or even inverts, the Company
will experience pressure on the net interest margin as the cost of funds increases relative to the
yield that can be earned on assets.
The Company assesses interest rate risk by estimating the effect on earnings in various scenarios
that differ based on assumptions about the direction, magnitude and speed of interest rate changes
and the slope of the yield curve. The Company may hedge some interest rate risk with interest rate
derivatives. The Company does not hedge all of its interest rate risk. There is risk that changes
in interest rates could reduce our net interest income and earnings in material amounts, especially
if actual conditions turn out to be materially different that the assumptions used in the model.
One example: If interest rates rise or fall faster than assumed or the slope of the yield curve
changes, the Company may incur losses on debt securities held as investments.
To reduce the interest rate risk, the Company may choose to rebalance the investment and loan
portfolio, refinance debt outstanding or take other strategic actions. The Company may incur losses
or expenses when taking such actions.
Lending Risks Associated with Commercial Banking and Construction Activities
The business strategy of the Company is to focus on commercial, single family and multi-family real
estate loans, construction loans and commercial business loans. Loans secured by commercial real
estate are generally larger and involve a greater degree of credit and transaction risk than
residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial
and multi-family real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. Moreover, real estate
construction financing is generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the propertys value at
completion of construction or development compared to the estimated cost (including interest) of
construction. If the estimate of value proves to be inaccurate, the Company may be confronted with
a project which, when completed, has a value which is insufficient to assure full repayment of the
construction loan. Although the Company manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not materialize, in which
event the Companys financial condition, results of operations, cash flows and business prospects
could be materially adversely affected.
Adequacy of Allowance for Loan and Lease Losses (ALLL)
Higher credit losses could require the Company to increase the allowance for loan and lease losses
through a charge to earnings. When the Company loans money or commits to loan money it incurs
credit risk or the risk of losses if our borrowers do not repay their loans. The Company provides a
reserve for credit risk by establishing an allowance through a charge to earnings. The amount of
the allowance is based on an assessment of credit losses inherent in the loan portfolio (including
unfunded credit commitments). The process for determining the amount of the allowance is critical
to our financial results and condition. It requires difficult, subjective and complex judgments
about the future, including forecasts of economic or market conditions that might impair our
borrowers ability to repay their loans.
The Company might increase the allowance because of changing economic conditions or unexpected
events. The Companys allowance for loan and lease losses was approximately $8.5 million, or 1.43%
of total portfolio loans at June 30, 2009.
Potential Volatility of Deposits
The Banks depositors could choose to take their money out of the bank and put it into alternative
investments, causing an increase in funding costs and reducing net interest income. Checking,
savings and money market account balances can decrease when customers perceive that alternative
investments, such as the stock market, as providing a better risk/return tradeoff. When customers
move funds out of bank deposits into other investments, the Bank will lose a relatively low cost
source of funds, increasing funding costs.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
At June 30, 2009, time certificates of deposit in excess of $100,000 represented approximately 30%
of the dollar value of the total deposits of the Company. As such, these deposits are considered
volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits
could adversely affect the liquidity of the Company, profitability, business prospects, results of
operations and cash flows. The Company monitors activity of volatile liability deposits on a
quarterly basis.
Dividends
Bank of Commerce Holdings, the parent holding company, is a separate and distinct legal entity from
its subsidiaries. The Company conducts no other significant activity than the management of its
investment in the Bank and Mortgage Company and as such, the Company is dependent on these
subsidiaries for income. The ability of the Bank and Mortgage Company to pay cash dividends in the
future depends on the profitability, growth and capital needs of the Bank and Mortgage Company.
Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of
the Treasury Department will be required for the Company to (1) declare or pay any dividend or make
any distribution on our common stock (other than regular quarterly cash dividends of not more than
$0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Companys
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreement.
Dividends paid from the Bank and the Mortgage Company are used to pay dividends on common stock and
interest and principal on debt. In addition, the California Financial Code restricts the ability of
the Bank to pay dividends. No assurance can be given that the Company or the Bank will pay any
dividends in the future or, if paid, such dividends will not be discontinued. Dividends from the
Bank to the Holding Company are restricted under California law to the lesser of the Banks
retained earnings or the Banks net income for the latest three fiscal years, less dividends
previously declared during that period, or, with the approval of California Superintendent of
Banks, to the greater of the retained earnings of the Bank, the net income of the Bank for its last
fiscal year, or the net income of the Bank for its current fiscal year.
Participation in the Treasury Departments Capital Purchase Program restricts our ability to raise
the common stock dividend and may result in dilution of common stockholders
The U.S. government has taken action to restore liquidity and stability to financial and credit
markets, including the enactment of the Emergency Economic Stabilization Act of 2008 (EESA) and the
Troubled Asset Relief Program (TARP). As part of TARP, the Treasury Department implemented the
Capital Purchase Program (CPP) to purchase senior preferred stock from qualifying financial
institutions including Bank of Commerce Holdings. On November 14, 2008, we issued preferred
securities and a common stock purchase warrant to the Treasury Department under the CPP. Prior to
November 14, 2011, unless the Company has redeemed the preferred securities or the Treasury
Department has transferred the securities to a third party, the Treasury Departments consent will
be required for us to increase our common stock dividend or repurchase our common stock other than
in connection with benefit plans consistent with past practice.
Under the anti-dilution provisions included in the terms of the departments CPP investment, the
per share exercise price of the warrant and the number of shares of our common stock issuable upon
exercise of the warrant will be adjusted upon certain issuances of our common stock at or below a
specified price relative to the initial exercise price. The exercise of the common stock purchase
warrant could result in material dilution to existing common stockholders. As a condition to an
additional CPP investment, the Company could be required to eliminate our common stock dividend.
As a participant in the CPP our business activities and corporate governance may be subject to
additional restrictions and requirements, including requirements for lending activities and
restrictions on compensation, some possibly with retroactive application, adopted by Congress, the
Treasury Department or government agencies.
Changes in Accounting Policies or Accounting Standards, and Changes in How Accounting Standards are
interpreted or applied, Could Materially Affect How the Company Reports its Financial Results and
Condition
The Companys accounting policies are fundamental to understanding our financial results and
condition. Some of these policies require use of estimates and assumptions that may affect the
value of our assets or liabilities and financial results. Three of our accounting policies are
critical because they require management to make difficult, subjective and complex judgments about
matters that are inherently uncertain and because it is likely that materially different amount
would be reported under different conditions or using different assumptions (refer to Critical
Accounting Policies).
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
From time to time the Financial Accounting Standards Board (FASB) and the SEC change the
financial accounting and reporting standards that govern the preparation of financial statements.
In addition, accounting standard setters and those who interpret the accounting standards (such as
the FASB, SEC, banking regulators and outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be applied. Changes in financial
accounting and reporting standards and changes in current interpretations may be beyond the
Companys control, can be hard to predict and could materially impact how we report our financial
results and condition. The Company could be required to apply a new or revised standard
retroactively or apply an existing standard differently, also retroactively, in each case resulting
in restating prior period financial statements.
Government Regulation and Legislation
The Company and the Bank are subject to extensive state and federal regulation, supervision and
legislation, which govern almost all aspects of the operations of the Company and the Bank. The
business of the Company is particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position of other financial
institutions. Such laws are subject to change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on the business and
prospects of the Company, but it could be material and adverse.
Recent high-profile events have resulted in additional regulations. For example, Sarbanes-Oxley
limits the types of non-audit services our outside auditors may provide to the Company in order to
preserve the independence of our auditors. If our auditors were found not to be independent under
SEC rules, we could be required to engage new auditors and file new financial statements and audit
reports with the SEC.
The Patriot Act which was enacted in the wake of the September 2001 terrorist attacks, requires the
Company to implement new or revised policies and procedures related to anti-money laundering,
compliance, suspicious activities, currency transaction reports and due diligence on customers. The
Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve a proposed bank acquisition.
The American Recovery and Reinvestment Act of 2009 includes extensive new restrictions on the
Companys ability to pay retention awards, bonuses and other incentive compensation during the
period in which the Company has any outstanding obligation arising from financial assistance
provided to the Company under the TARP. Many of the restrictions are not limited to senior
executives and cover other employees whose contributions to revenue and performance can be
significant. The limitations may adversely affect the Companys ability to recruit and retain key
employees.
As long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and
repurchases or redemptions relating to our common stock are prohibited until all accrued and unpaid
dividends are paid on that preferred stock, subject to certain exceptions. In addition, until the
U.S. Treasury ceases to own any of our securities sold under the TARP Capital Purchase Program, the
compensation arrangements for the Companys senior executive officers must comply with the U.S.
Emergency Economic Stabilization Act of 2008 (EESA) and the rules and regulations thereunder. EESA
requires the following provisions with respect to our Chief Executive Officer: limits on
compensation to exclude incentives to take unnecessary and excessive risks; a claw-back with
respect to incentive compensation based on statements of earnings, gains or other criteria that are
later proven to be materially inaccurate; and a prohibition on golden parachute payments. EESA also
limits the deductibility of compensation earned by our senior executive officers to $500,000 per
year.
The American Recovery and Reinvestment Act of 2009 (Stimulus Act), which was signed into law on
February 17, 2009, imposes extensive new restrictions on participants in the TARP Capital Purchase
Program. The new restrictions include additional limits on executive compensation such as
prohibiting the payment or accrual of any bonus, retention award or incentive compensation to the
Companys Chief Executive Officer except for the payment of long-term restricted stock; prohibiting
any compensation plan that would encourage the manipulation of earnings; and extending the
claw-back required by EESA to the top 5 most highly compensated employees. The Stimulus Act also
requires compliance with new corporate governance standards including an annual say on pay
shareholder vote, the adoption of policies regarding excessive or luxury expenditures, and a
certification by our Chief Executive Officer and Chief Financial Officer that we have complied with
the standards in the Stimulus Act. The full impact of the Stimulus Act is not yet certain because
it calls for additional regulatory action. The Company will continue to monitor the effect of the
Stimulus Act and the anticipated regulations.
From time to time, Congress considers legislation that could significantly change our regulatory
environment, potentially increasing the cost of doing business, limiting activities or affecting
the competitive balance among banks, savings associations, credit unions and other financial
institutions.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Certain Ownership Restrictions under California and Federal Law
Federal law prohibits a person or group of persons acting in concert from acquiring control of
a bank holding company unless the FRB has been given 60 days prior written notice of such proposed
acquisition and within that time period the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days, the period during which such a disapproval may
be issued. An acquisition may be made before the expiration of the disapproval period if the FRB
issues written notice of its intent not to disapprove the action.
Under a rebuttal presumption established by the FRB, the acquisition of more than 10% of a class of
voting stock of a bank with a class of securities registered under Section 12 of the Exchange Act
(such as the common stock), would, under the circumstances set forth in the presumption, constitute
the acquisition of control. In addition, any company would be required to obtain the approval of
the FRB under the BHCA, before acquiring 25% (5% in the case of an acquirer that is, or is deemed
to be, a bank holding company) or more of the outstanding shares of the Companys common stock, or
such lesser number of shares as constitute control. See Regulation and Supervision of Bank
Holding Companies in the Companys 2008 Annual Report on Form 10-K.
