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 March 31, 2010
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)
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
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(Do not check if a smaller reporting company) |
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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 April 30, 2010: 16,991,845
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index to Form 10-Q
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2010 (unaudited), December 31, 2009 and March 31, 2009 (unaudited)
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March 31, |
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December 31, |
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March 31, |
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Dollars in thousands |
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2010 |
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2009 |
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2009 |
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ASSETS |
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Cash and due from banks, noninterest bearing |
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$ |
57,599 |
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$ |
36,902 |
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$ |
38,965 |
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Interest bearing due from banks |
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32,149 |
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31,338 |
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Federal funds sold and securities purchased under
agreements to resell |
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56,655 |
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Cash and cash equivalents |
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89,748 |
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68,240 |
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95,620 |
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Securities available-for-sale, at fair value (including
pledged collateral of $60,130 at March 31, 2010, $55,672
at December 31, 2009 and $66,210 at March 31, 2009) |
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77,571 |
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80,062 |
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105,538 |
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Portfolio Loans, net of the allowance for loan losses of
$12,197 at March 31, 2010, $11,207 at December 31, 2009
and $7,701 at March 31, 2009 |
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596,787 |
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590,023 |
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525,182 |
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Mortgage loans held for sale |
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16,591 |
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27,288 |
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Bank premises and equipment, net |
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9,975 |
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9,980 |
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10,553 |
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Goodwill |
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3,727 |
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3,727 |
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Other real estate owned |
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3,395 |
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2,880 |
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2,934 |
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Other assets |
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32,899 |
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31,206 |
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25,509 |
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TOTAL ASSETS |
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$ |
830,693 |
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$ |
813,406 |
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$ |
765,336 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Demand noninterest bearing |
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$ |
65,213 |
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$ |
69,448 |
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$ |
66,351 |
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Demand interest bearing |
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150,528 |
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163,814 |
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138,231 |
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Savings accounts |
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72,756 |
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65,414 |
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72,873 |
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Certificates of deposit |
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330,546 |
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341,788 |
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270,490 |
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Total deposits |
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619,043 |
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640,464 |
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547,945 |
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Securities sold under agreements to repurchase |
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18,820 |
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9,621 |
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10,813 |
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Federal Home Loan Bank and Federal Reserve Bank borrowings |
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70,000 |
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70,000 |
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120,000 |
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Other liabilities |
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9,554 |
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9,050 |
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7,716 |
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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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732,882 |
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744,600 |
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701,939 |
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Commitments and contingencies |
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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 on March 31, 2010, December 31,
2009, and March 31, 2009 |
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16,663 |
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16,641 |
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16,573 |
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Common stock , no par value, 50,000,000 shares
authorized; 15,911,495 shares issued and outstanding at
March 31, 2010, 8,711,495 issued and outstanding on
December 31, 2009 and at March 31, 2009 |
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38,495 |
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9,730 |
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9,679 |
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Common Stock Warrant |
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449 |
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449 |
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449 |
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Retained earnings |
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39,781 |
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39,004 |
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36,541 |
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Accumulated other comprehensive income, net of tax |
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353 |
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657 |
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155 |
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Total Equity Bank of Commerce Holdings |
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95,741 |
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66,481 |
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63,397 |
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Non controlling interest in subsidiary |
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2,070 |
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2,325 |
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Total stockholders equity |
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97,811 |
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68,806 |
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63,397 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
830,693 |
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$ |
813,406 |
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$ |
765,336 |
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See accompanying notes to condensed consolidated financial statements.
3
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 2010, December 31, 2009 and March 31, 2009
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For Three Months Ended: |
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March 31, |
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December 31, |
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March 31, |
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Amounts in thousands, except for per share data |
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2010 |
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2009 |
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2009 |
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Interest income: |
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Interest and fees on loans |
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$ |
9,051 |
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$ |
9,184 |
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$ |
8,049 |
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Interest on tax-exempt securities |
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322 |
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311 |
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296 |
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Interest on U.S. government securities |
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439 |
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676 |
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1,192 |
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Interest on federal funds sold and securities purchased under
agreements to resell |
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1 |
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1 |
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25 |
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Interest on other securities |
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270 |
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266 |
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117 |
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Total interest income |
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10,083 |
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10,438 |
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9,679 |
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Interest expense: |
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Interest on demand deposits |
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230 |
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229 |
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307 |
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Interest on savings deposits |
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219 |
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221 |
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281 |
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Interest on certificates of deposit |
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1,761 |
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1,906 |
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1,881 |
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Securities sold under agreements to repurchase |
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12 |
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13 |
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14 |
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Interest on FHLB and other borrowings |
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136 |
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172 |
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581 |
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Interest on junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
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208 |
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208 |
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215 |
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Total interest expense |
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2,566 |
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2,749 |
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3,279 |
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Net interest income |
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7,517 |
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7,689 |
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6,400 |
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Provision for loan and lease losses |
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2,250 |
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3,150 |
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1,425 |
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Net interest income after provision for loan and lease losses |
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5,267 |
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4,539 |
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4,975 |
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Noninterest income: |
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Service charges on deposit accounts |
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82 |
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94 |
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92 |
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Payroll and benefit processing fees |
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128 |
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105 |
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134 |
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Earnings on cash surrender value Bank owned life insurance |
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108 |
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107 |
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86 |
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Net gain on sale of securities available-for-sale |
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931 |
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454 |
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404 |
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Merchant credit card service income, net |
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54 |
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68 |
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74 |
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Mortgage brokerage fee income |
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2,539 |
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2,112 |
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Other income |
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100 |
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120 |
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75 |
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Total noninterest income |
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3,942 |
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3,060 |
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865 |
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Noninterest expense: |
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Salaries and related benefits |
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3,711 |
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3,209 |
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2,127 |
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Occupancy and equipment expense |
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1,110 |
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1,339 |
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572 |
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FDIC insurance premium |
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251 |
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279 |
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273 |
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Data processing fees |
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89 |
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51 |
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111 |
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Professional service fees |
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400 |
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146 |
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159 |
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Payroll and benefit fees |
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29 |
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26 |
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34 |
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Deferred compensation expense |
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118 |
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118 |
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119 |
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Stationery and supplies |
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80 |
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44 |
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53 |
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Postage |
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42 |
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36 |
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81 |
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Directors expense |
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84 |
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67 |
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37 |
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Other expenses |
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1,271 |
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802 |
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394 |
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Total noninterest expense |
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7,185 |
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6,117 |
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3,960 |
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Income before provision for income taxes |
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2,024 |
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1,482 |
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1,880 |
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Provision for income taxes |
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744 |
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43 |
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610 |
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Net Income |
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1,280 |
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1,439 |
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1,270 |
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Less: Net (loss) income attributable to non-controlling interest |
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(255 |
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33 |
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Net Income attributable to Bank of Commerce Holdings |
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$ |
1,535 |
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$ |
1,406 |
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$ |
1,270 |
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Less: preferred dividend and accretion on preferred stock |
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(235 |
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(235 |
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(237 |
) |
Income available to common stockholders |
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$ |
1,300 |
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$ |
1,171 |
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$ |
1,033 |
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Basic earnings per share |
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$ |
0.15 |
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$ |
0.13 |
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$ |
0.12 |
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Weighted average shares basic |
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8,871 |
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8,711 |
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8,711 |
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Diluted earnings per share |
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$ |
0.15 |
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$ |
0.13 |
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$ |
0.12 |
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Weighted average shares diluted |
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8,871 |
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8,711 |
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8,711 |
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Cash dividends declared |
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$ |
0.06 |
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$ |
0.06 |
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$ |
0.06 |
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See accompanying notes to condensed consolidated financial statements.
4
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
Three Months Ended March 31, 2010 (Unaudited)
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Accumulated |
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Subtotal |
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Non |
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Other Comp- |
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Bank of |
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Controlling |
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Comprehensive |
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Preferred |
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Common |
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Stock |
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Retained |
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Income (Loss), |
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Commerce |
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Interest in |
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Dollars in Thousands |
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Income |
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Amount |
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Warrant |
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Shares |
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Amount |
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Earnings |
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net of tax |
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Holdings |
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Subsidiary |
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Total |
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Balance at December 31, 2009 |
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|
|
|
|
$ |
16,641 |
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|
$ |
449 |
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|
|
8,711,495 |
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|
$ |
9,730 |
|
|
$ |
39,004 |
|
|
$ |
657 |
|
|
$ |
66,481 |
|
|
$ |
2,325 |
|
|
$ |
68,806 |
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|
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|
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Comprehensive Income: |
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|
|
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|
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|
Net Income (loss) |
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$ |
1,280 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,535 |
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|
|
|
|
|
|
1,535 |
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|
|
(255 |
) |
|
|
1,280 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
Unrealized gains on
securities, net of tax |
|
|
244 |
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification
adjustment for gains
included in net income,
net of tax |
|
|
(559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other Comprehensive loss
non-controlling interest |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income BOCH |
|
$ |
1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304 |
) |
|
|
(304 |
) |
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred Stock |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividends ($0.06 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(523 |
) |
|
|
|
|
|
|
(523 |
) |
|
|
|
|
|
|
(523 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
Compensation expense associated
with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
Issuance of new shares, net of
issuance costs ($4.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,200,000 |
|
|
|
28,752 |
|
|
|
|
|
|
|
|
|
|
|
28,752 |
|
|
|
|
|
|
|
28,752 |
|
Balance at March 31, 2010 |
|
|
|
|
|
$ |
16,663 |
|
|
$ |
449 |
|
|
|
15,911,495 |
|
|
$ |
38,495 |
|
|
$ |
39,781 |
|
|
$ |
353 |
|
|
$ |
95,741 |
|
|
$ |
,2,070 |
|
|
$ |
97,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
Dollars in thousands |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,280 |
|
|
$ |
1,270 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
2,250 |
|
|
|
1,425 |
|
Provision for depreciation and amortization |
|
|
232 |
|
|
|
260 |
|
Compensation expense associated with stock options |
|
|
13 |
|
|
|
29 |
|
Write down of Other Real Estate Owned |
|
|
184 |
|
|
|
|
|
Gross proceeds from sales of loans held for sale |
|
|
141,752 |
|
|
|
|
|
Gross originations of loans held for sale |
|
|
(141,662 |
) |
|
|
|
|
Gain on sale of securities available-for-sale |
|
|
(931 |
) |
|
|
(404 |
) |
Amortization of investment premiums and accretion of discounts, net |
|
|
(3 |
) |
|
|
51 |
|
Gain on sale of fixed assets |
|
|
(1 |
) |
|
|
|
|
(Increase)/decrease in deferred income taxes |
|
|
(730 |
) |
|
|
193 |
|
Increase in cash surrender value of bank owned life policies |
|
|
(92 |
) |
|
|
(86 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(668 |
) |
|
|
548 |
|
Deferred compensation |
|
|
118 |
|
|
|
82 |
|
Deferred loan fees |
|
|
(37 |
) |
|
|
11 |
|
Other liabilities |
|
|
909 |
|
|
|
600 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
2,614 |
|
|
|
3,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities and payments of available-for-sale securities |
|
|
3,015 |
|
|
|
11,820 |
|
Proceeds from sales of available-for-sale securities |
|
|
18,158 |
|
|
|
20,379 |
|
Purchases of available-for-sale securities |
|
|
(18,266 |
) |
|
|
(5,631 |
) |
Purchases of home equity loan portfolio |
|
|
(14,801 |
) |
|
|
|
|
Investment in bank owned life policies |
|
|
|
|
|
|
(1,191 |
) |
Loan origination, net of principal repayments |
|
|
15,743 |
|
|
|
(7,672 |
) |
Purchases of Bank premises and equipment, net |
|
|
(227 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
3,622 |
|
|
|
17,565 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net decrease in demand deposits and savings accounts |
|
|
(10,179 |
) |
|
|
(13,541 |
) |
Net (decrease) increase in certificates of deposit |
|
|
(11,242 |
) |
|
|
6,204 |
|
Net increase (decrease) in securities sold under agreement to
repurchase |
|
|
9,199 |
|
|
|
(3,040 |
) |
Cash dividends paid on common stock |
|
|
(1,045 |
) |
|
|
(523 |
) |
Cash dividends paid on preferred stock |
|
|
(213 |
) |
|
|
(215 |
) |
Net proceeds from issuance of common stock |
|
|
28,752 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
15,272 |
|
|
|
(11,115 |
) |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
21,508 |
|
|
|
10,429 |
|
Cash and cash equivalents, beginning of period |
|
|
68,240 |
|
|
|
85,191 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
89,748 |
|
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
400 |
|
|
$ |
|
|
Interest |
|
|
2,491 |
|
|
|
3,318 |
|
Transfer of loans to other real estate owned |
|
|
699 |
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
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,
2009, 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 U.S. generally accepted accounting
principles (GAAP) and general practices within the banking industry. In preparing the consolidated
financial statements in conformity with GAAP, management is required to make estimates and
assumptions about future economic and market conditions 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.