Under the California Financial Code, no person shall, directly or indirectly, acquire control of a
California licensed bank or a bank holding company unless the Commissioner has approved such
acquisition of control. A person would be deemed to have acquired control of the Company and the
Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of the Company or (ii) to direct or cause the direction of the management
and policies of the Company. For purposes of this law, a person who directly or indirectly owns or
controls 10% or more of the common stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company.
Negative Publicity could Damage our Reputation
Reputation risk, or the risk to the Companys earnings and capital from negative public opinion, is
inherent in the financial services business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse legal and regulatory consequences.
Negative public opinion could result from actual or alleged conduct in any number of activities,
including lending practices, corporate governance, acquisitions, and from actions taken by
government regulators and community organizations in response to that conduct.
Environmental Risks
The Company, in its ordinary course of business, acquires real property securing loans that are in
default, and there is a risk that hazardous substance or waste, contaminants or pollutants could
exist on such properties. The Company may be required to remove or remediate such substances from
the affected properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured by such properties.
Furthermore, the Company may not have adequate remedies against the prior owners or other
responsible parties to recover its costs. Finally, the Company may find it difficult or impossible
to sell the affected properties either before or following any such removal. In addition, the
Company may be considered liable for environmental liabilities concerning its borrowers
properties, if, among other things, it participates in the management of its borrowers operations.
The occurrence of such an event could have a material adverse effect on the Companys business,
financial condition, results of operations and cash flows.
Shares Eligible for Future Sale
As of June 30, 2009, the Company had 8,711,495 shares of Common Stock outstanding, of which
6,409,494 shares are eligible for sale in the public market without restriction and 2,302,001
shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of
1933, as amended (the Securities Act). Future sales of substantial amounts of the Companys
common stock, or the perception that such sales could occur, could have a material adverse effect
on the market price of the common stock. In addition, options to acquire 687,485 shares of the
issued and outstanding shares of common stock at exercise prices ranging from $5.00 to $11.59 have
been issued to directors and certain employees of the Company under the Companys 1998 Stock Option
Plan. No prediction can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the Companys common
stock.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Technology and Computer Systems
Advances and changes in technology can significantly affect the business and operations of the
Company. The Company faces many challenges including the increased demand for providing computer
access to bank accounts and the systems to perform banking transactions electronically. The
Companys ability to compete depends on its ability to continue to adapt its technology on a timely
and cost-effective basis to meet these requirements. In addition, the Companys business and
operations are susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to cause disruptions or
failures of the Companys data processing systems.
Company Stock Price may be volatile due to Other Factors
The Companys stock price can fluctuate widely in response to a variety of factors, in addition to
those described above, including:
|
|
|
General business and economic conditions; |
|
|
|
|
Recommendations by securities analysts; |
|
|
|
|
New technologies introduced or services offered by our competitors; |
|
|
|
|
News reports relating to trends, concerns and other issues in the financial services industry; |
|
|
|
|
Natural disasters; and |
|
|
|
|
Geopolitical conditions, such as acts or threats of terrorism or military conflicts. |
Mortgage banking interest rate and market risk
Changes in interest rates greatly affect the mortgage banking business. Our mortgage subsidiary
originates, funds and services mortgage loans, which subjects the Company to various risks,
including credit, liquidity and interest rate risks. Based on market conditions and other factors,
the Company reduces unwanted credit and liquidity risks by selling some or all of the long-term
fixed-rate mortgage loans and adjustable rate mortgages originated.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity
in the nonconforming secondary markets, the subsidiary mortgage banking revenue continued to be
positive. Interest rate and market risk can be substantial in the mortgage business. Changes in
interest rates may potentially impact total origination fees.
Interest rates impact the amount and timing of origination because consumer demand for new
mortgages and the level of refinancing activity are sensitive to changes in mortgage interest
rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage
originations and fees. Given the time it takes for consumer behavior to fully react to interest
rate changes, as well as the time required for processing a new application, providing the
commitment, and selling the loan, interest rate changes will impact origination fees with a lag.
The amount and timing of the impact on origination fees will depend on the magnitude, speed and
duration of the change in interest rates. A decline in interest rates generally increases the
propensity for refinancing.
As part of subsidiary mortgage banking activities, we enter into commitments to fund residential
mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate
lock that binds us to lend funds to a potential borrower at a specified interest rate and within a
specified period of time, generally up to 60 days after inception of the rate lock. Outstanding
loan commitments expose the Company to the risk that the price of the mortgage loans underlying the
commitments might decline due to increases in mortgage interest rates from inception of the rate
lock to the funding of the loan.
Mortgage banking revenue can be volatile from quarter to quarter
The Company earns revenue from fees for originating mortgage loans. When rates rise, the demand for
mortgage loans tends to fall, reducing the revenue from loan originations. It is also possible
that, because of the recession and deteriorating housing market, even if interest rates were to
fall, mortgage originations may also fall.
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Executive Overview
Bank of Commerce Holdings is a financial services company providing banking, investments, mortgage
banking, consumer banking, the internet and other distribution channels to our markets. Our Company
was established to make a profitable return while serving the financial needs of the communities of
our markets. We are in the financial services business, and no line of financial services is beyond
our charter as long as it serves the needs of businesses and professionals in our communities. The
mission of our Company is to provide its stockholders with a safe, profitable return on their
investment, over the long term. Management will attempt to minimize risk to our stockholders by
making prudent business decisions, will maintain adequate levels of capital and reserves, and will
maintain effective communications with stockholders. Our Companys most valuable asset is its
customers. We will consider their needs first when we design our products and services. The
high-quality customer experience is an important mission of our Company, and how well we accomplish
this mission will have a direct influence on our profitability.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. The flexibility
provided by the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and products that can be
delivered to our customers efficiently and profitably. Producing quality returns is, as always, a
top priority.
The Companys long term success rests on the shoulders of the leadership team to effectively work
to enhance the performance of the Company. As a financial services company, we are in the business
of taking risk. Whether we are successful depends largely upon whether we take the right risks and
get paid appropriately for the risks we take. Our governance structure enables us to manage all
major aspects of the Companys business effectively through an integrated process that includes
financial, strategic, risk and leadership planning.
We define risks to include not only credit, market and liquidity risk the traditional concerns
for financial institutions but also operational risks, including risks related to systems,
processes or external events, as well as legal, regulatory and reputation risks.
Our management processes, structures and policies help to ensure compliance with laws and
regulations and provide clear lines for decision-making and accountability. Results are important,
but equally important is how we achieve those results. Our core values and commitment to high
ethical standards is material to sustaining public trust and confidence in our Company. For
additional information concerning risks and uncertainties related to the Company and its operations
please refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2008,
under the heading Risk Management.
Sources of Income
The Company has two reportable segments: Commercial banking and mortgage brokerage services. The
Company conducts a general commercial banking business in the counties of El Dorado, Placer,
Shasta, Tehama and Sacramento, California. The principal commercial banking activities include a
full array of deposit accounts and related services and commercial lending for businesses,
professionals and their interests.
The Company derives its commercial banking income from two principal sources: (i) net interest
income, which is the difference between the interest income it receives on interest-earning assets
and the interest expense it pays on interest-bearing liabilities, and (ii) fee income, which
includes fees earned on deposit services, income from SBA lending, electronic-based cash management
services, mortgage brokerage fee income and merchant credit card processing services. The income
of the Bank depends to a great extent on net interest income. These interest rate factors are
highly sensitive to many factors, which are beyond the Companys control, including general
economic conditions, inflation, recession, and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board. Because of the Banks predisposition to
variable rate pricing and non-interest bearing demand deposit accounts, the Bank is considered
asset sensitive. As a result, the Company is adversely affected by declining interest rates.
Mortgage brokerage services are performed by Bank of Commerce Mortgage subsidiary. Mortgage
brokerage services offers residential real estate loans with ten offices in three different states
and licenses in California, Oregon, Idaho and Nevada. Mortgages that are originated are sold,
servicing included, in the secondary market or directly to correspondent financial institutions.
The Company derives fee income from its mortgage brokerage services.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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Key Performance Ratios |
|
June 30, 2009 |
|
June 30, 2008 |
Profitability Ratios |
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|
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Net Interest Income to Average Assets |
|
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3.53 |
% |
|
|
3.22 |
% |
Net Income to Average Equity |
|
|
8.85 |
% |
|
|
9.05 |
% |
|
|
|
|
|
|
|
|
|
Efficiency Ratio1 |
|
|
49.30 |
% |
|
|
61.09 |
% |
|
Capital Ratios |
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|
|
|
|
|
|
|
Leverage Ratio |
|
|
9.71 |
% |
|
|
8.81 |
% |
Risk Based Capital |
|
$ |
82,943,177 |
|
|
$ |
62,725,450 |
|
Tier 1 Capital |
|
|
11.57 |
% |
|
|
9.75 |
% |
Total Capital |
|
|
12.82 |
% |
|
|
10.67 |
% |
|
|
|
|
|
|
|
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Per Common Share Data |
|
|
|
|
|
|
|
|
Dividend Payout Ratio |
|
|
16.33 |
% |
|
|
65.40 |
% |
Book Value |
|
$ |
7.67 |
|
|
$ |
5.28 |
|
Market Price |
|
$ |
5.70 |
|
|
$ |
6.96 |
|
High |
|
$ |
6.00 |
|
|
$ |
11.64 |
|
Low |
|
$ |
5.53 |
|
|
$ |
6.00 |
|
Financial Highlights Results of Operations
Balance Sheet
Our Company believes that 2009 and beyond may be redefining the financial services industry. During
2009 and 2008, the focus of the Company has been on strengthening the balance sheet, by providing
appropriate reserves, strong capital, and significant liquidity. Our strength and security continue
to compare favorably with our industry peers.
Our balance sheet increased by $32.9 million or 4.3% over the year end 2008, and $160.5 million or
24.8% over the same period a year ago. During the second quarter 2009, the Company entered into a
stock purchase agreement with Simonich Corporation d.b.a. BWC Mortgage Services to acquire 51% of
the capital stock of Simonich Corporation. Simonich Corporation d.b.a. BWC Mortgage Services is a
successful state of the art mortgage broker of residential real estate loans with ten offices in
three different states and licenses in California, Oregon, Idaho and Nevada. The business was
formed in 1984 and the corporate offices are located in San Ramon, California. The business funds
over $1.0 billion of first mortgages per year. The Corporate offices are located in San Ramon,
California.
The agreement was dated May 15, 2009. The total consideration paid by the Company was $2.5 million,
with $1.5 million paid at closing and the additional $1.0 million to be earned-out over a period of
three years based upon delivering an established level of profits. In return for consideration
paid, the Company recorded assets of $15.6 million and goodwill of $2.9 million. The agreement
allows the Company to enter into Mortgage Brokerage Services through our retail outlets and to
share in the income on transactions produced from other locations. Effective July 1, 2009 the
Company changed its name to Bank of Commerce Mortgage. At June 30, 2009 the Company had no pending
business combinations.
The loan portfolio, the single largest asset class of the Company grew by $72.0 million over
year-end 2008 and $83.2 million over the same period a year ago. On April 17, 2009, the Company
completed a Loan Swap transaction which included the purchase of a portfolio of Individual Tax
Identification Number (ITIN) residential mortgage loans with a fair value of $80.6 million. The
mortgage loan industry has long been able to adapt to changing market conditions. As immigrants
begin to comprise a larger and larger portion of our population, the lending industry has begun to
introduce loans that are tailored to an immigrant population that may not have solid credit
histories or social security numbers. ITIN loans are offered to immigrants that do not have a
social security number. The process of obtaining an ITIN is somewhat more complicated than that of
applying for a conventional mortgage. As a result, the usual underwriting required in issuing such
a loan is more complicated and more time consuming than a conventional mortgage. For this reason,
fees and interest rates tend to be higher than for other types of conventional mortgage loans.
|
|
|
1 |
|
The efficiency ratio is calculated by dividing
non-interest expense by the sum of net interest income and noninterest income.
The efficiency ratio measures how the Company spends in order to generate each
dollar of net revenue. |
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The ITIN portfolio was purchased from a private equity firm in exchange for a combination of
approximately $14.0 million in non-performing loans and cash of approximately $67.0 million. At the
settlement date, the mortgage loan pool contained 859 single family residential mortgages with an
average principle balance of approximately $96,596, a weighted average credit score of 647, a
weighted average loan to value ratio of 89%, a weighted average yield of 7.44% and all loans were
full documentation. The ITIN mortgage pool is geographically disbursed through out the United
States.
The Companys primary funding source, deposits, reflected increases of $11.8 million from year-end
2008 and $98.7 million year-over-year. The deposit growth was centered in time deposits; time
deposits increased by $31.2 million or 12% since year-end 2008 and $77.2 million or 35%
year-over-year. Management primarily attributes deposit growth to the current economic environment
and our customers concern with alternative investments such as stocks and bonds. Therefore, it is
possible that with an economic recovery, our customers could migrate back into these other asset
classes.
Management has taken aggressive actions in provisioning for loan losses, charging down impairments
and keeping an attentive eye on expenses. As long as the U.S. economy remains weak, losses in the
loan portfolio may increase. Our Company continues to take actions to enable us to navigate through
this current economic and credit cycle.
The Commercial and Industrial portfolio is performing well given the current market conditions
while real estate development properties and construction related lending remains under stress. Our
loan portfolio will likely continue to be influenced by weakness in real estate values, the effects
of higher energy prices and higher unemployment levels. Net charge offs were $4.6 million at June
30, 2009 compared to net charge offs of $3.0 million for the same period a year ago. The
charge-offs were centered in commercial and real estate development loans. One development property
was taken into other real estate owned (OREO) during 2008 and one mortgage loan was added in the
second quarter 2009. OREO was $3.2 million at June 30, 2009 and zero for the same period a year
ago. The second OREO property of approximately $300,000 was sold and settled on July 22, 2009 with
no loss recorded. We are committed to working with our customers to find potential solutions when
our customers experience financial difficulties.
Elevated provisions are associated with an aggressive and conservative reclassification of loans
and managements aggressive stance in recognizing impaired loans. Our Company has provided $4.5
million in provisions for loan and lease losses for the six months ended June 30, 2009 compared to
$1.6 million for the same period a year ago. The Companys allowance for loan losses was 1.43% of
total portfolio loans at June 30, 2009 compared to 0.98% of total loans for the same period a year
ago.
Our Company continues to maintain a relatively low-risk, liquid and valuable available-for-sale
investment portfolio. This resource is utilized as a source of liquidity as opportunities to
reposition the balance sheet present themselves. During the six months ended June 30, 2009, the
Company has recorded $1.5 million in gains on sales of securities. Proceeds from the sales were
used to fund loan growth.
The capital ratios of Bank of Commerce continue to be above well-capitalized guidelines established
by regulatory agencies. With our strong capital position, we find significantly more opportunities
now for acquisitions, portfolio purchases and attractive loan and asset purchases.
On October 14, 2008, the FDIC expanded deposit insurance coverage with the new Transaction Account
Guarantee Program under its Temporary Liquidity Guarantee Program. The new program provides
customers of financial institutions that choose to participate in it full FDIC insurance for all
deposit balances in noninterest-bearing transaction deposit accounts through December 31, 2009.
Bank of Commerce has opted to participate in this program to provide an additional level of
security to our customers.
Income Statement
Net income attributable to the Company for the second quarter of 2009 totaled $1,616,000 an
increase of 78.2% from the $906,000 reported for the same quarterly period of 2008. On the same
basis diluted earnings per common share for the second quarter of 2009 was $0.16, compared to $0.10
for the same period of 2008. Return on average assets (ROA) and return on average equity (ROE) for
the second quarter of 2009 were 0.84% and 10.89%, respectively, compared with 0.56% and 7.71%,
respectively, for the second quarter of 2008.
Net income attributable to the Company for the six-month period ended June 30, 2009 totaled
$2,886,000, an increase of 35.1% over net income of $2,136,000 reported for the same six-month
period ended June 30, 2008.
On the same basis, diluted earnings per common share for the six-months ended June 30, 2009 was
$0.28, compared to $0.24 for the same six-month period in 2008. ROA was 0.73% and ROE was 8.85% for
the first six-months of 2009 compared with 0.66% and 9.05%, respectively, for the same six-month
period of 2008.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net Interest Income and Net Interest Margin
Net interest income is the primary source of the Companys income. Net interest income represents
the excess of interest and fees earned on interest-earning assets (loans, securities and Federal
Funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net interest income for the
quarter ended June 30, 2009 was $7.5 million compared with $5.0 million for the same period in
2008, an increase of 48.6%. Net interest income for the six-months ended June 30, 2009 was $13.9
million compared with $10.5 million for the same six-month period in 2008, an increase of 32.8%.
Average earning assets for the six-months ended June 30, 2009 increased $124.5 million or 20.5%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $57.3 million or 11.1% on average compared with the prior year period.
Average loan yields dropped by 65 basis points to 6.04% during the period. The decrease in average
earning asset yields is primarily due to multiple interest rate drops on the loan portfolio during
the period.
Average deposits and borrowings increased by $111.7 million over the same period a year ago. The
yield on funding costs decreased to 2.00% compared with 3.25% for the same period a year ago.
Federal Home Loan Bank borrowings have seen a significant drop in costs as the Treasury continues
to provide liquidity to the financial services industries.
Increases in the volume of earning assets contributed $2.9 million partially offset by the decrease
in yields of $1.6 million for the same period, resulting in an increase in the margin of $1.2
million. Increases in the source of funding reduced the margin by $1.6 million while reductions in
deposit and borrowing costs contributed $3.4 million to the margin. The net result is an increase
to the net interest margin of $3.4 million over the prior year.
Liquidity
The objective of liquidity management is to ensure that the Company can efficiently meet the
borrowing needs of our customers, withdrawals of our depositors and other cash commitments under
both normal operating conditions and under unforeseen and unpredictable circumstances of industry
or market stress.
The Asset Liability Management Committee (ALCO) establishes and monitors liquidity guidelines
that require sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid
resources of cash and due from banks and federal funds sold, asset liquidity is supported by debt
securities in the available for sale security portfolio and wholesale lines of credit with the
Federal Home Loan Bank and borrowing lines with other financial institutions. Customer core
deposits have historically provided the Company with a source of relatively stable and low-cost
funds.
The Companys consolidated liquidity position remains adequate to meet short-term and long-term
future contingencies. At June 30, 2009, the Company had overnight investments of $79.0 million,
available lines of credit at the Federal Home Loan bank of approximately $30.0 million, and two
federal funds borrowing line with correspondent banks of $25.0 million.
Capital Management
The Company has an active program for managing stockholder capital. Capital is used to fund organic
growth, acquisitions, pay dividends and repurchase shares. The objective of effective capital
management is to produce above market long-term returns by using capital when returns are perceived
to be high and issuing capital when costs are perceived to be low.
Periodically, the Board of Directors authorizes the Company to repurchase shares. Share repurchase
announcements are published in press releases and SEC 8-K filings. Typically we do not give any
public notice before repurchasing shares. Various factors determine the amount and timing of our
share repurchases, including our capital requirements, market conditions and legal considerations.
These factors can change at any time and there can be no assurance as to the number of shares
repurchased or the timing of the repurchases.
Our policy has been to repurchase shares under the safe harbor conditions of Rule 10b-18 of the
Exchange Act including a limitation on the daily volume of repurchases. The Companys potential
sources of capital include retained earnings, common and preferred stock issuance and issuance of
subordinated debt and trust notes.
The Company and bank are subject to various regulatory capital adequacy requirements as prescribed
by the Federal Reserve Bank. Risk-based capital guidelines establish a risk-adjusted ratio relating
capital to difference categories of assets and off-balance sheet exposures.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As of June 30, 2009, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the following table. There are no conditions or events since that
notification that management believes have changed the Banks category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
June 30, 2009 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
81,807,014 |
|
|
|
10.55 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
81,807,014 |
|
|
|
12.65 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Total Risk-Based |
|
|
85,873,434 |
|
|
|
13.27 |
% |
|
|
n/a |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
74,831,883 |
|
|
|
9.71 |
% |
|
|
5.0 |
% |
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
74,831,883 |
|
|
|
11.57 |
% |
|
|
6.0 |
% |
|
|
4.0 |
% |
Total Risk-Based |
|
|
82,943,177 |
|
|
|
12.82 |
% |
|
|
10.00 |
% |
|
|
8.0 |
% |
|
Short and Long Term Borrowings
The Company actively uses Federal Home Loan Bank (FHLB) advances as a source of wholesale funding
to support growth strategies as well as to provide liquidity. At June 30, 2009, the Companys FHLB
advances were of fixed term borrowings without call or put option features.
The Company also has an advance from the Federal Reserve Bank of San Francisco (FRB) totaling
$20,000,000 as of June 30, 2009 and $0 as of June 30, 2008. The advance is under FRBs Term Auction
Facility (TAF) and was originated on June 17, 2009, matures on September 10, 2009, and bears a
fixed rate of 0.25%. The FRBs TAF credit facility is an auction based borrowing with terms limited
to 28 and 84 day maturities. The Company has pledged $74,215,075 in commercial and industrial loans
as collateral as of June 30, 2009, and had available borrowing lines at the FRB of $48,220,472.
At June 30, 2009, the Bank had $120 million in FHLB and FRB term advances outstanding at an average
rate of 0.90% compared to $95 million at an average rate of 3.50% at June 30, 2008.
Provision for Loan and Lease Losses
The Allowance for Loan and Lease Losses, which consists of the allowance for loan losses, is
managements estimate of credit losses inherent in the loan portfolio at the balance sheet date.
The Company has established a process using several analytical tools and benchmarks, to calculate a
range of probable outcomes and determine the adequacy of the allowance. No single statistic or
measurement determines the adequacy of the allowance. Loan recoveries and the provision for credit
losses increase the allowance, while loan charge-offs decrease the allowance.