Although our estimates contemplate current conditions and how they are expected to change in the
future, it is reasonably possible that actual conditions could be worse than anticipated in those
estimates, which could materially affect the Companys results of operations and financial
condition. Management has made significant estimates in several areas, including the evaluation of
other-than-temporary impairment on investment securities, allowance for loan and lease losses, and
income taxes. Actual results could differ from those estimates. Among other effects, such changes
could result in future impairments of investment securities, increases to the allowance for loan
and lease losses, and changes to tax positions.
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 2009 Annual Report on Form 10-K. The results of operations and cash flows for the
2010 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. 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
1993 and the corporate offices are located in San Ramon, California. 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. The earn-out is based upon the mortgage companys profits and will be paid in annual
installments over the three year period. The measurement date for the earn out payments is December
31. The Company has accounted for the business combination using the acquisition method. The
Companys acquisition of 51% majority ownership interest was measured at fair value based on the
total consideration transferred.
The market and income approaches were used to value the business. The total estimated fair value of
the non controlling interest was estimated to be $2.06 million and was based on the following
multiples: 13.27 times trailing twelve months earnings, 29.21% price to trailing twelve months
gross revenues and 436.70% of total shareholders equity.
7
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.
Purchase Price and Goodwill
The following table summarizes the purchase and resulting goodwill:
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Total consideration at fair value |
|
$ |
2,465 |
|
Fair value of non-controlling interest |
|
|
2,062 |
|
|
|
|
|
|
|
$ |
4,527 |
|
|
|
|
|
|
Net acquisition date fair value of assets acquired |
|
|
($800 |
) |
|
|
|
|
|
Goodwill |
|
$ |
3,727 |
|
Total consideration paid in the acquisition consisted of $1.5 million in cash and $965 thousand in
contingent consideration measured at fair value. No assets or liabilities arose out of
contingencies. Goodwill totaling $3.7 million is not being amortized for book purposes under
current accounting guidelines. Goodwill is not deductible for tax purposes. No other intangible
assets, other than goodwill were recorded as a result of the business combination.
The following table represents the pro-forma income statement as if the acquisition had occurred on
January 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-Forma Income Statement |
|
Three Months Ended March 31, 2009 |
|
(In Thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
9,599 |
|
|
|
|
|
|
|
103 |
|
|
|
(23 |
) |
|
|
9,679 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
3,087 |
|
|
|
19 |
|
|
|
215 |
|
|
|
(23 |
) |
|
|
3,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
6,512 |
|
|
|
(19 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
6,381 |
|
Provision for loan and lease losses |
|
|
1,425 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
1,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
5,087 |
|
|
|
(47 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
4,928 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
0 |
|
|
|
1,885 |
|
|
|
|
|
|
|
|
|
|
|
1,885 |
|
Other noninterest income |
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
865 |
|
|
|
1,885 |
|
|
|
|
|
|
|
|
|
|
|
2,750 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
2,094 |
|
|
|
890 |
|
|
|
32 |
|
|
|
|
|
|
|
3,016 |
|
Occupancy and equipment expense |
|
|
572 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
784 |
|
Other noninterest expense |
|
|
1,184 |
|
|
|
524 |
|
|
|
78 |
|
|
|
|
|
|
|
1,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,850 |
|
|
|
1,626 |
|
|
|
110 |
|
|
|
|
|
|
|
5,586 |
|
Income before provision for income taxes |
|
|
2,102 |
|
|
|
212 |
|
|
|
(222 |
) |
|
|
|
|
|
|
2,092 |
|
Provision for income taxes |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,492 |
|
|
|
212 |
|
|
|
(222 |
) |
|
|
|
|
|
|
1,482 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
1,492 |
|
|
$ |
109 |
|
|
$ |
(222 |
) |
|
|
|
|
|
$ |
1,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on preferred stock |
|
|
|
|
|
|
|
|
|
|
(237 |
) |
|
|
|
|
|
|
(237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,492 |
|
|
$ |
109 |
|
|
$ |
(459 |
) |
|
|
= |
|
|
$ |
1,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
3. Recent Accounting Pronouncements
On February 24, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and
Exchange Commission (SEC) filer to disclose a date through which subsequent events have been
evaluated in both issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or retrospective
application of U.S. generally accepted accounting principals (U.S. GAAP). The FASB also clarified
that if the financial statements have been revised, then an entity that is not an SEC filer should
disclose both the date that the financial statements were issued or available to be issued and the
date the revised financial statements were issued or available to be issued. The FASB believes
these amendments remove potential conflicts with the SECs literature. All of the amendments in the
ASU were effective upon issuance, except for the use of the issued date for conduit debt obligors,
which will be effective for interim or annual periods ending after June 15, 2010.
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This ASU requires: (1) disclosure of the significant
amount transferred in and out of Level 1 and Level 2 fair value measurements and the reasons for
the transfers; and (2) separate presentation of purchases, sales, issuances and settlements in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3). In
addition, ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in
FASB Accounting Standards Codification (The Codification or ASC) Subtopic 820-10: (1) For
purposes of reporting fair value measurement for each class of assets and liabilities, a reporting
entity needs to use judgment in determining the appropriate classes of assets and liabilities; and
(2) A reporting entity should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010, except
for the disclosures about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal years beginning January
1, 2011, and for interim periods within those fiscal years. Our adoption of this ASU in the first
quarter of 2010 did not have an impact on our financial condition or results of operations.
In January 2010, ASU No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders
with Components of Stock and Cash was issued to clarify the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
ASU 2010-01 is effective for interim and annual periods beginning January 1, 2010. We currently do
not make distributions to shareholders with a stock component.
9
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 months ended March 31,
2010 and 2009.
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per share data) |
|
Three Months Ended |
|
Earnings Per Share |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
1,535 |
|
|
$ |
1,270 |
|
Less: dividend on Preferred Stock |
|
|
(213 |
) |
|
|
(215 |
) |
Less: accretion on Preferred Stock |
|
|
(22 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common stockholders |
|
$ |
1,300 |
|
|
$ |
1,033 |
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
8,871 |
|
|
|
8,711 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per Share |
|
$ |
0.15 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
1,535 |
|
|
$ |
1,270 |
|
Less: dividend on Preferred Stock |
|
|
(213 |
) |
|
|
(215 |
) |
Less: accretion on Preferred Stock |
|
|
(22 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
Numerator: Earnings available to common stockholders |
|
$ |
1,300 |
|
|
$ |
1,033 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
8,871 |
|
|
|
8,711 |
|
|
Plus incremental shares from assumed conversions |
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,871 |
|
|
|
8,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Share |
|
$ |
0.15 |
|
|
$ |
0.12 |
|
Anti-dilutive options not included in EPS Calculation |
|
|
282 |
|
|
|
615 |
|
Anti-dilutive warrants not included in EPS Calculation |
|
|
405 |
|
|
|
405 |
|
5. Stock Option Plans
For the first three months of 2010, stock option compensation expense charged against income was
$12,549 compared to $28,902 at March 31, 2009. At March 31, 2010, there was $91,122 of total
unrecognized compensation costs related to non-vested share based payments for named officers and
directors. This amount is expected to be recognized over a period of 4.4 years. No options were
granted during the first three months of 2010.
During the three months ended March 31, 2010 and 2009 no stock options were exercised.
10
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
6. Securities Available-for-Sale
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 $2.5 million or 3.1% at March 31, 2010 compared to
December 31, 2009. As of March 31, 2010, the Company has pledged a total of $60.1 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
(Dollars in thousands) |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
19,999 |
|
|
$ |
41 |
|
|
$ |
(47 |
) |
|
$ |
19,993 |
|
Obligations of state and political subdivisions |
|
|
34,967 |
|
|
|
589 |
|
|
|
(115 |
) |
|
|
35,441 |
|
Residential mortgage backed securities and
collateralized mortgage obligations |
|
|
19,702 |
|
|
|
407 |
|
|
|
(292 |
) |
|
|
19,817 |
|
Other asset backed securities |
|
|
2,320 |
|
|
|
|
|
|
|
|
|
|
|
2,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
76,988 |
|
|
$ |
1,037 |
|
|
$ |
(454 |
) |
|
$ |
77,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
(Dollars in thousands) |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
18,500 |
|
|
$ |
101 |
|
|
$ |
|
|
|
$ |
18,601 |
|
Obligations of state and political subdivisions |
|
|
32,184 |
|
|
|
547 |
|
|
|
(85 |
) |
|
|
32,646 |
|
Residential mortgage backed securities and
collateralized mortgage obligations |
|
|
28,278 |
|
|
|
869 |
|
|
|
(332 |
) |
|
|
28,815 |
|
Other asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
78,962 |
|
|
$ |
1,517 |
|
|
$ |
(417 |
) |
|
$ |
80,062 |
|
The amortized cost and estimated fair value of available-for-sale securities at March 31, 2010 are
shown below.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
5,220 |
|
|
|
5,294 |
|
Due after five years through ten years |
|
|
16,835 |
|
|
|
16,888 |
|
Due after ten years |
|
|
54,933 |
|
|
|
55,389 |
|
|
|
|
|
|
|
|
Total |
|
$ |
76,988 |
|
|
$ |
77,571 |
|
An investment is impaired if the fair value of the investment is less than its cost adjusted for
accretion, amortization and Other Than Temporary Impairment (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.