The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer,
Sacramento and Tehama counties, in California, and the location of the four full service offices of
the Bank. In addition the Company purchased an ITIN loan portfolio from a private equity firm in
exchange for a combination of approximately $14.0 million in non-performing loans and cash of
approximately $67.0 million. At the settlement date, the mortgage loan pool contained 859 single
family residential mortgages with an average principle balance of approximately $96,596, a
weighted average credit score of 647, a weighted average loan to value ratio of 89%, a weighted
average yield of 7.44% and all loans were full documentation. The ITIN loan portfolio is
geographically disbursed through out the United States.
Although the Company has a diversified loan portfolio, a significant portion of its customers
ability to repay the loans is dependent upon the professional services and investor commercial real
estate sectors. Generally, the loans are secured by real estate or other assets and are expected
to be repaid from cash flows of the borrowers business or cash flows from real estate investments.
The Companys exposure to credit loss, if any, is the difference between the fair value of the
collateral, and the outstanding balance of the loan. At June 30, 2009 and December 31, 2008, the
Company had pledged $34,537,244 and $96,721,113, respectively, in loans as available collateral for
Federal Home Loan Bank borrowings. In the ordinary course of business, the Company enters various
types of transactions, which involve financial instruments with off-balance sheet risk.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
These instruments include commitments to extend credit and stand-by letters of credit, which are
not reflected in the consolidated balance sheets. These transactions may involve, to varying
degrees, credit and interest rate risk more than the amount, if any recognized in the consolidated
balance sheets. Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans. An allowance for unfunded loan commitments and letters of
credit is determined using estimates of the probability of funding. This reserve is carried as a
liability on the consolidated balance sheet.
The allowance for loan and lease losses is the Companys most significant management accounting
estimate. The Company follows a methodology for calculating the appropriate level for the
allowance for loan and lease losses as discussed under Asset Quality and Allowance for Loan and
Lease Losses (ALLL) in this document. The entire allowance is used to absorb credit losses
inherent in the loan portfolio.
The allowance includes an amount for imprecision or uncertainty to incorporate a range of probable
outcomes inherent in estimates used for the allowance, which may change from period to period. This
portion of the total allowance is the results of the Companys judgment of risks inherent in the
portfolio, economic uncertainties, historical loss experience and other subjective factors,
including industry trends. The methodology used is refined to calculate a portion of the allowance
for each portfolio type to reflect our view of the risk in these portfolios.
Changes in the estimate of the allowance for loan and lease losses and the related provision
expense can materially affect net income. Determining the allowance for loan and lease losses
requires management to make forecasts of losses that are highly uncertain and require a high degree
of judgment.
Provision for loan and lease losses of $4,481,000 were provided for the six-months ended June 30,
2009 compared with $1,600,000 for the six-months ended June 30, 2008. The Companys allowance for
loan and lease losses was 1.43% of total loans at June 30, 2009, 1.60% at December 31, 2008 and
0.98% at June 30, 2008, while its ratio of non-performing assets to total assets was 1.20% at June
30, 2009, 2.98% at December 31, 2008, and 2.88% at June 30, 2008.
Factors that may affect future results
As a financial services company, our earnings are significantly affected by general business and
economic conditions. These conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, and the strength of the
United States economy and local economies in which we operate. For example, an economic downturn,
increase in unemployment, or other events that negatively impact household and/or corporate incomes
could decrease the demand for the Companys loan and non-loan products and services and increase
the number of customers who fail to pay interest or principal on their loans. Geopolitical
conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United
States or other governments in response to acts or threats of terrorism and our military conflicts
including the aftermath of the war with Iraq, could impact business conditions in the United
States.
The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part our cost of funds for lending and investing
and the return we earn on those loans and investments, both of which impact our net interest
margin, and can materially affect the value of financial instruments we hold. Its policies can also
affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in
Federal Reserve Board policies are beyond our control and hard to predict or anticipate.
We operate in a highly competitive industry that could become even more competitive because of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can now merge creating a financial holding company that can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and some have lower cost structures.
The holding company, subsidiary bank and non-bank subsidiary are heavily regulated at the federal
and state levels. This regulation is to protect depositors, federal deposit insurance funds and the
banking system as a whole, not investors. Congress and state legislatures and federal and state
regulatory agencies continually review banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies including changes in interpretation and
implementation could affect us in substantial and unpredictable ways including limiting the types
of financial services and products we may offer. Our failure to comply with the laws, regulations
or policies could result in sanctions by regulatory agencies and damage our reputation. For more
information, refer to the Supervision and Regulation section in the Companys 2008 Annual Report
on Form 10-K.
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
There is increasing pressure on financial services companies to provide products and services at
lower prices. Our success depends, in part, on our ability to adapt our products and services to
evolving industry standards. This can reduce our net interest margin and revenues from fee-based
products and services. In addition, the widespread adoption of new technologies, including
internet-based services, could require us to make substantial expenditures to modify or adapt our
existing products and services. Our success depends, in large part, on our ability to attract and
retain key people. Competition for the best people can be intense.
The holding company is a separate and distinct legal entity from its subsidiaries. It receives
substantially all of its revenues from dividends from its subsidiaries. These dividends are the
principal source of funds to pay dividends on the holding companys common stock and interest and
principal on its debt. Various federal and state laws and regulations limit the amount of
dividends that our bank may pay to the holding company. For more information, refer to Dividends
and Other Distributions in the Companys 2008 Annual Report on Form 10-K.
Critical Accounting Policies
The Securities and Exchange Commission (SEC) issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require application of
managements most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in future
periods.
Our accounting policies are integral to understanding the results reported. Accounting policies are
described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Companys
2008 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2
to the Consolidated Financial Statements contained in the Companys 2008 Annual Report on Form 10-K
require management to make difficult, subjective or complex judgments or estimates.
Preparation of financial statements
The preparation of these financial statements requires management to make estimates and judgments
that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis,
management evaluates the estimates used. Estimates are based upon historical experience, current
economic conditions and other factors that management considers reasonable under the circumstances.
Use of estimates
These estimates result in judgments regarding the carrying values of assets and liabilities when
these values are not readily available from other sources, as well as assessing and identifying the
accounting treatments of contingencies and commitments. Actual results may differ from these
estimates under different assumptions or conditions.
Accounting Principles Generally Accepted in the United States of America
The Companys financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The Companys significant accounting policies
are presented in Note 2 to the Consolidated Financial Statements contained in the Companys 2008
Annual Report on Form 10-K.
The Company follows accounting policies typical to the commercial banking industry and in
compliance with various regulations and guidelines as established by the Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA) and the
Banks primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). The following
is a brief description of the Companys current accounting policies involving significant
management judgments.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the fair value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of when an other-than-temporary impairment has occurred. The ALCO Committee reviews the
investment portfolio on at least a quarterly basis, with ongoing analysis as new information
becomes available.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
An investment is impaired if the fair value of the investment is less than its cost adjusted
for accretion, amortization and Other Than Temporarily Impaired (OTTI), otherwise defined as an
unrealized loss. When an investment is impaired, we assess whether to sell the security, or it is
more likely than not that we will be required to sell the security before recovery of its amortized
cost basis less any current-period credit losses. For debt securities, that are considered other
than temporarily impaired and that we do not intend to sell and will not be required to sell prior
to recovery of our amortized cost basis, we separate the amount of the impairment into the amount
that is credit related (credit loss component) and the amount due to all other factors. The credit
loss component is recognized in earnings and is calculated as the difference between the
investments amortized cost basis and the present value of its expected future cash flows. The
remaining difference between the investments fair value and the present value of future expected
cash flows is deemed to be due to factors that are not credit related and is recognized in other
comprehensive income. Significant judgment is required in the determination of whether an OTTI has
occurred for an investment. The Company follows a consistent and systematic process for determining
and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI
process. The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates
both quantitative and qualitative information.
The ALCO Committee considers a number of factors including, but not limited to: (a) the length of
time and the extent to which the fair value has been less than amortized cost, (b) the financial
condition and near term prospects of the issuer, (c) the intent and ability of the Company to
retain its investment for a period of time sufficient to allow for an anticipated recovery in
value, (d) whether the debtor is current on interest and principal payments and (e) general market
conditions and industry or sector specific outlook. Management has evaluated all securities at June
30, 2009 and has determined that no securities are other than temporarily impaired.
We do not have the intent to sell the investments that are temporarily impaired, and it is more
likely than not that we will not have to sell those investments before recovery of the cost basis.
Additionally, we have evaluated the credit ratings of our investment securities and their issuers
and or insurers, if applicable. Based upon our evaluation, management has determined that no
investment security in our portfolio is other than temporarily impaired.
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is the Companys most significant management accounting
estimate. The allowance for loan and lease losses is managements best estimate of the probable
losses that may be sustained in our loan portfolio. The allowance is based on two basic principles
of accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of
occurring and estimable and (2) SFAS No. 114, which requires that losses on impaired loans be
accrued based on the differences between that value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan balance.
The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to Statement of Financial Accounting Standards
(SFAS) Statement No. 5, Accounting for Contingencies or SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Managements estimate of each SFAS No. 5 component is based on certain
observable data that management believes is the most reflective of the underlying credit losses
being estimated. Changes in the amount of each component of the allowance for loan losses are
directionally consistent with changes in the observable data, taking into account the interaction
of the SFAS No. 5 components over time.
An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys credit risk evaluation process, which includes credit risk grading individual,
commercial, construction, commercial real estate, and consumer loans. Loans are assigned credit
risk grades based on the Companys assessment of conditions that affect the borrowers ability to
meet its contractual obligations under the loan agreement.
That process includes reviewing borrowers current financial information, historical payment
experience, credit documentation, public information, and other information specific to each
individual borrower. Loans are reviewed on an annual or rotational basis and/or as management
become aware of information affecting the borrowers ability to fulfill its obligations. Credit
risk grades carry a dollar weighted risk percentage.
For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to
measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, we measure
impairment based on the present value of expected future principal and interest cash flows
discounted at the loans effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loans observable market price or the fair value of collateral,
if the loan is collateral dependent. When developing the estimate of future cash flows for a loan,
we consider all available information reflecting past events and current conditions, including the
effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan
commitments and letters of credit is determined using estimates of the probability of funding. This
reserve is carried as a liability on the consolidated balance sheet.
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Revenue recognition
The Companys primary source of revenue is interest income. Interest income is recorded on an
accrual basis. Note 2 to the Consolidated Financial Statements contained in the Companys 2008
Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of
interest income is discontinued on an impaired loan.
Income Taxes
The Company files a consolidated federal and state income tax return. The Company accounts for
income taxes under the asset and liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using currently
enacted tax rates applied to such taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. If
future income should prove non-existent or less than the amount of deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and our net income will be
reduced. The Companys deferred tax assets are described further in Note 13 of the Notes to
Consolidated Financial Statements in the Companys 2008 Annual Report on Form 10-K.
42
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table presents the Companys daily average balance sheet information together with
interest income and yields earned on average interest-bearing assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily balances.
Table 1. Average Balances, Interest Income/Expense and
Yields/Rates Paid
(Unaudited, Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans2 |
|
$ |
574,206 |
|
|
$ |
17,321 |
|
|
|
6.04 |
% |
|
$ |
516,938 |
|
|
$ |
17,302 |
|
|
|
6.69 |
% |
Tax-exempt Securities3 |
|
|
28,245 |
|
|
|
575 |
|
|
|
4.07 |
% |
|
|
30,402 |
|
|
|
576 |
|
|
|
3.79 |
% |
US Government Securities |
|
|
8,624 |
|
|
|
192 |
|
|
|
4.45 |
% |
|
|
14,601 |
|
|
|
264 |
|
|
|
3.62 |
% |
Mortgage backed Securities |
|
|
69,253 |
|
|
|
1,954 |
|
|
|
5.64 |
% |
|
|
30,960 |
|
|
|
750 |
|
|
|
4.84 |
% |
Federal Funds Sold |
|
|
25,771 |
|
|
|
30 |
|
|
|
0.23 |
% |
|
|
17,561 |
|
|
|
148 |
|
|
|
1.69 |
% |
Other Securities |
|
|
31,905 |
|
|
|
248 |
|
|
|
1.55 |
% |
|
|
2,000 |
|
|
|
45 |
|
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
$ |
738,004 |
|
|
$ |
20,320 |
|
|
|
5.51 |
% |
|
$ |
612,462 |
|
|
$ |
19,085 |
|
|
|
6.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Due From Banks |
|
$ |
19,388 |
|
|
|
|
|
|
|
|
|
|
$ |
13,252 |
|
|
|
|
|
|
|
|
|
Bank Premises |
|
|
13,480 |
|
|
|
|
|
|
|
|
|
|
|
11,264 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
( 8,638 |
) |
|
|
|
|
|
|
|
|
|
|
( 5,946 |
) |
|
|
|
|
|
|
|
|
Other Assets |
|
|
25,971 |
|
|
|
|
|
|
|
|
|
|
|
17,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
788,205 |
|
|
|
|
|
|
|
|
|
|
$ |
648,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Interest Bearing |
|
$ |
137,938 |
|
|
$ |
546 |
|
|
|
0.79 |
% |
|
$ |
132,543 |
|
|
$ |
1,248 |
|
|
|
1.88 |
% |
Savings Deposits |
|
|
63,499 |
|
|
|
519 |
|
|
|
1.63 |
% |
|
|
48,987 |
|
|
|
650 |
|
|
|
2.65 |
% |
Certificates of Deposit |
|
|
289,925 |
|
|
|
3,781 |
|
|
|
2.61 |
% |
|
|
229,245 |
|
|
|
4,614 |
|
|
|
4.03 |
% |
Repurchase Agreements |
|
|
11,523 |
|
|
|
25 |
|
|
|
0.43 |
% |
|
|
12,925 |
|
|
|
119 |
|
|
|
1.84 |
% |
FHLB Borrowings |
|
|
124,393 |
|
|
|
1,120 |
|
|
|
1.80 |
% |
|
|
91,869 |
|
|
|
1,512 |
|
|
|
3.29 |
% |
Trust Preferred Borrowings |
|
|
15,000 |
|
|
|
431 |
|
|
|
5.75 |
% |
|
|
15,000 |
|
|
|
476 |
|
|
|
6.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642,278 |
|
|
$ |
6,422 |
|
|
|
2.00 |
% |
|
|
530,569 |
|
|
$ |
8,619 |
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
|
72,009 |
|
|
|
|
|
|
|
|
|
|
|
66,606 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
8,674 |
|
|
|
|
|
|
|
|
|
|
|
4,391 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
65,244 |
|
|
|
|
|
|
|
|
|
|
|
47,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Liabilities and Stockholders Equity |
|
$ |
788,205 |
|
|
|
|
|
|
|
|
|
|
$ |
648,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and
Net Interest Margin |
|
|
|
|
|
$ |
13,898 |
|
|
|
3.77 |
% |
|
|
|
|
|
$ |
10,466 |
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes fee (expense) income of approximately ($72,828), and
$10,610 for the period ended June 30, 2009 and 2008, respectively.
|
|
|
2 |
|
Average non-performing loans of $14.2 million are
included |
|
3 |
|
The yield on tax-exempt securities has not been
adjusted to a tax-equivalent yield basis. |
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following tables set forth changes in interest income and expense for each major category of
earning assets and interest-bearing liabilities, and the amount of change attributable to volume
and rate changes for the periods indicated. Changes attributable to rate/volume have been
allocated to volume changes.
Table 2 Analysis of Changes in Net Interest Income and Interest
Expense (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
Over |
|
|
June 30, 2008 |
|
(Dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
Increase(Decrease) In Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans |
|
$ |
1,727 |
|
|
|
($1,708 |
) |
|
|
19 |
|
Tax-exempt Securities |
|
|
(44 |
) |
|
|
43 |
|
|
|
(1 |
) |
US Government Securities |
|
|
(133 |
) |
|
|
61 |
|
|
|
(72 |
) |
Mortgage Back Securities |
|
|
1,080 |
|
|
|
124 |
|
|
|
1,204 |
|
Federal Funds Sold |
|
|
10 |
|
|
|
(128 |
) |
|
|
(118 |
) |
Other Securities |
|
|
232 |
|
|
|
(29 |
) |
|
|
203 |
|
|
|
|
Total Increase (Decrease) |
|
$ |
2,872 |
|
|
|
($1,637 |
) |
|
$ |
1,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase(Decrease) In Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand |
|
$ |
21 |
|
|
|
($723 |
) |
|
|
($702 |
) |
Savings Deposits |
|
|
119 |
|
|
|
(250 |
) |
|
|
(131 |
) |
Certificates of Deposit |
|
|
791 |
|
|
|
(1,624 |
) |
|
|
(833 |
) |
Repurchase Agreements |
|
|
(3 |
) |
|
|
(91 |
) |
|
|
(94 |
) |
FHLB Borrowings |
|
|
293 |
|
|
|
(685 |
) |
|
|
(392 |
) |
Trust Preferred Borrowings |
|
|
0 |
|
|
|
(45 |
) |
|
|
(45 |
) |
|
|
|
Total Increase (Decrease) |
|
$ |
1,221 |
|
|
|
($3,418 |
) |
|
|
($2,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase |
|
$ |
1,651 |
|
|
$ |
1,781 |
|
|
$ |
3,432 |
|
|
|
|
Average earning assets for the six-months ended June 30, 2009 increased $125.5 million or 20.5%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $57.3 million or 11.1% year-over-year. During the second quarter 2009,
the Company purchased an $80.4 million pool of ITIN residential mortgage loans; the purchase was
funded through the combination of the sale of securities, deposit growth, and liquidation of cash
equivalents.
Average securities including federal funds sold increased $68.3 million year-over-year. The yield
on earning assets decreased to 5.51% for the six-month period ended June 30, 2009 compared to 6.23%
for the same period a year ago. The decrease in the average yield on earning assets is primarily
due to a general decline in interest rates and the consequential re-pricing of the loan portfolio,
and federal funds sold and cash equivalents during the period.
Average deposits and borrowings increased by $111.7 million year-over-year. The yield on funding
costs decreased to 2.00% compared with 3.25% for the same period a year ago. The Companys
re-pricing time deposits and Federal Home Loan Bank borrowings have seen a significant drop in
costs as interest rates have declined as the Federal Reserve Board of Governors and United States
Treasury Department continues to provide liquidity to the financial services industries.
Increases in the volume of earning assets contributed $2.9 million partially offset by the decrease
in yields of $1.6 million for the same period, resulting in an increase in the margin of $1.2
million. Increases in the source of funding reduced the margin by $1.6 million while reductions in
deposit and borrowing costs contributed $3.4 million to the margin. The net result is an increase
to the net interest margin of $3.4 million over the prior year.
44
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Companys non-interest income consists of service charges on deposit accounts, other fee
income, processing fees for credit card payments and gains or losses on security sales. The
following table sets forth a summary of noninterest income for the periods indicated.
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
96 |
|
|
$ |
50 |
|
|
$ |
188 |
|
|
$ |
112 |
|
Payroll and benefit processing fees |
|
|
104 |
|
|
|
99 |
|
|
|
238 |
|
|
|
228 |
|
Earnings on
cash surrender value
Bank owned insurance |
|
|
117 |
|
|
|
85 |
|
|
|
203 |
|
|
|
168 |
|
Net gain on sale of securities available-for-sale |
|
|
1,074 |
|
|
|
194 |
|
|
|
1,478 |
|
|
|
436 |
|
Net loss on sale of derivative swap transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225 |
) |
Net gain on sale of loans |
|
|
340 |
|
|
|
|
|
|
|
340 |
|
|
|
|
|
Merchant credit card service income, net |
|
|
75 |
|
|
|
97 |
|
|
|
149 |
|
|
|
180 |
|
Mortgage brokerage fee income |
|
|
1,302 |
|
|
|
5 |
|
|
|
1,302 |
|
|
|
15 |
|
Other Income |
|
|
87 |
|
|
|
187 |
|
|
|
162 |
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest income |
|
$ |
3,195 |
|
|
$ |
717 |
|
|
$ |
4,060 |
|
|
$ |
1,282 |
|
|
Quarter-to-date noninterest income increased $2.5 million and is attributed to increases in the
gain on sales of securities available-for-sale that provided a significant source of liquidity to
fund loan growth and the business combination of Bank of Commerce Mortgage. Additionally, mortgage
brokerage fee income increased by $1.3 million as a result of the business acquisition.
Year-to-date noninterest income increased $2.8 million for the same reasons as above. Prior year to
date a loss was recorded on the sale of a derivative swap transaction.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2008 |
|
|
June 30, 2008 |
|
|
Salaries and related benefits |
|
$ |
2,644 |
|
|
$ |
1,892 |
|
|
$ |
4,771 |
|
|
$ |
3,841 |
|
Occupancy and equipment expense |
|
|
730 |
|
|
|
640 |
|
|
|
1,302 |
|
|
|
1,284 |
|
FDIC insurance premium |
|
|
301 |
|
|
|
113 |
|
|
|
574 |
|
|
|
171 |
|
Data processing fees |
|
|
68 |
|
|
|
65 |
|
|
|
179 |
|
|
|
143 |
|
Professional service fees |
|
|
295 |
|
|
|
133 |
|
|
|
454 |
|
|
|
251 |
|
Payroll and Benefit fees |
|
|
27 |
|
|
|
27 |
|
|
|
61 |
|
|
|
60 |
|
Deferred compensation expense |
|
|
123 |
|
|
|
113 |
|
|
|
242 |
|
|
|
224 |
|
Stationery and Supplies |
|
|
26 |
|
|
|
80 |
|
|
|
79 |
|
|
|
142 |
|
Postage |
|
|
76 |
|
|
|
38 |
|
|
|
157 |
|
|
|
72 |
|
Directors expense |
|
|
120 |
|
|
|
94 |
|
|
|
157 |
|
|
|
142 |
|
Other expenses |
|
|
483 |
|
|
|
418 |
|
|
|
877 |
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest expense |
|
$ |
4,893 |
|
|
$ |
3,613 |
|
|
$ |
8,853 |
|
|
$ |
7,177 |
|
|
Quarter-to-date noninterest expense increased $1.3 million and is partially attributed to the
increase in salaries and employee benefits due to the business combination of Bank of Commerce
Mortgage. $558,000 or 21%of the quarterly increase is attributed to the business combination of
the mortgage company. Secondly, the provision for FDIC insurance premiums has increased by $188,000
to accommodate the one time assessment due in September 2009.