11
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
March 31, 2010 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
amortized 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 March 31, 2010. The table also discloses whether these securities have
had unrealized losses for less than 12 months or for 12 months or longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In Thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
U.S. Treasury and agencies |
|
$ |
10,020 |
|
|
$ |
(47 |
) |
|
|
|
|
|
|
|
|
|
$ |
10,020 |
|
|
$ |
(47 |
) |
Obligations of state and
political subdivisions |
|
|
10,208 |
|
|
|
(115 |
) |
|
|
|
|
|
|
|
|
|
|
10,208 |
|
|
|
(115 |
) |
Residential mortgage
backed securities and
collateralized mortgage |
|
|
5,506 |
|
|
|
(292 |
) |
|
|
|
|
|
|
|
|
|
|
5,506 |
|
|
|
(292 |
) |
Total temporarily
impaired securities |
|
$ |
25,734 |
|
|
$ |
(454 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
25,734 |
|
|
$ |
(454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(In Thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
Obligations of
state and political
subdivisions |
|
|
8,517 |
|
|
|
(84 |
) |
|
|
500 |
|
|
|
(1 |
) |
|
|
9,017 |
|
|
|
(85 |
) |
Residential
mortgage backed
securities and
collateralized
mortgage |
|
|
7,516 |
|
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
7,516 |
|
|
|
(332 |
) |
Total temporarily
impaired securities |
|
$ |
16,033 |
|
|
$ |
(416 |
) |
|
$ |
500 |
|
|
$ |
(1 |
) |
|
$ |
16,533 |
|
|
$ |
(417 |
) |
U.S. Treasury and agency securities
The unrealized losses associated with securities of U.S. states and political subdivisions are
primarily driven by changes in interest rates and not due to the credit quality of the securities.
Obligations of state and political subdivisions
The unrealized losses associated with securities of U.S. states and political subdivisions are
primarily driven by changes in interest rates and not due to the credit quality of the securities.
These investments are exclusively investment grade and were underwritten in accordance with our
investment standards prior to the decision to purchase, without relying on a bond insurers
guarantee in making the investment decision.
12
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
These securities will continue to be monitored as part of our ongoing impairment analysis, but are
expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. We
expect to recover the entire amortized cost basis of these securities.
Mortgage-Backed securities
The unrealized losses associated with federal agency mortgage-backed securities are primarily
driven by changes in interest rates and not due to credit losses. These securities are issued by
U.S. government or government sponsored entities and do not have any credit losses given the
explicit government guarantee.
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 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 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.
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 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. BOC Mortgage Services, the Company has recorded goodwill (See note 2).
Impairment testing will be performed on an annual basis each June.
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 March 31, 2010 was 3.55%. 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.
13
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 fixed 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. No payments to date have been deferred.
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.
10. Preferred Stock and Warrants
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. 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.
14
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The preferred stock proceeds from the Treasury Department was allocated based upon the relative
fair value of the warrant as compared with the fair value of the preferred stock. The fair value of
the warrant was determined using a Black-Sholes pricing model incorporating assumptions including
our common stock price, dividend yield, stock price volatility and risk-free interest rate. We
determined the fair value of the preferred stock based on assumptions regarding the discount rate
(market rate) on the preferred stock which was estimated to be approximately 9.0% at the date of
issuance. The discount on the preferred stock is being accreted to par value over a five-year term
which is the expected life of the preferred stock. The proceeds of $17.0 million were allocated
between the preferred stock and warrant with $16.6 million allocated to preferred stock and
$449,000 allocated to the warrant based on their relative fair value at the time of issuance.
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.
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 Company may opt out by repaying the capital without raising additional capital subject to
consultation with the appropriate Federal regulator.
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 March 31, 2010 are below:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Operating Leases |
|
|
|
|
2010 |
|
$ |
636 |
|
2011 |
|
|
775 |
|
2012 |
|
|
606 |
|
2013 |
|
|
488 |
|
2014 |
|
|
498 |
|
Thereafter |
|
|
447 |
|
|
|
|
|
Total |
|
$ |
3,450 |
|
|
|
|
|
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.
15
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
FHLB Advances The Company has advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $70,000,000 as of March 31, 2010 and $120,000,000 as of March 31, 2009. The
Company has one $15,000,000 FHLB advance, and one $40,000,000 advance bearing fixed rates of
0.16% with interest payable monthly. In addition, the Company has one floating rate advance
for $15,000,000. The floating rate adjusts quarterly to 3 month libor plus 1 basis point, and
interest on the principal is payable quarterly. The following table illustrates borrowings
outstanding at the end of the period:
|
|
|
|
|
(In Thousands) |
|
|
|
|
Advance Amount |
|
Interest Rate |
|
Maturity |
$40,000,000
|
|
0.16%
|
|
4/26/2010 |
$15,000,000
|
|
0.16%
|
|
5/19/2010 |
$15,000,000
|
|
0.26%
|
|
3/5/2013 |
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 an
investment in FHLB stock of $6,110,000 and to pledge $196,687,478 of its commercial and real
estate mortgage loans and $24,380,419 of its securities portfolio to the FHLB as collateral
as of March 31, 2010. At March 31, 2010, the Bank had available borrowing lines at the FHLB
of $108,719,599 and a federal fund borrowing line at a correspondent bank totaling
$10,000,000.
FRB Advances The Company may periodically obtain secured borrowings from the Federal
Reserve Bank of San Francisco (FRB). FRB borrowings outstanding were $0 as of March 31,
2010 and $0 as of March 31, 2009. The FRBs discount window credit facility is limited to
overnight borrowings. The Company has pledged $91.7 million in commercial and industrial
loans as collateral as of March 31, 2010, and had available borrowing lines at the FRB of
$58.7 million.
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 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 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.
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:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
March 31, 2009 |
Credit Commitments |
|
|
|
|
|
|
|
|
Unfunded loan commitments |
|
$ |
116,232,721 |
|
|
$ |
151,329,729 |
|
Standby letters of credit |
|
|
4,290,307 |
|
|
|
6,785,969 |
|
Guaranteed commitments outstanding |
|
|
1,324,799 |
|
|
|
1,350,399 |
|
|
|
|
|
|
$ |
121,847,827 |
|
|
$ |
159,466,097 |
|
16
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has mortgage loan purchase agreements with various mortgage bankers. The Company is
obligated to perform certain procedures in accordance with these agreements. The agreements provide
for conditions whereby the Company may be required to repurchase mortgage loans for various reasons
among which are either (1) a mortgage loan is originated in violation of the mortgage bankers
requirement, (2) the Company breaches any term of the agreement and (3) an early payment default
occurs from a mortgage originated by the Company. The mortgage loan repurchase agreements are
consistent with the standard representations and warranties of the loan sales agreements and the
impact is considered immaterial to the consolidated financial statements.
The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of
mortgage loans. Under the agreement, the Company is committed to deliver $270,000,000 loan volume
over the period from March 1, 2009 through May 31, 2010. Upon failure to deliver minimum loan
volume quarterly, the Company is responsible to pay a non-delivery fee to the purchaser. The
Company is currently in the process of renegotiating and amending this agreement. Although the
basic term would remain the same, the new agreement would extend the term until January 31, 2011
and require the Company to commit to deliver a loan volume of $264,000,000 over a new period.
The Company, through its majority owned subsidiary, Bank of Commerce Mortgage, enters into best
efforts forward delivery contracts to sell residential mortgage loans at specific prices and dates
in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its
residential mortgage loan commitments. Generally, the Company enters into a best efforts interest
rate lock commitment (IRLC) with borrowers and best efforts forward delivery contracts with
investors associated with mortgage loans receivable held for sale. The Companys derivative
instruments consist primarily of best efforts IRLCs executed with borrowers which are offset
against best efforts forward purchase commitments with investor lenders. These derivative
instruments are accounted for as fair value hedges, with the changes in fair value reflected in
earnings as a component of mortgage brokerage fee income. The net impact of the best efforts IRLCs
and commitments to deliver is not considered significant. At March 31, 2010 the Company did not
maintain any open positions or any other outstanding derivative loan commitments.
12. Accounting for Income Tax and Uncertainties
The Companys effective income tax rate was 32.50% in the first quarter 2010 compared with 32.41%
in the first quarter 2009. 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
income before taxes. The principal difference between statutory tax rates and the Companys
effective tax rate is the benefit derived investing in tax-exempt securities and preferential state
tax treatment for qualified enterprise zone loans. The increase is primarily attributable to
increased tax expense (with a comparable increase in interest income). 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.
Non-controlling interests are presented in the income statement such that the consolidated income
statement includes amounts from both the Company interests and the non-controlling interests. As a
result, the effective tax rate is calculated by dividing income tax expense by income before income
tax expense less the net income from non-controlling interests.
13. Fair Value Measurement
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at
fair value on a recurring basis. From time to time, the Company may be required to record at fair
value other assets on a non recurring basis, such as impaired loans and certain other assets
including other real estate owned and mortgages held for sale. These non recurring fair value
adjustments involve the application of lower-of-cost-or-market accounting or write-downs of
individual assets.
Fair Value Hierarchy
Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access.
17
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 valuations 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 valuations are unobservable inputs for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. Valuation is generated from
model-based techniques that use significant assumptions not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include the use of option pricing models,
discounted cash flow models and similar techniques.
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 Company maximizes the use of observable inputs and minimizes the use of unobservable inputs
when developing fair value measurements.
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 March 31, 2010, and indicate the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At March 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
March 31, 2010 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Available-for-sale securities |
|
$ |
77,571,142 |
|
|
$ |
|
|
|
$ |
77,571,142 |
|
|
$ |
|
|
Total assets measured at fair value |
|
$ |
77,571,142 |
|
|
$ |
|
|
|
$ |
77,571,142 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair
value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
Fair Value |
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Available for sale securities |
|
$ |
80,062,136 |
|
|
$ |
|
|
|
$ |
80,062,136 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at fair value |
|
$ |
80,062,136 |
|
|
$ |
|
|
|
$ |
80,062,136 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities Measured at fair value |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
18
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
Non Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At March 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
Fair Value |
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
March 31, |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Impaired Loans |
|
$ |
11,049,354 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,049,354 |
|
Other real estate owned |
|
|
3,395,161 |
|
|
$ |
|
|
|
$ |
|
|
|
|
3,395,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured
at fair value |
|
$ |
14,444,515 |
|
|
|
|
|
|
|
|
|
|
$ |
14,444,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
measured at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non Recurring Basis |
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Dec 31, 2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Impaired Loans |
|
$ |
5,278,493 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,278,493 |
|
Other real estate owned |
|
|
2,879,956 |
|
|
$ |
|
|
|
$ |
|
|
|
|
2,879,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured
at fair value |
|
$ |
8,158,449 |
|
|
|
|
|
|
|
|
|
|
$ |
8,158,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
measured at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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, the Company records non recurring fair value
adjustments to the loan to reflect (1) partial write-downs that are based on observable market
price or current appraised value of collateral or (2) the full charge-off of the loan carrying
value.
19
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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
adjusted for credit losses. 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 March 31, 2010, substantially all of the total impaired loans were collateral
dependent and were evaluated based on the fair value of the collateral. 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 non recurring 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 non recurring Level 3.
Other Real Estate Owned The fair value of other real estate owned is estimated using one of
several methods, including collateral value, market value of similar debt, enterprise value,
liquidation value, and discounted cash flows. At March 31, 2010, the estimated fair value was based
on the fair value of the other real estate owned, supported by current appraisals. The Company
records other real estate owned as a nonrecurring Level 3.
Method for determining fair values
The following are descriptions of the valuation methodologies that 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. The carrying amount is a
reasonable estimate of fair value because of the relatively short term between the origination of
the instrument and its expected realization.
Loans receivable 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.
Mortgage Loans held for sale Mortgage loans held for sale are carried at the lower of cost or fair
value. Cost generally approximates fair value, given the short duration of these assets.
Commitments to extend credit and standby letters of credit The fair value of commitments is the
off-balance sheet amount of loan commitments and outstanding letters of credit.
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, savings, and money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., carrying amounts). The fair values for fixed-rate time
deposits are estimated using a discounted cash flow calculation applying interest rates currently
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 purchased under agreements to resell 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.
Earn out payable The fair value of the earn out payable is estimated by discounting the
contractual cash flows expected to be paid out, under the assumption the mortgage subsidiary meets
the targeted results.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
Contract |
|
Carrying |
|
|
(In Thousands) |
|
Amount |
|
Amount |
|
Fair Value |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
$ |
89,748 |
|
|
$ |
89,748 |
|
Portfolio Loans, net |
|
|
|
|
|
|
596,787 |
|
|
|
607,243 |
|
Mortgages held for sale |
|
|
|
|
|
|
16,591 |
|
|
|
16,591 |
|
Accrued interest on loans |
|
|
|
|
|
|
2,870 |
|
|
|
2,870 |
|
Accrued interest on securities |
|
|
|
|
|
|
720 |
|
|
|
720 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and savings |
|
|
|
|
|
|
288,497 |
|
|
|
288,497 |
|
Fixed rate certificates |
|
|
|
|
|
|
328,860 |
|
|
|
331,332 |
|
Variable certificates |
|
|
|
|
|
|
1,686 |
|
|
|
1,686 |
|
Accrued interest on deposits and borrowings |
|
|
|
|
|
|
424 |
|
|
|
424 |
|
Securities sold under agreements to repurchase |
|
|
|
|
|
|
18,820 |
|
|
|
18,820 |
|
Federal Home Loan Borrowings |
|
|
|
|
|
|
70,000 |
|
|
|
15,000 |
|
Earn out payable |
|
|
|
|
|
|
965 |
|
|
|
965 |
|
Junior subordinated debt payable to
unconsolidated subsidiary grantor trust |
|
|
|
|
|
|
15,465 |
|
|
|
15,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments: |
|
$ |
116,232,721 |
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
|
4,290,307 |
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
1,324,799 |
|
|
|
|
|
|
|
|
|
Guaranteed commitments outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
14. Transfer of Financial Assets
On March 12, 2010, the Company completed a loan swap transaction which included the purchase
of a pool of residential mortgage home equity loans with a par value of $22.0 million. The
residential mortgage home equity loan portfolio (portfolio) was purchased from an unrelated
private equity firm in exchange for a combination of approximately $7.0 million in carrying
value of certain impaired loans measured at fair value and cash of approximately $14.8
million. The impaired loans were transferred without recourse and were carried at fair value
prior to the exchange, in accordance with accounting standards. The acquisition of the
residential mortgage home equity loan portfolio and the transfer of certain impaired loans was
accounted for as a transfer of financial assets, requiring the assets obtained to be initially
measured at fair value and reflected as proceeds from the transfer.
In addition, the assets transferred (cash and certain impaired loans) should be derecognized
with a corresponding gain or loss recorded. The Company initially measured the acquired loan
portfolio at fair value, equal to the price paid to acquire the portfolio. The fair value of
the acquired loan portfolio was measured at $21.7 million. As a result of this transfer of
financial assets, no gain or loss was recorded.
21
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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, Washington, Idaho and Colorado. 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
as of March 31, 2010. Balances reported are net of intercompany items. Intercompany items relate
primarily to intercompany deposits and borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Consolidated |
|
Net interest income (expense) |
|
$ |
7,673 |
|
|
|
($1 |
) |
|
|
($155 |
) |
|
$ |
7,517 |
|
Provision for loan and lease losses |
|
|
2,250 |
|
|
|
|
|
|
|
|
|
|
|
2,250 |
|
Total noninterest income |
|
|
1,548 |
|
|
|
2,394 |
|
|
|
|
|
|
|
3,942 |
|
Total noninterest expense |
|
|
4,408 |
|
|
|
2,638 |
|
|
|
139 |
|
|
|
7,185 |
|
Income before provision for income taxes |
|
|
2,563 |
|
|
|
(245 |
) |
|
|
(294 |
) |
|
|
2,024 |
|
Provision for income taxes |
|
|
744 |
|
|
|
|
|
|
|
|
|
|
|
744 |
|
Net Income |
|
|
1,819 |
|
|
|
(245 |
) |
|
|
(294 |
) |
|
|
1,280 |
|
Less: Net loss attributable to non-controlling interest |
|
|
|
|
|
|
(255 |
) |
|
|
|
|
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
1,819 |
|
|
$ |
10 |
|
|
$ |
(294 |
) |
|
$ |
1,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Consolidated |
|
Total assets |
|
$ |
815,515 |
|
|
$ |
12,308 |
|
|
$ |
2,870 |
|
|
$ |
830,693 |
|
Total loans, gross |
|
$ |
606,559 |
|
|
$ |
|
|
|
$ |
2,425 |
|
|
$ |
608,984 |
|
Total deposits |
|
$ |
619,043 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
619,043 |
|
16. Common Stock Offering
On March 23, 2010, the Company filed a Form S-1/A Registration Statement (the Registration
Statement) with the SEC to offer 7,200,000 shares of our common stock in an underwritten public
offering (Offering). In the Registration Statement, we set out our intent to use the net proceeds
of the Offering for general corporate purposes, including contributing additional capital to the
Bank, supporting our ongoing and future anticipated growth, which may include opportunistic
acquisitions of all or parts of other financial institutions, including FDIC-assisted transactions,
and positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury
On March 29, 2010 the Company announced the successful closing of the offering. Our Company
received net proceeds from the offering of approximately $28.8 million, after underwriting
discounts and commissions and estimated expenses. 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 and expansion.
17. Subsequent Events
The Company has evaluated the effects of subsequent events that have occurred subsequent to period
end March 31, 2010 and has determined that there were no material recognized or non-recognized
subsequent events that require recognition or disclosure in our first quarter 2010 consolidated
financial statements or Notes to the financial statements.
22
|
|
|
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,
2009 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, 2009 to March 31, 2010. Also discussed are
significant trends and changes in the Companys results of operations for the three months ended
March 31, 2010, compared to the same period in 2009. 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 (Company,, Holding Company, We, or Us) 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). Our principal business is to serve as a
holding company for Redding Bank of Commercetm (Bank), which operates under
two separate names (Redding Bank of Commercetm and Roseville Bank of
Commercetm) and for Bank of Commerce Mortgagetm, our
majority-owned mortgage brokerage subsidiary. We also have two unconsolidated subsidiaries, Bank
of Commerce Holdings Trust and Bank of Commerce Holdings Trust II, which were organized in
connection with our prior issuances of trust preferred securities. Our common stock is traded on
the NASDAQ Global Market under the symbol BOCH.
The Company commenced banking operations in 1982 and currently operates four full service
facilities in two diverse markets in Northern California. We are proud of the Banks reputation as
one of Northern Californias premier banks for business. During 2007, we re-branded the Bank as
Bank of Commerce ï Bank of Choicetm reflecting a renewed commitment to
making the Bank the choice for local businesses with a fresh focus on family and personal finances.
We provide 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 in
California, such as free checking, interest-bearing checking and savings accounts, money market
deposit accounts, sweep arrangements, commercial, construction and 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 that affiliation.
In order to enhance our noninterest income, in May 2009 we acquired 51.0% of the capital stock of
Simonich Corporation, a successful state of the art mortgage broker of residential real estate
loans headquartered in San Ramon, California, with ten offices in three different states and
licenses in California, Oregon, Washington, Idaho and Colorado. The business was formed in 1993
and funds over $1.0 billion of first mortgages annually. The acquisition allows us to penetrate
into the mortgage brokerage services market at our current bank locations and to share in the
income on mortgage transactions nationwide. On July 1, 2009 we changed the mortgage companys name
to Bank of Commerce Mortgagetm in order to enhance our name recognition
throughout Northern California. The services offered by Bank of Commerce
Mortgagetm 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.
We continuously search for both organic and external expansion opportunities, through internal
growth, strategic alliances, acquisitions, establishing a new office or the delivery of new
products and services.
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Systematically, we will reevaluate the short and long-term profitability of all of our lines of
business, and will not hesitate to reduce or eliminate unprofitable locations or lines of business.
We remain a viable, independent bank committed to enhancing shareholder value. This commitment
has been fostered by proactive management and dedication to our staff, customers, and the markets
we serve.
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 a myriad of other financial entities that compete for our core
business. The flexibility provided by our status as a financial holding company has 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.
Our governance structure enables us to manage all major aspects of our business effectively through
an integrated process that includes financial, strategic, risk and leadership planning. Our
management processes, structures and policies and procedures help to ensure compliance with laws
and regulations and provide clear lines for decision-making and accountability. Results are
important, but we are equally concerned with 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.
Our primary business strategy is to provide comprehensive banking and related services to small and
mid-sized businesses, not-for-profit organizations, and professional service providers as well as
banking services for consumers, primarily business owners and their key employees. We emphasize
the diversity of our product lines and high levels of personal service and, through our technology,
offer convenient access typically associated with larger financial institutions, while maintaining
the local decision-making authority and market knowledge, typical of a local community bank.