Year-to-date noninterest expense increased $1.7 million for the same reasons as above. FDIC
insurance premiums have increased by $403,000 over the prior period in 2008, to accommodate the one
time assessment due in September 2009. Professional service fees have increased by $203,000 as a
result of the business combination and fair valuations during the period.
45
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates applied to such taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Companys effective tax rate varies with changes in the relative amounts of its non-taxable
income and non-deductible expenses. The decrease in the Companys tax provision is attributable to
increases in non-taxable income related to increases in the municipal security portfolio,
classification of enterprise zone qualified credits and California Affordable Housing project which
affords federal and state tax credits. The principal difference between statutory tax rates and the
Companys effective tax rate is the benefit derived from key life proceeds, investing in tax-exempt
securities and preferential state tax treatment for qualified enterprise zone loans.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Six Months Ended |
|
Income Taxes |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
Tax provision |
|
$ |
1,027 |
|
|
$ |
244 |
|
|
$ |
1,637 |
|
|
$ |
835 |
|
Effective tax rate |
|
|
37.43 |
% |
|
|
21.20 |
% |
|
|
35.40 |
% |
|
|
28.11 |
% |
The Companys provision for income taxes includes both federal and state income taxes and reflects
the application of federal and state statutory rates to the Companys net income before taxes.
Increases and decreases in the provision for taxes reflect changes in the Companys net income
before tax, and takes into consideration strategies to increase tax exempt income and tax credits.
The Company had a net deferred tax asset of $5.7 million at June 30, 2009. The Company does not
reasonably estimate that the deferred tax asset will change significantly within the next twelve
months. Deferred tax assets are recognized subject to management judgment that realization is more
likely than not. The Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income tax expense.
The Company files a consolidated federal and state income tax return. The Company determines
deferred income tax assets and liabilities using the balance sheet method. Under this method, the
net deferred tax asset or liability is based on the tax effects of the differences between book and
tax basis of assets and liabilities, and recognizes enacted changes in tax rates and laws.
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at June 30, 2009 consist of the following:
|
|
|
|
|
|
|
|
|
Deferred Tax Assets |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
2,249,218 |
|
|
$ |
2,078,634 |
|
Loan loss reserves |
|
|
4,577,887 |
|
|
|
2,284,938 |
|
Other Comprehensive Income |
|
|
(20,997 |
) |
|
|
633,449 |
|
Other |
|
|
24,768 |
|
|
|
(37,979 |
) |
|
|
|
Total Deferred Tax Assets |
|
|
6,830,876 |
|
|
|
4,959,042 |
|
|
|
|
|
|
|
|
|
|
State Franchise taxes |
|
|
($83,382 |
) |
|
|
($87,095 |
) |
Depreciation |
|
|
(84,559 |
) |
|
|
(132,760 |
) |
Deferred loan origination costs |
|
|
(426,715 |
) |
|
|
(466,348 |
) |
Deferred state taxes |
|
|
(516,580 |
) |
|
|
(316,661 |
) |
Other |
|
|
(55,992 |
) |
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
|
(1,167,228 |
) |
|
|
(1,002,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Deferred Tax Asset |
|
$ |
5,663,648 |
|
|
$ |
3,956,178 |
|
|
|
|
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Asset Quality
The Company concentrates its lending activities primarily within El Dorado, Placer, Sacramento,
Shasta, and Tehama counties, California, and the location of the Banks four full services
branches, specifically identified as Northern California. The Company manages its credit risk
through diversification of its loan portfolio and the application of underwriting policies and
procedures and credit monitoring practices. In addition the Company purchased an ITIN loan
portfolio from a private equity firm in exchange for a combination of approximately $14.0 million
in non-performing loans and cash of approximately $67.0 million. At the settlement date, the
mortgage loan pool contained 859 single family residential mortgages with an average principle
balance of approximately $96,596, a weighted average credit score of 647, a weighted average loan
to value ratio of 89%, a weighted average yield of 7.44% and all loans were full documentation. The
ITIN loan portfolio is geographically disbursed through out the United States.
Although the Company has a diversified loan portfolio, a significant portion of its borrowers
ability to repay the loans is dependent upon the professional services, commercial real estate
market and the residential real estate development industry sectors. Generally, the loans are
secured by real estate or other assets located in California and are expected to be repaid from
cash flows of the borrower or proceeds from the sale of collateral. The Companys dependence on
real estate increases the risk of loss in the loan portfolio of the Company and its holdings of
other real estate owned as economic conditions in California continue to deteriorate in the future.
Deterioration of the real estate market in California has had an adverse effect on the Companys
business, financial condition and results of operations. The recent slowdown in residential
development and construction markets has led to an increase in nonperforming loans which has made
it prudent to strengthen our reserve position at this time. Management has taken cautious steps to
ensure the proper funding of loan reserves. Credit quality, expense control and the bottom line
remain top focus.
The following table sets forth the amounts of loans outstanding by category as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Portfolio Loans |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
Commercial and financial loans |
|
$ |
148,081 |
|
|
$ |
164,083 |
|
Real estate-construction loans |
|
|
73,379 |
|
|
|
84,218 |
|
Real estate-commercial |
|
|
232,479 |
|
|
|
217,914 |
|
Real estate ITIN loan pool |
|
|
80,671 |
|
|
|
|
|
Real estate-mortgage |
|
|
21,912 |
|
|
|
20,285 |
|
Real estate-other |
|
|
38,238 |
|
|
|
39,915 |
|
Installment |
|
|
140 |
|
|
|
145 |
|
Other loans |
|
|
1,490 |
|
|
|
902 |
|
Less: |
|
|
|
|
|
|
|
|
Net deferred loan fees |
|
|
(257 |
) |
|
|
(87 |
) |
Allowance for loan losses |
|
|
(8,496 |
) |
|
|
(8,429 |
) |
|
|
|
Total net portfolio loans |
|
$ |
587,637 |
|
|
$ |
518,946 |
|
|
|
|
The Companys practice is to place an asset on nonaccrual status when one of the following events
occur: (i) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well secured and in the process of collection). (ii) Management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past due and still accruing or
have been restructured.
Non accrual and impaired loans are loans for which it is probable that the Bank will not be able to
collect all amounts due and payable. The Bank had outstanding balances of $9.8 million and $20.2
million in impaired loans that had impairment allowances of $2.1 million and $1.1 million as of
June 30, 2009 and December 31, 2008, respectively.
Mortgages held for sale
Bank of Commerce Mortgage originates residential mortgage loans within Bank of Commerces
footprint and on a nationwide basis. Mortgage loans generally represent loans collateralized by
one-to-four family residential real estate and are typically sold to primary mortgage market
aggregators (Fannie Mae, Freddie Mac, and Ginnie Mae) and to third party investors, servicing
included. The mortgage loans are typically funded on a pre-committed basis and held for sale; the
loans are carried on the balance sheet at the lower of cost or fair market value until a sale to
the third party is completed.
As of June 30, 2009, $20.2 million in mortgages are held for sale outside of the net portfolio
loans listed in the above table.
47
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Non performing assets |
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Nonaccrual loans |
|
$ |
5,697 |
|
|
$ |
20,154 |
|
|
|
|
Total nonaccrual loans |
|
|
5,697 |
|
|
|
20,154 |
|
90 days past due and still accruing interest |
|
|
760 |
|
|
|
0 |
|
|
|
|
Other Real Estate Owned |
|
|
3,229 |
|
|
|
2,934 |
|
|
|
|
Total non performing assets |
|
$ |
9,686 |
|
|
$ |
23,088 |
|
|
|
|
$2.9 million of the OREO properties is a single parcel of land located in the Companys Sacramento,
California market. Prior to foreclosure, the project was in the entitlement phase of development;
the Company in coordination with the other participating banks will continue the entitlement
processes in conjunction with establishing a marketing plan to ultimately dispose of the project. A
recent valuation of the property fully supports any additional improvement costs until such time
the property is sold. The Companys foreclosed assets are carried at the lower of cost or fair
value, less estimated costs to dispose of the properties. The balance of $300,000 is a mortgage
loan that has since sold on July 21, 2009 with no loss to the Company.
Material future additions to the allowance for loan losses may be necessary if material adverse
economic conditions persist and the performance of the loan portfolio of the Company deteriorates.
Future additions to the Companys allowance for loan and lease losses may also be required to
reflect market changes and other factors affecting the Companys real estate and real estate
related portfolios. Moreover, the FDIC and the DFI, as an integral part of their examination
process, review the Companys allowance for loan and lease losses and the carrying value of its
assets. The Bank was most recently examined by the FDIC in this regard during the second quarter
of 2008. No adjustments were made to managements estimates for the allowance for loan and lease
losses during the examination.
Non-performing assets were 1.20% of total assets as of June 30, 2009; 2.98% at December 31, 2008
and 2.88% at June 30, 2008.
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is managements estimate of the amount of probable loan
losses in the loan portfolio. The Company determines the allowance for loan losses based on an
ongoing evaluation. The evaluation is inherently subjective because it requires material estimates,
including the amounts and timing of cash flows expected to be received on impaired loans. Those
estimates may be susceptible to significant change. The Company makes provisions to the ALLL on a
regular basis through charges to operations that are reflected in the Companys statements of
income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against
the allowance. Any recoveries of previously charged-off loans are credited back to the allowance.
There is no precise method of predicting specific losses or amounts that ultimately may be
charged-off on particular categories of the loan portfolio.
Material future additions to the allowance for loan losses might be necessary if material adverse
changes in economic conditions occur and the performance of the loan portfolio of the Company
deteriorates. Future additions to the Companys allowance for loan and lease losses may also be
required in order to reflect changes in the markets for real estate in which the Companys real
estate related portfolios are located and other factors which may result in adjustments which are
necessary to ensure that the Companys foreclosed assets are carried at the lower of cost or fair
value, less estimated costs to dispose of the properties.
Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically
review the Companys allowance for loan and lease losses and the carrying value of its assets. The
Bank was most recently examined by the FDIC in this regard during the second quarter of 2008. No
adjustments were made to managements estimates for the allowance for loan and lease losses during
the examination.
The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to SFAS No. 5, Accounting for Contingencies or
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Managements estimate of each SFAS
No. 5 Accounting for Contingencies component is based on certain observable data that management
believes is the most reflective of the underlying loan losses being estimated. Changes in the
amount of each component of the allowance for loan losses are directionally consistent with changes
in the observable data, taking into account the interaction of the SFAS No. 5 components over time.
48
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys loan risk evaluation process, which includes loan risk grading individual commercial,
construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades
based on the Companys assessment of conditions that affect the borrowers ability to meet its
contractual obligations under the loan agreement. That process includes reviewing borrowers
current financial information, historical payment experience, loan documentation, public
information, and other information specific to each individual borrower. Loans are reviewed on an
annual or rotational basis or as management become aware of information affecting the borrowers
ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage.
The ALLL is a general reserve available against the total loan portfolio. It is maintained without
any inter-allocation to the categories of the loan portfolio, and the entire allowance is available
to cover loan losses. While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of the examination process, periodically
review the Companys ALLL. Such agencies may require the Company to provide additions to the
allowance based on their judgment of information available to them at the time of their
examination. Accordingly, it is not possible to predict the effect future economic trends may have
on the level of the provision for loan losses in future periods. In addition to the ALLL, an
allowance for unfunded loan commitments and letters of credit is determined using estimates of the
probability of funding. This reserve is carried as a liability on the condensed consolidated
balance sheet.
The ALLL should not be interpreted as an indication that charge-offs in future periods will occur
in the stated amounts or proportions.
The following table summarizes the activity in the ALLL reserves for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Six Months Ended |
|
Allowance for Loan Losses |
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
Beginning
balance for Loan Losses |
|
$ |
7,701 |
|
|
$ |
5,815 |
|
|
$ |
8,429 |
|
|
$ |
8,233 |
|
Provision for Loan Losses |
|
|
3,056 |
|
|
|
1,000 |
|
|
|
4,481 |
|
|
|
1,600 |
|
Charge offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
(774 |
) |
|
|
(733 |
) |
|
|
(2,432 |
) |
|
|
(733 |
) |
Real Estate |
|
|
(1,603 |
) |
|
|
(1,067 |
) |
|
|
(2,100 |
) |
|
|
(4,087 |
) |
Other |
|
|
(12 |
) |
|
|
(0 |
) |
|
|
(12 |
) |
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge offs |
|
|
(2,389 |
) |
|
|
(1,800 |
) |
|
|
(4,544 |
) |
|
|
(4,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
127 |
|
|
|
0 |
|
|
|
128 |
|
|
|
0 |
|
Real Estate |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Other |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries |
|
|
128 |
|
|
|
2 |
|
|
|
130 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
8,496 |
|
|
$ |
5,017 |
|
|
$ |
8,496 |
|
|
$ |
5,017 |
|
ALLL to total loans |
|
|
1.43 |
% |
|
|
0.98 |
% |
|
|
1.43 |
% |
|
|
0.98 |
% |
Net Charge offs to average loans |
|
|
0.39 |
% |
|
|
0.35 |
% |
|
|
0.77 |
% |
|
|
0.93 |
% |
The allowance for loan and lease losses totaled $8.5 million at June 30, 2009 compared to $8.4
million at December 31, 2008 and $5.0 million at June 30, 2008. The Companys allowance for loan
losses was 1.43% of total loans at June 30, 2009, 1.60% at December 31, 2008 and 0.98% at June 30,
2008. Provisions for loan losses for the six months ended June 30, 2009 were $4,481,000 compared to
$1,600,000 for the same period in 2008.
The Company continues to be aggressive in identifying non-performing assets. Elevated provisions
are associated with a reclassification of loans, following completion of a total portfolio review,
and managements aggressive stance in recognizing impaired loans.
On April 17, 2009, the company completed a loan swap transaction which included the purchase of a
pool of Individual Tax Identification Number (ITIN) residential mortgage loans with a fair value
of $80,671,104. The ITIN portfolio (portfolio) was purchased from a private equity firm in exchange
for a combination of approximately $14.0 million in non-performing loans and cash of approximately
$67.0 million. As a result of the swap transaction, the Companys ratio of non-performing assets to
total assets decreased to 1.20% at June 30, 2009, compared to 2.98% at December 31, 2008.
49
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
Dollars in thousands, except for per share data |
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
9,272 |
|
|
$ |
8,049 |
|
|
$ |
8,028 |
|
|
$ |
8,252 |
|
|
$ |
8,171 |
|
Interest on tax-exempt securities |
|
|
279 |
|
|
|
296 |
|
|
|
313 |
|
|
|
308 |
|
|
|
302 |
|
Interest on U.S. government securities |
|
|
954 |
|
|
|
1,192 |
|
|
|
873 |
|
|
|
582 |
|
|
|
533 |
|
Interest on federal funds sold and
securities repurchased under agreements to
resell |
|
|
5 |
|
|
|
25 |
|
|
|
39 |
|
|
|
116 |
|
|
|
90 |
|
Interest on other securities |
|
|
131 |
|
|
|
117 |
|
|
|
81 |
|
|
|
13 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
10,641 |
|
|
|
9,679 |
|
|
|
9,334 |
|
|
|
9,271 |
|
|
|
9,119 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
239 |
|
|
|
307 |
|
|
|
411 |
|
|
|
514 |
|
|
|
498 |
|
Interest on savings deposits |
|
|
238 |
|
|
|
281 |
|
|
|
383 |
|
|
|
543 |
|
|
|
360 |
|
Interest on certificates of deposit |
|
|
1,900 |
|
|
|
1,881 |
|
|
|
1,975 |
|
|
|
1,963 |
|
|
|
2,238 |
|
Securities sold under repurchase agreements |
|
|
11 |
|
|
|
14 |
|
|
|
22 |
|
|
|
32 |
|
|
|
35 |
|
Interest on FHLB and other borrowings |
|
|
539 |
|
|
|
581 |
|
|
|
638 |
|
|
|
662 |
|
|
|
781 |
|
Interest on junior subordinated debt
payable to unconsolidated subsidiary
grantor trust |
|
|
216 |
|
|
|
215 |
|
|
|
263 |
|
|
|
317 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
3,143 |
|
|
|
3,279 |
|
|
|
3,692 |
|
|
|
4,031 |
|
|
|
4,073 |
|
Net interest income |
|
|
7,498 |
|
|
|
6,400 |
|
|
|
5,642 |
|
|
|
5,240 |
|
|
|
5,046 |
|
Provision for loan and lease losses |
|
|
3,056 |
|
|
|
1,425 |
|
|
|
3,620 |
|
|
|
1,300 |
|
|
|
1,000 |
|
Net interest income after provision for
loan and lease losses |
|
|
4,442 |
|
|
|
4,975 |
|
|
|
2,022 |
|
|
|
3,940 |
|
|
|
4,046 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
96 |
|
|
|
92 |
|
|
|
108 |
|
|
|
91 |
|
|
|
50 |
|
Payroll and benefit processing fees |
|
|
104 |
|
|
|
134 |
|
|
|
118 |
|
|
|
107 |
|
|
|
99 |
|
Earnings on cash surrender value bank
owned life insurance |
|
|
117 |
|
|
|
86 |
|
|
|
86 |
|
|
|
86 |
|
|
|
85 |
|
Net gain on sale of securities
available-for-sale |
|
|
1,074 |
|
|
|
404 |
|
|
|
33 |
|
|
|
159 |
|
|
|
194 |
|
Net gain on sale of loans |
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchant credit card service income, net |
|
|
75 |
|
|
|
74 |
|
|
|
85 |
|
|
|
99 |
|
|
|
97 |
|
Mortgage brokerage fee income |
|
|
1,302 |
|
|
|
|
|
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
Other income |
|
|
87 |
|
|
|
75 |
|
|
|
156 |
|
|
|
207 |
|
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,195 |
|
|
|
865 |
|
|
|
590 |
|
|
|
751 |
|
|
|
717 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
2,644 |
|
|
|
2,127 |
|
|
|
2,001 |
|
|
|
1,909 |
|
|
|
1,892 |
|
Occupancy and equipment expense |
|
|
730 |
|
|
|
572 |
|
|
|
1,339 |
|
|
|
613 |
|
|
|
640 |
|
FDIC insurance premium |
|
|
301 |
|
|
|
273 |
|
|
|
99 |
|
|
|
113 |
|
|
|
113 |
|
Data processing fees |
|
|
68 |
|
|
|
111 |
|
|
|
52 |
|
|
|
81 |
|
|
|
65 |
|
Professional service fees |
|
|
295 |
|
|
|
159 |
|
|
|
270 |
|
|
|
146 |
|
|
|
133 |
|
Payroll processing fees |
|
|
27 |
|
|
|
34 |
|
|
|
30 |
|
|
|
26 |
|
|
|
27 |
|
Deferred compensation expense |
|
|
123 |
|
|
|
119 |
|
|
|
120 |
|
|
|
118 |
|
|
|
113 |
|
Stationery and supplies |
|
|
26 |
|
|
|
53 |
|
|
|
70 |
|
|
|
50 |
|
|
|
80 |
|
Postage |
|
|
76 |
|
|
|
81 |
|
|
|
30 |
|
|
|
32 |
|
|
|
38 |
|
Directors expense |
|
|
120 |
|
|
|
37 |
|
|
|
71 |
|
|
|
81 |
|
|
|
94 |
|
Other expenses |
|
|
483 |
|
|
|
394 |
|
|
|
425 |
|
|
|
443 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
4,893 |
|
|
|
3,960 |
|
|
|
4,507 |
|
|
|
3,612 |
|
|
|
3,613 |
|
Income (loss) before provision for income taxes |
|
|
2,744 |
|
|
|
1,882 |
|
|
|
(1,895 |
) |
|
|
1,079 |
|
|
|
1,150 |
|
Provision (benefit) for income taxes |
|
|
1,027 |
|
|
|
610 |
|
|
|
(1,237 |
) |
|
|
362 |
|
|
|
244 |
|
Less: Income non-controlling interest |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,616 |
|
|
$ |
1,270 |
|
|
$ |
(658 |
) |
|
$ |
717 |
|
|
$ |
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred dividend and accretion on
preferred stock |
|
|
($235 |
) |
|
|
($237 |
) |
|
|
($0 |
) |
|
|
($0 |
) |
|
|
($0 |
) |
Income available to common shareholders |
|
$ |
1,381 |
|
|
$ |
1,033 |
|
|
$ |
(658 |
) |
|
$ |
717 |
|
|
$ |
906 |
|
Basic earnings (loss) per share |
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
|
($0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
Weighted average shares basic |
|
|
8,711 |
|
|
|
8,711 |
|
|
|
8,755 |
|
|
|
8,711 |
|
|
|
8,748 |
|
Diluted earnings (loss) per share |
|
$ |
0.16 |
|
|
$ |
0.12 |
|
|
|
($0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
Weighted average shares diluted |
|
|
8,712 |
|
|
|
8,711 |
|
|
|
8,802 |
|
|
|
8,713 |
|
|
|
8,751 |
|
Cash dividends per share |
|
$ |
0.00 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
50
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk that values of assets and liabilities or revenues will be adversely
affected by changes in market conditions such as market movements. The risk is inherent in the
financial instruments associated with our operations and activities including loans, deposits,
securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and
liabilities are generated through loans and deposits associated with our banking business, our
Asset Liability Management (ALM) process, and credit risk mitigation activities. Traditional loan
and deposit products are reported at amortized cost for assets or the amount owed for liabilities.