Management intends to pursue our business strategy through the following initiatives:
Utilize the Strength of Our Management Team. The experience, depth and knowledge of our management
team represent one of our greatest strengths and competitive advantages. Our Senior Leadership
Committee establishes short and long-term strategies, operating plans and performance measures and
reviews our performance to plan on a monthly basis. Our Credit Round Table Committee recommends
corporate credit practices and limits, including industry concentration limits and approval
requirements and exceptions. Our Technology Steering Committee establishes technological
strategies, makes technology investment decisions, and manages the implementation process. Our
ALCO Round Table Committee establishes and monitors liquidity ranges, pricing, maturities,
investment goals, and interest spread on balance sheet accounts. Our SOX 404 Compliance Team has
established the master plan for full documentation of the Companys internal controls and
compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Leverage Our Existing Foundation for Additional Growth. Based on our managements depth of
experience and certain infrastructure investments, we believe that we will be able to take
advantage of certain economies of scale typically enjoyed by larger organizations to expand our
operations both organically and through strategic cost-effective avenues. We believe that there
will be significant opportunities to acquire failing institutions or their assets through loss
sharing agreements with the FDIC, buy branches from struggling banks in our market areas looking to
raise capital, and acquire entire franchises for little to no premium. We also believe that the
investments we have made in our data processing, staff and branch network will be able to support a
much larger asset base. We are committed, however, to control any additional growth in a manner
designed to minimize risk and to maintain strong capital ratios. We believe that the net proceeds
raised in this offering will assist us in implementing our growth strategies by providing the
capital necessary to support future asset growth, both organically and through strategic
acquisitions.
Maintain Local Decision-Making and Accountability. We believe we have a competitive advantage over
larger national and regional financial institutions by providing superior customer service with
experienced, knowledgeable management, localized decision-making capabilities and prompt credit
decisions. We believe that our customers want to deal directly with the people who make the
ultimate credit decisions and have provided our Bank managers and loan officers with the authority
commensurate with their experience and history which we believe strikes the right balance between
local decision-making and sound banking practice.
Focus on Asset Quality and Strong Underwriting. We consider asset quality to be of primary
importance and have taken measures to ensure that, despite the turbulent economy and growth in our
loan portfolio, we consistently maintain strong asset quality. As part of our efforts, we utilize
a third party loan review service to evaluate our loan portfolio on a quarterly basis and recommend
action on certain loans if deemed appropriate. As of March 31, 2010, we had $16.7 million in
nonperforming assets, including other real estate owned of $3.4 million, which as a percentage of
total assets was 2.02%. We also seek to maintain a prudent allowance for loan losses, which at
March 31, 2010 was $12.2 million, representing 2.0% of our loan portfolio.
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Build a Stable Core Deposit Base. We will continue to grow a stable core deposit base of business
and retail customers. In the event that our asset growth outpaces these local core deposit funding
sources, we will continue to utilize Federal Home Loan Bank borrowings and raise deposits in the
national market using deposit intermediaries. We intend to continue our practice of developing a
full deposit relationship with each of our loan customers, their business partners, and key
employees. We will continue to use hot spot consumer depositories with state of the art
technologies in highly convenient locations to enhance our core deposit base.
Our principal executive offices are located at 1901 Churn Creek Road, Redding, California and the
telephone number is (530) 722-3939.
Risk Factors
Our business is subject to various economic risks that could adversely impact our results of
operations and financial condition.
The financial markets and the financial services industry in particular suffered unprecedented
disruption, causing a number of institutions to fail or require government intervention to avoid
failure. These conditions were largely the result of the erosion of the United States and
international credit markets, including a significant and rapid deterioration in the mortgage
lending and related real estate markets and valuation levels. Unemployment nationwide and in
California has increased significantly through this economic downturn and is anticipated to
increase or remain elevated for the foreseeable future. Continued declines in real estate values,
high unemployment and financial stress on borrowers as a result of the uncertain economic
environment could have an adverse effect on our borrowers or their customers, which could adversely
affect our financial condition and results of operations.
We conduct banking operations principally in Northern California. As a result, our business
results are dependent in large part upon the business activity, population, income levels, deposits
and real estate activity in Northern California. There can be no assurance that the economic
conditions that have adversely affected the financial services industry, and the capital, credit
and real estate markets generally, will improve in the near term, in which case we could continue
to experience losses and write-downs of assets, and could face capital and liquidity constraints or
other business challenges. In addition, the State of California is currently experiencing
significant budgetary and fiscal difficulties, which include terminating and furloughing state
employees. The businesses operating in California and Sacramento in particular depend on these
state employees for business, and reduced spending activity by these state employees could have a
material impact on the success or failure of these businesses, some of which are current or
potential future customers of the Bank. A further deterioration in economic conditions,
particularly within our geographic region, could result in the following consequences, any of which
could have a material adverse effect on our business, prospects, financial condition and results of
operations:
|
|
|
Loan delinquencies may further increase causing additional increases in our provision
and allowance for loan losses; |
|
|
|
|
Financial sector regulators may adopt more restrictive practices or interpretations of
existing regulations, or adopt new regulations; |
|
|
|
|
Collateral for loans made by the Bank, especially real estate related, may continue to
decline in value, which in turn could reduce a clients borrowing power, and reduce the
value of assets and collateral associated with our loans held for investment; |
|
|
|
|
Consumer confidence levels may decline and cause adverse changes in payment patterns,
resulting in increased delinquencies and default rates on loans and other credit facilities
and decreased demand for our products and services; and |
|
|
|
|
Performance of the underlying loans in the private label mortgage backed securities we
hold may continue to deteriorate as the recession continues, potentially causing
other-than-temporary impairment markdowns to our investment portfolio. |
Nonperforming assets take significant time to resolve and adversely affect our results of
operations and financial condition.
Until economic and market conditions improve, we may expect to continue to incur losses relating to
an increase in nonperforming assets. We generally do not record interest income on nonperforming
loans or other real estate owned, thereby adversely affecting our income, and increasing our loan
administration costs. When we take collateral in foreclosures and similar proceedings, we are
required to mark the related asset to the then fair market value of the collateral, which may
ultimately result in a loss. An increase in the level of nonperforming assets increases our risk
profile and may impact the capital levels our regulators believe are appropriate in light of the
ensuing risk profile.
While we reduce problem assets through loan sales, workouts, restructurings and otherwise,
decreases in the value of the underlying collateral, or in these borrowers performance or
financial condition, whether or not due to economic and market conditions beyond our control, could
adversely affect our business, results of operations and financial condition.
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition, the resolution of nonperforming assets requires significant commitments of time from
management and our directors, which can be detrimental to the performance of their other
responsibilities. There can be no assurance that we will not experience future increases in
nonperforming assets.
We have a concentration risk in real estate related loans.
As a result of increased levels of commercial and consumer delinquencies and declining real estate
values, we have experienced increasing levels of net charge-offs. A large percentage of our loan
portfolio is secured by commercial real estate loans which generally carry larger loan balances and
historically have involved a greater degree of financial and credit risks than residential first
mortgage loans. These loans are primarily made based on the cash flow of the borrower and
secondarily on the underlying collateral provided by the borrower, and therefore repayment of these
loans is often dependent on the cash flow of the borrower which may be unpredictable. Continued
increases in commercial and consumer delinquency levels or continued declines in real estate market
values would require increased net charge-offs and increases in the allowance for loan and lease
losses, which could have a material adverse effect on our business, financial condition, results of
operations and prospects.
Monitoring and servicing our Individual Tax Identification Number (ITIN) residential mortgage
loans could prove more costly and time consuming than previously modeled.
In April 2009, we completed a loan swap transaction, whereby we exchanged, without recourse,
$14.0 million in certain nonperforming assets measured at fair value and cash of approximately
$67.0 million for a pool of performing ITIN loans with an estimated fair value of $80.7 million.
These loans are residential mortgage loans made to United States residents without a social
security number and are geographically dispersed throughout the United States. This is our first
ITIN loan transaction, and as such, is serviced through a third party. Worsening economic
conditions in the United States may cause us to suffer higher default rates on our ITIN loans and
reduce the value of the assets that we hold as collateral. In addition, if we are forced to
foreclose and service these ITIN properties ourselves, we may realize additional monitoring,
servicing and appraisal costs due to the geographic dispersement of the portfolio which would
adversely affect our noninterest expense.
Future loan losses may exceed the allowance for loan losses.
We have established a reserve for possible losses expected in connection with loans in the credit
portfolio. This allowance reflects estimates of the collectability of certain identified loans, as
well as an overall risk assessment of total loans outstanding. The determination of the amount of
loan loss allowance is subjective; although the method for determining the amount of the allowance
uses criteria such as risk ratings and historical loss rates, these factors may not be adequate
predictors of future loan performance, particularly in the current economic climate. Accordingly,
we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss
allowance will be sufficient to protect against losses that ultimately may occur. If the loan loss
allowance proves to be inadequate, we will need to make additional provisions to the allowance,
which is accounted for as charges to income, which would adversely impact results of operations and
financial condition. Moreover, bank regulators frequently monitor banks loan loss allowances, and
if regulators were to determine that the allowance was inadequate, they may require us to increase
the allowance, which also would adversely impact results of operations and financial condition.
Defaults may negatively impact us.
A source of risk arises from the possibility that losses will be sustained if a significant number
of borrowers, guarantors and related parties fail to perform in accordance with the terms of their
loans.
We have adopted underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, which management believes are
appropriate to minimize risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying the loan portfolio. These policies and procedures, however, may not
prevent unexpected losses that could materially affect our results of operations.
Interest rate fluctuations, which are out of our control, could harm profitability.
Our income is highly dependent on interest rate differentials and the resulting net interest
margins (i.e., the difference between the interest rates earned on the Banks interest-earning
assets such as loans and securities, and the interest rates paid on the Banks interest-bearing
liabilities such as deposits and borrowings). These rates are highly sensitive to many factors,
which are beyond our control, including general economic conditions, inflation, recession and the
policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board.
Because of our preference for using variable rate pricing on the majority of our loan portfolio
and non-interest bearing demand deposit accounts we are asset sensitive. As a result, we are
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.
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
These changes also affect the rates received on loans and securities and paid on deposits, which
could have a material adverse effect on our business, financial condition and results of
operations.
Changes in the fair value of our securities may reduce our stockholders equity and net income.
We increase or decrease shareholders equity by the amount of change from the unrealized gain or
loss (the difference between the estimated fair value and the amortized cost) of our
available-for-sale securities portfolio, net of the related tax, under the category of accumulated
other comprehensive income/loss. Therefore, a decline in the estimated fair value of this
portfolio will result in a decline in reported shareholders equity, as well as book value per
common share and tangible book value per common share. This decrease will occur even though the
securities are not sold. In the case of debt securities, if these securities are never sold and
there are no credit impairments, the decrease will be recovered over the life of the securities. In
the event there are credit loss related impairments, the credit loss component is recognized in
earnings.
Our available for sale equity holdings consist of shares of the Federal Home Loan Bank of San
Francisco (FHLB). As of March 31, 2010, we held stock in the FHLB totaling $6.1 million. The
stock is carried at cost and is subject to recoverability testing under applicable accounting
standards. As of March 31, 2010, we did not recognize an impairment charge related to our FHLB
stock holdings; however, future negative changes to the financial condition of the FHLB may require
us to recognize an impairment charge with respect to such stock holdings.
Conditions in the financial markets may limit our access to additional funding to meet our
liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the
needs of depositors and borrowers. An inability to raise funds through deposits, repurchase
agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of loans and
other assets could have a substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities could be impaired by factors that affect us
specifically or the financial services industry in general. Factors that could negatively affect
our access to liquidity sources include negative operating results, a decrease in the level of our
business activity due to a market downturn or negative regulatory action against us. Our ability
to borrow could also be impaired by factors that are not specific to us, such as severe disruption
of the financial markets or negative news and expectations about the prospects for the financial
services industry as a whole, as evidenced by turmoil in the domestic and worldwide credit markets
in recent years.
The condition of other financial institutions could negatively affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty,
public perceptions and other relationships. We have exposure to many different industries and
counterparties, and we routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks and other institutional
clients.
In the event there are credit loss related impairments, the credit loss component is recognized in
earnings. Many of these transactions expose us to credit risk in the event of a default by a
counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by
us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the credit or derivative exposure due to us. Any such losses could have a material adverse effect
on our financial condition and results of operations.
Changes in laws, government regulation and monetary policy may have a material effect on our
results of operations.
Financial institutions have been the subject of substantial legislative and regulatory changes and
may be the subject of further legislation or regulation in the future, none of which is within our
control. Significant new laws or regulations or changes in, or repeals of, existing laws or
regulations may cause our results of operations to differ materially. In addition, the cost and
burden of compliance with applicable laws and regulations have significantly increased and could
adversely affect our ability to operate profitably. Further, federal monetary policy significantly
affects credit conditions for us, as well as for our borrowers, particularly as implemented by the
Federal Reserve Board, primarily through open market operations in United States government
securities, the discount rate for bank borrowings and reserve requirements. A material change in
any of these conditions could have a material impact on us or our borrowers, and therefore on our
results of operations.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law.
Pursuant to the EESA, the Treasury was granted the authority to take a range of actions for the
purpose of stabilizing and providing liquidity to the United States financial markets and has
proposed several programs, including the purchase by the Treasury of certain troubled assets from
financial institutions and the direct purchase by the Treasury of equity of financial institutions.
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
There can be no assurance, however, as to the actual impact that the foregoing or any other
governmental program will have on the financial markets. The failure of the financial markets to
stabilize and a continuation or worsening of current financial market conditions could materially
and adversely affect our business, financial condition, results of operations, access to credit or
the trading price of our common stock. In addition, current initiatives of President Obamas
Administration and the possible enactment of recently proposed bankruptcy legislation may adversely
affect our financial condition and results of operations. There can be no assurance, however, as
to the actual impact that the foregoing or any other governmental program will have on the
financial markets.
The failure of the financial markets to stabilize and a continuation or worsening of current
financial market conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit and the trading price of our common stock.
We expect to face increased regulation and supervision of our industry as a result of the existing
financial crisis, and there will be additional requirements and conditions imposed on us to the
extent that we participate in any of the programs established or to be established by the Treasury
or by the federal bank regulatory agencies. Such additional regulation and supervision may
increase our costs and limit our ability to pursue business opportunities. The effects of such
recently enacted, and proposed, legislation and regulatory programs on us cannot reliably be
determined at this time.
Because of our participation in the Troubled Asset Relief Program we are subject to several
restrictions including, without limitation, restrictions on our ability to declare or pay dividends
and repurchase our shares as well as restrictions on compensation paid to our executives.
On November 14, 2008, in exchange for an aggregate purchase price of $17.0 million, we issued and
sold to the Treasury pursuant to the Trouble Asset Relief Program (TARP) Capital Purchase Program
the following: (i) 17,000 shares of our newly designated Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, no par value per share and liquidation preference $1,000 per share (Series A
Preferred Stock) and (ii) a warrant to purchase up to 405,405 shares of our common stock, no par
value per share, at an exercise price of $6.29 per share, subject to certain anti-dilution and
other adjustments. The warrant may be exercised for up to ten years after issuance.
In connection with the issuance and sale of our securities, we entered into a Letter Agreement
including the Securities Purchase Agreement Standard Terms, dated November 14, 2008, with the
Treasury (Agreement). The Agreement contains limitations on the payment of quarterly cash
dividends on our common stock in excess of $0.08 per share, and on our ability to repurchase our
common stock.
Our Series A Preferred Stock diminishes the net income available to our common shareholders and
earnings per common share.
The dividends accrued on the Series A Preferred Stock reduce the net income available to common
stockholders and our earnings per common share. The Series A Preferred Stock is cumulative, which
means that any dividends not declared or paid will accumulate and will be payable when the payment
of dividends is resumed. The dividend rate on the Series A Preferred Stock will increase from 5%
to 9% per annum five years after its original issuance if not earlier redeemed. If we are unable
to redeem the Preferred Stock prior to the date of this increase, the cost of capital to us will
increase substantially. Depending on our financial condition at the time, this increase in the
Series A Preferred Stock annual dividend rate could have a material adverse effect on our earnings
and could also adversely affect our ability to pay dividends on our common shares. Shares of Series
A Preferred Stock will also receive preferential treatment in the event of the liquidation,
dissolution or winding up of the Company.
Finally, the terms of the Series A Preferred Stock allow the Treasury to impose additional
restrictions, including those on dividends and unilateral amendments required to comply with
changes in applicable federal law.
Our holders of the Series A Preferred Stock have certain voting rights that may adversely affect
our common shareholders, and the holders of the Series A Preferred Stock may have interests
different from our common shareholders.
In the event that we fail to pay dividends on the Series A Preferred Stock for a total of at least
six quarterly dividend periods (whether or not consecutive), the Treasury will have the right to
appoint two directors to our Board of Directors until all accrued but unpaid dividends has been
paid. Otherwise, except as required by law, holders of the Series A Preferred Stock have limited
voting rights.
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
So long as shares of Series A Preferred Stock are outstanding, in addition to any other vote or
consent of shareholders required by law or our Articles of Incorporation, the vote or consent of
holders of at least 66-2/3% of the shares of Series A Preferred Stock outstanding is required for:
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Any authorization or issuance of shares ranking senior to the Series A Preferred Stock; |
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Any amendments to the rights of the Series A Preferred Stock so as to adversely affect
the rights, preferences, privileges or voting power of the Series A Preferred Stock; or |
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Consummation of any merger, share exchange or similar transaction unless the shares of
Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such
transaction, are converted into or exchanged for preference securities of the surviving
entity and the shares of Series A Preferred Stock remaining outstanding or such preference
securities have the rights, preferences, privileges and voting power of the Series A
Preferred Stock. |
The holders of our Series A Preferred Stock, including the Treasury, may have different interests
from the holders of our common stock, and could vote to block the foregoing transactions, even when
considered desirable by, or in the best interests of, the holders of our common stock.
We rely heavily on our management team and the loss of key officers may adversely affect
operations.
Our success has been and will continue to be greatly influenced by the ability to retain existing
senior management and, with expansion, to attract and retain qualified additional senior and middle
management. We recently had a number of changes in our senior management team, including the
promotions of our new Chief Financial Officer and Chief Operating Officer and the appointment of a
new Chief Risk Officer. The departure of any of our senior management could have an adverse effect
on us.
Our participation in the TARP Capital Purchase Program could also have an adverse effect on our
ability to attract and retain qualified executive officers. Legislation and rules applicable to the
TARP Capital Purchase Program participants include extensive new restrictions on our ability to pay
retention awards, bonuses and other incentive compensation to our Chief Executive Officer during
the period in which the Series A Preferred Stock is outstanding. Other restrictions are not limited
to our Chief Executive Officer and cover other employees whose contributions to revenue and
performance can be significant.
The limitations may adversely affect our ability to recruit and retain these key employees in
addition to our senior executive officers, especially if we are competing for talent against
institutions that are not subject to the same restrictions.
The Federal Reserve, and perhaps the FDIC, is contemplating proposed rules governing the
compensation practices of financial institutions and these rules, if adopted, may adversely affect
our management retention and limit our ability to promote our objectives through our compensation
and incentive programs and, as a result, adversely affect our results of operations and financial
condition.
The full scope and impact of these limitations is uncertain and difficult to predict. The Secretary
of the Treasury has adopted standards that implement certain compensation limitations, but these
standards have not yet been broadly interpreted and remain, in many respects, ambiguous. The new
and potential future legal requirements and implementing standards under the Capital Purchase
Program may have unforeseen or unintended adverse effects on the financial services industry as a
whole, and particularly on Capital Purchase Program participants, including us. It will likely
require significant time, effort and resources on our part to interpret and apply them. If any of
our regulators believe that we are not in compliance with new and future legal requirements and
implementing standards, it could subject us to regulatory actions or otherwise adversely affect our
management retention and, as a result, our results of operations and financial condition.
Even if we redeem our Series A Preferred Stock and repurchase the warrant issued to the
Treasury, we will continue to be subject to evolving legal and regulatory requirements that may,
among other things, require increasing amounts of our time, effort and resources to ensure
compliance.
Internal control systems could fail to detect certain events.
We are subject to many operating risks, including, without limitation, data processing system
failures and errors, and customer or employee fraud. There can be no assurance that such an event
will not occur, and if such an event is not prevented or detected by our other internal controls
and does occur, and it is uninsured or is in excess of applicable insurance limits, it could have a
significant adverse impact on our reputation in the business community and our business, financial
condition and results of operations.
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Our operations could be interrupted if third party service providers experience difficulty,
terminate their services or fail to comply with banking regulations.
We depend, and will continue to depend to a significant extent, on a number of relationships with
third-party service providers. Specifically, we utilize software and hardware systems for
processing, essential web hosting, debit and credit card processing, merchant processing, Internet
banking systems and other processing services from third-party service providers. If these
third-party service providers experience difficulties or terminate their services, and we are
unable to replace them with other qualified service providers, our operations could be interrupted.
If an interruption were to continue for a significant period of time, our business, financial
condition and results of operations could be materially adversely affected.
Confidential customer information transmitted through the Banks online banking service is
vulnerable to security breaches and computer viruses, which could expose the Bank to litigation and
adversely affect its reputation and ability to generate deposits.
The Bank provides its customers the ability to bank online. The secure transmission of confidential
information over the Internet is a critical element of online banking. The Banks network could be
vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems.
The Bank may be required to spend significant capital and other resources to protect against the
threat of security breaches and computer viruses, or to alleviate problems caused by security
breaches or viruses. To the extent that the Banks activities or the activities of its customers
involve the storage and transmission of confidential information, security breaches and viruses
could expose us and the Bank to claims, litigation and other possible liabilities. Any inability to
prevent security breaches or computer viruses could also cause existing customers to lose
confidence in the Banks systems and could adversely affect its reputation and our ability to
generate deposits.
Potential acquisitions may disrupt our business and dilute shareholder value.