These positions are subject to changes in economic value based on varying market conditions.
Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as
our other interest rate sensitive instruments and is reflected in the levels of future income and
expense produced by these positions versus levels that would be generated by current levels of
interest rates. We seek to mitigate interest rate risk as part of the ALM process.
Interest rate risk, which potentially can have a significant earnings impact, is an integral part
of financial services. The Company is subject to interest rate risk for the following reasons:
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Assets and liabilities may mature or reprice at different times (for example, if
assets reprice faster than liabilities and interest rates fall, earnings will
initially decline); |
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Assets and liabilities may reprice at the same time but by different amounts (for
example, the level of interest rates in the market is falling and the Company may
reduce rates paid on checking and savings deposit accounts by an amount that is less
than the general decline in market rates); |
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Short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may affect new loan yields and funding costs
differently); or |
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The remaining maturities of various assets and liabilities may shorten or
lengthen as interest rates change (for example, if long-term mortgage rates decline
sharply, mortgage-backed securities held in the securities available-for-sale may
prepay significantly earlier than anticipated, which could reduce portfolio income.) |
Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not
adversely affect net interest income. Interest rates risk is measured as the potential volatility
in our net interest income caused by changes in market interest rates. Lending and deposit taking
create interest rate sensitive positions on our balance sheet. Interest rate risk from these
activities as well as the impact of ever changing market conditions is mitigated using the ALM
process. The Company does not operate a trading account and does not hold a position with exposure
to foreign currency exchange or commodities. The Company faces market risk through interest rate
volatility.
The Board of Directors has overall responsibility for the Companys interest rate risk management
policies. The Company has an Asset/Liability Management Committee (ALCO) which establishes and
monitors guidelines to control the sensitivity of earnings to changes in interest rates. The
internal ALCO Roundtable group maintains a net interest income forecast using different rate
scenarios utilizing a simulation model. This group updates the net interest income forecast for
changing assumptions and differing outlooks based on economic and market conditions.
The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In the simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for + 200 to 200 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The formal policies and practices adopted by the Company to monitor and manage interest rate risk
exposure measure risk in two ways: (i) repricing opportunities for earning assets and
interest-bearing liabilities and (ii) changes in net interest income for declining interest rate
shocks of 100,200 or 300 basis points. Because of the Companys predisposition to variable rate,
pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment, the Companys net
interest income and margin would be expected to decline, and, in an increasing interest rate
environment, the Companys net interest income and margin would be expected to increase. However,
no assurance can be given that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Company is asset sensitive,
the Company is adversely affected by declining rates rather than rising rates.
To estimate the effect of interest rate shocks on the Companys net interest income,
management uses a model to prepare an analysis of interest rate risk exposure. Such analysis
calculates the change in net interest income given a change in the federal funds rate of 100,200 or
300 basis points up or down. All changes are measured in dollars and are compared to projected net
interest income. Managements most recent calculation estimated an annualized reduction in net
interest income attributable to a 50 and 100 basis point decline in the federal funds rate. At
April 30, 2009 (the most recent report), the estimated annualized reduction in net interest income
attributable to a 100, 200 and 300 basis point decline in the federal funds rate was $6,314,
$386,865 and $682,927, respectively, with a similar and opposite result attributable to a 100, 200
and 300 basis point increase in the federal funds rate.
The ALCO has established a policy limitation to interest rate risk of -21% of net interest margin
and -30% of the present value of equity.
The securities portfolio is integral to our asset liability management process. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity, regulatory requirements and the
relative mix of our cash positions.
The Companys approach to managing interest rate risk may include the use of derivatives. This
helps to minimize significant, unplanned fluctuations in earnings, fair values of assets and
liabilities and cash flows caused by interest rate volatility. This approach involves modifying the
repricing characteristics of certain assets and liabilities so that changes in interest rates do
not have a significant adverse effect on the net interest margin and cash flows. As a result of
interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair
value hedging strategy, the effect of this unrealized gain or loss will generally be offset by
income or loss on the derivatives linked to the hedged assets and liabilities. For a cash flow
hedge, the change in the fair value of the derivative to the extent that it is effective is
recorded through other comprehensive income.
The Company may use derivatives as part of our interest rate risk management, including interest
rate swaps, caps and floors. At inception, the relationship between hedging instruments and hedged
items is formally documented with our risk management objective, strategy and our evaluation of
effectiveness of the hedge transactions. This includes linking all derivatives designated as fair
value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific
transactions. Periodically, as required, we formally assess whether the derivative we designated
in the hedging relationship is expected to be and has been highly effective in offsetting changes
in fair values or cash flows of the hedged item. The Companys use of derivatives is monitored by
the Directors ALCO committee.
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ITEM 4T. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is designed to provide
reasonable assurance that information required to be disclosed is accumulated and communicated to
management in a timely manner. Management has reviewed this system of disclosure controls and
procedures as of the end of the period covered by this report and believe that the system is
operating effectively to ensure appropriate disclosure.
During the quarter ended June 30, 2009, there have been no changes in the Companys internal
controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
PART II. Other Information
Item 1. Legal proceedings
The Company is involved in various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions, which are both
probable and estimable. In the opinion of management, the disposition of claims, currently pending
will not have a material adverse affect on the Companys financial position or results of
operations.
Item 1a. Risk Factors
During the second quarter 2009, the Company acquired a 51% ownership position in a mortgage banking
subsidiary. Risk factors have been updated from the registrants Form 10-K to include the
following:
Mortgage banking interest rate and market risk
Changes in interest rates greatly affect the mortgage banking business. Our mortgage subsidiary
originates, funds and services mortgage loans, which subjects the Company to various risks,
including credit, liquidity and interest rate risks. Based on market conditions and other factors,
the Company reduces unwanted credit and liquidity risks by selling some or all of the long-term
fixed-rate mortgage loans and adjustable rate mortgages originated.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity
in the nonconforming secondary markets, the subsidiary mortgage banking revenue continued to be
positive. Interest rate and market risk can be substantial in the mortgage business. Changes in
interest rates may potentially impact total origination fees.
Interest rates impact the amount and timing of origination because consumer demand for new
mortgages and the level of refinancing activity are sensitive to changes in mortgage interest
rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage
originations and fees. Given the time it takes for consumer behavior to fully react to interest
rate changes, as well as the time required for processing a new application, providing the
commitment, and selling the loan, interest rate changes will impact origination fees with a lag.
The amount and timing of the impact on origination fees will depend on the magnitude, speed and
duration of the change in interest rates. A decline in interest rates generally increases the
propensity for refinancing.
As part of subsidiary mortgage banking activities, we enter into commitments to fund residential
mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate
lock that binds us to lend funds to a potential borrower at a specified interest rate and within a
specified period of time, generally up to 60 days after inception of the rate lock. Outstanding
loan commitments expose the Company to the risk that the price of the mortgage loans underlying the
commitments might decline due to increases in mortgage interest rates from inception of the rate
lock to the funding of the loan.
Mortgage banking revenue can be volatile from quarter to quarter
The Company earns revenue from fees for originating mortgage loans. When rates rise, the demand for
mortgage loans tends to fall, reducing the revenue from loan originations. It is also possible
that, because of the recession and deteriorating housing market, even if interest rates were to
fall, mortgage originations may also fall.
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Recent legislative and regulatory initiatives to support the financial services industry have been
coupled with numerous restrictions and requirements that could detrimentally affect the Companys
business and require us to raise additional capital
In addition to the U.S. Treasury Departments Capital Purchase Program (CPP) under the Troubled
Asset Relief Program (TARP) announced in the fall of 2008, the U.S. Treasury and the FDIC have
taken further steps to support and regulate the financial services industry, that include enhancing
the liquidity support available to financial institutions, establishing a commercial paper funding
facility, temporarily guaranteeing money market funds and certain types of debt issuances, and
increasing insurance on bank deposits. Also, the U.S. Congress, through the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, have imposed a
number of restrictions and limitations on the operations of financial services firms participating
in the federal programs. These programs subject us and other financial institutions who participate
in them to (i) additional restrictions, oversight, reporting obligations and costs; and (ii)
compensation restrictions that limit our ability to attract and retain executives, each of which
could have an adverse impact on our business, financial condition, results of operations or the
price of our common stock. In addition, new proposals for legislation continue to be introduced in
the U.S. Congress that could further substantially increase regulation of the financial services
industry and impose restrictions on the ability of firms within the industry to conduct business
consistent with historical practices, including aspects such as compensation, interest rates, new
and inconsistent consumer protection regulations and mortgage regulation, among others. Federal and
state regulatory agencies also frequently adopt changes to their regulations or change the manner
in which existing regulations are applied. We cannot predict the substance or impact of pending or
future legislation or regulation, or the application thereof. Compliance with such current and
potential regulation and scrutiny may significantly increase our costs, impede the efficiency of
our internal business processes, require us to increase our regulatory capital and limit our
ability to pursue business opportunities in an efficient manner. In response, we may be required to
or choose to raise additional capital, which could have a dilutive effect on the existing holders
of our common stock and adversely affect the market price of our common stock. We continually
evaluate opportunities to access capital markets taking into account our regulatory capital ratios,
financial condition, stock price and other relevant considerations. Capital actions may include
opportunistically retiring our outstanding securities, including our preferred shares issued to the
U.S. Treasury under the CPP or trust preferred securities, by raising capital in open market
transactions, privately negotiated transactions or public offers for cash or common shares. We may
also issue common stock in public or private transactions to increase or maintain our capital
levels above the requirements for a well-capitalized institution as established by the federal bank
regulatory agencies as well as other regulatory targets. There can be no assurance that we will, or
will be able to, raise capital.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
N/A.
Item 4. Submission of Matters to a vote of Security Holders
Bank of Commerce Holdings parent company of Redding Bank of Commerce and Bank of Commerce Mortgage
reports actions approved at their annual Shareholders Meeting held May 12, 2009. The count of
shares represented in person or proxy were 5,440,033 or 62.4% of the outstanding voting shares of
the Company. 98.0% if the votes cast voted FOR the election of nine directors named in the proxy
statement for terms expiring on the date of the annual meeting in 2010. 60.4% of the shares voted
FOR the amendment to the Company bylaws expanding the number of director seats to a range of seven
(7) to thirteen (13). 100% of the votes cast voted FOR adoption of non-binding advisory resolution
approving executive compensation (Say on Pay) and 92.9% of the votes cast voted FOR ratification
of the selection of Moss Adams, LLP as the Companys independent auditors for 2009.
Item 5. Other Information
Item 6. Exhibits
(31.1) Certification of Chief
Executive Officer pursuant to Sarbanes-Oxley Act of 2002
(31.2) Certification of Chief Financial Officer pursuant to
Sarbanes-Oxley Act of 2002
(32.0) Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BANK OF COMMERCE HOLDINGS
(Registrant)
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Date: August 14, 2009 |
/s/ Samuel D. Jimenez
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Samuel D. Jimenez |
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Senior Vice President and
Chief Financial Officer |
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