We continuously consider merger and acquisition opportunities and conduct due diligence activities
related to possible transactions with other financial institutions. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and future mergers or
acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions
typically involve the payment of a premium over book and market values, and, therefore, some
dilution of our stocks tangible book value and net income per common share may occur in connection
with any future transaction. In addition, while loss sharing arrangements currently associated with
FDIC-assisted transactions provide some level of risk reduction; these arrangements do not
completely eliminate risk. To the extent we would participate in an FDIC-assisted transaction there
can be no assurances that any positive expected results of such a transaction would fully
materialize.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an acquisition could have a
material adverse effect on our financial condition and results of operations. We may seek merger or
acquisition partners that are culturally similar, have experienced management and possess either
significant market presence or have potential for improved profitability through financial
management, economies of scale or expanded services. We do not currently have any specific plans,
arrangements or understandings regarding such expansion.
We cannot say with certainty that we will be able to consummate, or if consummated, successfully
integrate future acquisitions or that we will not incur disruptions or unexpected expenses in
integrating such acquisitions. In attempting to make such acquisitions, we anticipate competing
with other financial institutions, many of which have greater financial and operational resources
than us. Acquiring other banks, businesses, or branches involves various risks commonly associated
with acquisitions, including, among other things:
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Potential exposure to unknown or contingent liabilities of the target company; |
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Exposure to potential asset quality issues of the target company; |
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Difficulty and expense of integrating the operations and personnel of the target
company; |
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Potential disruption to our business; |
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The possible loss of key employees and customers of the target company; |
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Difficulty in estimating the value of the target company; and |
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Potential changes in banking or tax laws or regulations that may affect the target
company. |
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
We are subject to extensive regulation which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. Given the current disruption in the
financial markets and potential new regulatory initiatives, including the Obama Administrations
recent financial regulatory reform proposal, new regulations and laws that may affect us are
increasingly likely. Because our business is highly regulated, the laws, rules and regulations
applicable to us are subject to modification and change. There are currently proposed laws, rules
and regulations that, if adopted, would impact our operations.
These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted
in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our
ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or
restrict the amount of commissions, interest or other charges earned on loans originated or sold by
us, or (iv) otherwise adversely affect our business or prospects for business. Moreover, banking
regulators have significant discretion and authority to address what regulators perceive to be
unsafe or unsound practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement duties. The exercise of
regulatory authority by banking regulators over us may have a negative impact on our financial
condition and results of operations. Additionally, in order to conduct certain activities,
including acquisitions, we are required to obtain regulatory approval. There can be no assurance
that any required approvals can be obtained, or obtained without conditions or on a timeframe
acceptable to us.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
We expect to pay significantly higher FDIC premiums in the future. As the large number of recent
bank failures continues to deplete the Deposit Insurance Fund, the FDIC adopted a revised
risk-based deposit insurance assessment schedule in February 2009, which raised deposit insurance
premiums. In addition, the FDIC recently approved a rule requiring financial institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010
through and including 2012 in order to re-capitalize the Deposit Insurance Fund. Accordingly, the
Bank prepaid deposit insurance premiums in the amount of $3.1 million on March 31, 2010. The rule
also provides for increasing the FDIC assessment rates by three basis points effective January 1,
2011. There can be no assurance that the FDIC will not increase premiums further or levy additional
special assessments, either of which could have a material adverse effect on our results of
operations and financial condition.
Shares eligible for future sale could have a dilutive effect.
Shares of our common stock eligible for future sale, including those that may be issued in
connection with our various stock option and equity compensation plans, in possible acquisitions,
and any other offering of our common stock for cash, and the issuance of 405,405 shares underlying
the warrant issued to the Treasury pursuant to the TARP Capital Purchase Program, could have a
dilutive effect on the market for our common stock and could adversely affect its market price. Our
Articles of Incorporation authorize 50,000,000 shares of which 15,911,495 shares were outstanding
as of March 31, 2010. In addition there are 282,080 shares subject to common stock options
outstanding with a weighted average exercise price of $8.46 per share.
Changes in accounting standards may impact how we report our financial condition and results of
operations.
Our accounting policies and methods are fundamental to how we record and report our financial
condition and results of operations. From time to time, the Financial Accounting Standards Board
changes the financial accounting and reporting standards that govern the preparation of our
financial statements. These changes can be difficult to predict and can materially impact how we
record and report our financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in a restatement of prior
period financial statements.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to
the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural
disasters could harm our operations directly through interference with communications, including
the interruption or loss of our websites, which would prevent us from gathering deposits,
originating loans and processing and controlling our flow of business, as well as through the
destruction of facilities and our operational, financial and management information systems.
California has also experienced energy shortages, which, if they recur, could impair the value of
the real estate in those areas affected. Although we have implemented several back-up systems and
protections and maintain business interruption insurance, these measures may not protect us fully
from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in
California could have a material adverse effect on our business, prospects, financial condition and
results of operations.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell shares of common stock owned by you at times or at prices you find attractive.
Stock price volatility may make it difficult for you to resell your common stock when you want and
at prices you find attractive. Our stock price can fluctuate significantly in response to a variety
of factors including, among other things:
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Actual or anticipated variations in quarterly results of operations; |
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Recommendations by securities analysts; |
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Operating and stock price performance of other companies that investors deem comparable
to us; |
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News reports relating to trends, concerns and other issues in the financial services
industry, including the failures of other financial institutions in the current economic
downturn; |
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Perceptions in the marketplace regarding us and/or our competitors; |
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Public sentiments toward the financial services and banking industry generally; |
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New technology used, or services offered, by competitors; |
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Significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our competitors; |
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Failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
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Changes in government regulations; and |
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Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and
events, such as economic slowdowns or recessions, interest rate changes or credit loss trends,
could also cause our stock price to decrease regardless of operating results as evidenced by the
current volatility and disruption of capital and credit markets.
Our profitability measures could be adversely affected if we are unable to effectively deploy the
capital raised in our latest offering.
On March 23, 2010, we filed a Form S-1/A Registration Statement (the Registration Statement) with
the SEC to offer 7,200,000 shares of our common stock in an underwritten public offering
(Offering). In the Registration Statement, we set out our intent to use the net proceeds of the
Offering for general corporate purposes, including contributing additional capital to the Bank,
supporting our ongoing and future anticipated growth, which may include opportunistic acquisitions
of all or parts of other financial institutions, including FDIC-assisted transactions, and
positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement.
On March 29, 2010 the Company announced the successful closing of the offering. The Company
received net proceeds from the offering of approximately $28.8 million, after underwriting
discounts and commissions and estimated expenses. The shares were sold in an underwritten public
offering by Howe Barnes Hoefer & Arnett, Inc. acting as lead manager. There can be no assurance
that we will be able to negotiate future acquisitions on terms acceptable to us. Investing the
proceeds of the Offering in investment grade securities until we are able to deploy the proceeds
would provide lower margins than we generally earn on loans, potentially adversely impacting
shareholder returns, including earnings per share, net interest margin, return on assets and return
on equity.
Only a limited trading market exists for our common stock, which could lead to significant price
volatility.
Our common stock is traded on the NASDAQ Global Market under the trading symbol BOCH, but there
have historically been low trading volumes in our common stock. The limited trading market for our
common stock may cause fluctuations in the market value of our common stock to be exaggerated,
leading to price volatility in excess of that which would occur in a more active trading market of
our common stock. Future sales of substantial amounts of common stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing market price of the
common stock. In addition, even if a more active market in our common stock develops, we cannot
assure you that such a market will continue.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Anti-takeover provisions in our articles of incorporation could make a third party acquisition
of us difficult.
In order to approve a merger or similar business combination with the owner of 20% or more of our
common stock (an Interested Shareholder), our Articles of Incorporation contain provisions that
would require a supermajority vote of 66-2/3% of the outstanding shares of the common stock
(excluding the shares held by the Interested Shareholder or its affiliates). These provisions
further require that the per share consideration to be paid in such a transaction would have to
equal or exceed the greater of (a) the highest per share price paid by the Interested Shareholder
(i) within two years of the transaction proposal announcement date, or (ii) the date the Interested
Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two
years before the transaction announcement) and (b) the fair market value of the Common Stock on (i)
the transaction proposal announcement date, or (ii) the date the Interested Shareholder acquired a
20% -plus ownership interest (if the acquisition occurred less than two years before the
transaction announcement).
The operation of these provisions could result in the Company becoming a less attractive target for
a would-be acquirer. As a consequence, it is possible that shareholder would lose an opportunity to
be paid a premium for their shares in an acquisition transaction.
There may be future sales or other dilutions of our equity which may adversely affect the market
price of our common stock.
We are not restricted from issuing additional shares of common stock, including securities that are
convertible into or exchangeable for, or that represent the right to receive our common stock. In
addition, we are not prohibited from issuing additional securities which are senior to our common
stock. Because our decision to issue securities in any future offering will depend in part on
market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of any future offerings other than the Offering. Thus, our shareholders bear the
risk of any future stock issuances reducing the market price of our common stock and diluting their
stock holdings in us.
The exercise of the underwriters over-allotment option to be granted in connection with the
Offering, the exercise of any options granted to our directors and employees, the exercise of the
outstanding warrants for our common stock as referenced above, the issuance of shares of common
stock in acquisitions and other issuances of our common stock could have an adverse effect on the
market price of the shares of our common stock. In addition, the existence of options and warrants
to acquire shares of our common stock may materially adversely affect the terms upon which we may
be able to obtain additional capital in the future through the sale of equity securities. Any
future issuances of shares of our common stock will be dilutive to existing shareholders.
The holders of our preferred stock and trust preferred securities have rights that are senior to
those of our holders of common stock and that may impact our ability to pay dividends on our common
stock to our common shareholders and reduce net income available to our common shareholders.
At March 31, 2010, our subsidiary trusts had outstanding $15.0 million of trust preferred
securities. These securities are effectively senior to shares of common stock due to the priority
of the underlying junior subordinated debt. As a result, we must make payments on our trust
preferred securities before any dividends can be paid on our common stock; moreover, in the event
of our bankruptcy, dissolution, or liquidation, the obligations outstanding with respect to our
trust preferred securities must be satisfied before any distributions can be made to our
shareholders. While we have the right to defer dividends on the trust preferred securities for a
period of up to five years, if any such election is made, no dividends may be paid to our common or
preferred shareholders during that time.
We are required to pay cumulative dividends on the $17.0 million in Series A Preferred Stock issued
to the Treasury in the TARP Capital Purchase Program at an annual rate of 5% for the first five
years and 9% thereafter, unless we redeem the shares earlier. We may not declare or pay dividends
on our common stock or repurchase shares of our common stock without first having paid all accrued
cumulative preferred dividends that are due. Until January 2012, we also may not increase our per
share common stock dividend rate or repurchase shares of our common shares without the Treasurys
consent, unless the Treasury has transferred to third parties all the Series A Preferred Stock
originally issued to it.
Our future ability to pay dividends and repurchase stock is subject to restrictions.
Since we are a holding company with no significant assets other than the Bank and our
majority-owned mortgage company, we have no material source of income other than dividends received
from the Bank and the mortgage company. Therefore, our ability to pay dividends to our shareholders
will depend on the Banks and mortgage companys ability to pay dividends to us. Moreover, banks
and financial holding companies are both subject to certain federal and state regulatory
restrictions on cash dividends. We are also restricted from paying dividends if we have deferred
payments of the interest on, or an event of default has occurred with respect to, our trust
preferred securities or Series A Preferred Stock. Additionally, terms and conditions of our Series
A Preferred Stock place certain restrictions and limitations on our common stock dividends and
repurchases of our common stock.
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Potential Volatility of Deposits
The Banks depositors could choose to withdraw their deposits from the Bank and then put it into
alternative investments, causing an increase in our 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.
At March 31, 2010, time certificates of deposit in excess of $100,000 represented approximately
40.06% 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 our profitability, business prospects, results of
operations and cash flows. The Company monitors activity of volatile liability deposits on a
quarterly basis.
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 or acquisitions, and from actions taken by
government regulators and community organizations in response to that conduct.
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, our subsidiary mortgage banking revenue continued to be
strong. 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 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, 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, with a corresponding impact on origination fees.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Executive Overview
Our Company was established to make a profitable return while serving the financial needs of the
business and professional communities which make up our markets. We are in the financial services
business, and no line of financial services is beyond our charter so long as it serves the needs of
our customers. Our mission is to provide our shareholders with a safe and profitable return on
investment over the long term. Management will attempt to minimize risk to our shareholders by
making prudent business decisions, maintaining adequate levels of capital and reserves, and
communicating effectively with shareholders.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to both maintain 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 our status as a Financial Holding Company 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.
It is also our vision of the Company to remain independent, expanding our presence through internal
growth and the addition of strategically important full service and focused service locations. We
will pursue attractive opportunities to enter related lines of business and to acquire financial
institutions with complementary lines of business. We will strive to continue our expansion into
profitable markets in order to build franchise value. We will distinguish ourselves from the
competition by a commitment to efficient delivery of products and services in our target markets
to businesses and professionals, while maintaining personal relationships with mutual loyalty.
Our long term success rests on the shoulders of the leadership team and its ability to effectively
enhance the performance of the Company. As a financial services company, we are in the business of
taking and managing risks. Whether we are successful depends largely upon whether we take the
right risks and get paid appropriately for those risks. 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,
2009, under the heading Risk Management.
Sources of Income
We derive our income from two principal sources: (i) net interest income, which is the difference
between the interest income we receive on interest-earning assets and the interest expense we pay
on interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit
services, income from payroll processing, electronic-based cash management services, mortgage
brokerage fee income and merchant credit card processing services. Our income depends to a great
extent on net interest income. These interest rate characteristics are highly sensitive to many
factors, which are beyond our control, including general economic conditions, inflation, recession,
and the policies of various governmental and regulatory agencies, and the Federal Reserve Board in
particular. Because of our predisposition to variable rate pricing on our assets and level of time
deposits, we are considered asset sensitive. Consequently, we benefit in a rising rate environment
and we are affected adversely by declining interest rates.
Net interest income reflects both our net interest margin, which is the difference between the
yield we earn on our assets and the interest rate we pay for deposits and our other sources of
funding, and the amount of earning assets we hold. As a result, changes in either our net interest
margin or the amount of earning assets we hold could affect our net interest income and our
earnings.
Increase or decreases in interest rates could adversely affect our net interest margin. Although
the yield we earn on our assets 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, and cause our
net interest margin to expand or contract. Many of our assets are tied to prime rate, so they may
adjust faster in response to changes in interest rates. As a result, when interest rates fall, the
yield we earn on our assets may fall faster than the repricing opportunities of our liabilities,
causing our net interest margin to contract until the repricing of liabilities catches up.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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,
which means 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, we could
experience pressure on our net interest margin as our cost of funds increases relative to the yield
we can earn on our assets.
We assess our interest rate risk by estimating the effect on our earnings under various scenarios
that differ based on assumptions about the direction, magnitude and speed of interest rate changes
and the slope of the yield curve.
There is always the risk that changes in interest rates could reduce our net interest income and
our earnings in material amounts, especially if actual conditions turn out to be materially
different than what we assumed. For example, if interest rates rise or fall faster than we assumed
or the slope of the yield curve changes, we may incur significant losses on debt securities we hold
as investments. To reduce our interest rate risk, we may rebalance our investment and loan
portfolios, refinance our debt and take other strategic actions which may result in losses or
expenses.
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, Washington, Idaho and Colorado. Mortgages that are originated
are sold, servicing included, in the secondary market or directly to correspondent financial
institutions. We derive fee income from our mortgage brokerage services.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Profitability |
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.75 |
% |
|
|
0.66 |
% |
Return on average equity |
|
|
8.76 |
% |
|
|
8.05 |
% |
Average earning assets to total average assets |
|
|
89.51 |
% |
|
|
93.80 |
% |
Interest Margin |
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.12 |
% |
|
|
3.55 |
% |
Asset Quality |
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
|
|
2.00 |
% |
|
|
1.45 |
% |
Nonperforming assets to total assets |
|
|
2.02 |
% |
|
|
2.94 |
% |
Net charge-offs to average loans |
|
|
0.20 |
% |
|
|
0.41 |
% |
Liquidity |
|
|
|
|
|
|
|
|
Loans to deposits |
|
|
98.38 |
% |
|
|
97.25 |
% |
Liquidity ratio |
|
|
49.78 |
% |
|
|
43.16 |
% |
Capital |
|
|
|
|
|
|
|
|
Tier 1 risk-based capital Bank |
|
|
15.35 |
% |
|
|
11.44 |
% |
Total risk-based capital Bank |
|
|
16.61 |
% |
|
|
12.69 |
% |
Tier 1 risk-based capital Company |
|
|
14.90 |
% |
|
|
11.45 |
% |
Total risk-based capital Company |
|
|
16.16 |
% |
|
|
12.70 |
% |
Efficiency |
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
60.39 |
% |
|
|
54.48 |
% |
Financial Highlights Results of Operations
Balance Sheet
Due to conservative loan underwriting, active servicing of problem credits, and maintenance of a
healthy net interest margin, we have remained profitable during the recent economic downturn and
positioned our Company to take advantage of growth opportunities in the coming years. For the
first quarter 2010 we recorded net income attributable to Bank of Commerce Holdings of $1.5
million, and net income available to common stockholders of $1.3 million, or $0.15 per diluted
share, after deducting preferred dividend payments made to the Treasury and accretion of preferred
shares under the TARP Capital Purchase Program. This was an increase from $1.0 million of net
income, or $0.12 per diluted share, reported in the first quarter 2009. As of March 31, 2010, we
had total assets of $830.7 million, total loans of $609.0 million, an allowance for loan and lease
losses of $12.2 million, or 2.00% of total loans, deposits outstanding of $619.0 million and
stockholders equity of $97.8 million.
On March 12, 2010, the Company completed a loan swap transaction accounted for as a transfer
of financial assets, which included the purchase of a pool of residential mortgage home equity
loans with an estimated fair value of $21.8 million. The residential mortgage home equity loan
portfolio (portfolio) was purchased from a private equity firm in exchange for a combination of
approximately $7.0 million in carry value of certain impaired loans and cash of approximately $14.8
million. The impaired loans were transferred without recourse and were carried at fair value prior
to the exchange, in accordance with accounting standards.
The real estate development properties and construction related portfolio is showing some signs of
stability but generally remains under stress. The Companys Commercial and Industrial portfolio has
weakened, especially those borrowers tied to real estate. Our loan portfolio will likely continue
to be influenced by weakness in real estate values, the effects of high unemployment levels, and
general overall weakness in economic conditions. Net charge offs were $1.3 million for the three
month period ended at March 31, 2010 compared to net charge offs of $2.2 million for the same
period a year ago. The charge-offs were centered in real estate loans and commercial & industrial
loans. OREO was $3.4 million at March 31, 2010 and $2.9 million for the same period a year ago. We
are committed to working with our customers to find potential solutions when our customers
experience financial difficulties.
Our Company has provided $2.3 million in provisions for loan and lease losses for the three months
ended March 31, 2010 compared to $1.4 million for the same period a year ago. The Companys
allowance for loan losses was 2.00% of total portfolio loans at March 31, 2010 compared to 1.45% 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 three months ended March 31, 2010, the
Company has recorded approximately $931 thousand in realized gains on sales of securities. Proceeds
from the sales were used to fund loan growth.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On March 23, 2010, we filed a Form S-1/A Registration Statement (the Registration Statement) with
the SEC to offer 7,200,000 shares of our common stock in an underwritten public offering
(Offering). In the Registration Statement, we set out our intent to use the net proceeds of the
Offering for general corporate purposes, including contributing additional capital to the Bank,
supporting our ongoing and future anticipated growth, which may include opportunistic acquisitions
of all or parts of other financial institutions, including FDIC-assisted transactions, and
positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement. On March 29, 2010 the Company announced
the successful closing of the Offering. The Company received net proceeds from the offering of
approximately $28.8 million, after underwriting discounts and commissions and estimated expenses.
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 June 30, 2010. 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 Companys common stockholders for the first quarter of 2010 totaled
$1.3 million, an increase of 25.9% from the $1.0 reported for the same quarterly period of 2009. On
the same basis diluted earnings per common share for the first quarter of 2010 was $0.15, compared
to $0.12 for the same period of 2009. Return on average assets (ROA) and return on average equity
(ROE) for the first quarter of 2010 were 0.75% and 8.76%, respectively, compared with 0.66% and
8.05%, respectively, for the first quarter of 2009.
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 March 31, 2010 was $7.5 million compared with $6.4 million for the same period in
2009, an increase of 17.5%.
Average earning assets for the three-months ended March 31, 2010 increased $9.0 million or 1.3%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $92.3 million or 17.6% on average compared with the prior year period.
Average loan yields decreased by 27 basis points to 5.87% during the period; the decrease in
average loan yields is primarily due to the repricing of existing loans.
Average deposits and borrowings increased by $37.7 million over the same period a year ago. The
yield on funding costs decreased to 1.57% compared with 2.13% for the same period a year ago. The
downward repricing of deposits, especially time deposits, and Federal Home Loan Bank borrowings are
the main contributors to the overall reduction in the companys cost of funds.
A combination of reduced funding costs and an increase in the volume of higher yielding earning
assets significantly improved the companys net interest margin. Average interest bearing
liabilities increased $37.7 million while total interest expense decreased $0.7 million or 56 basis
points to 1.57% from the same period a year ago. Average loans increased by $92.3 and contributed
over $1.0 million to the margin in comparison to the same period a year ago. The additional
interest income from the loan portfolio offset the $0.6 million decrease in interest income from
the investment portfolio. The net result was an increase to the net interest margin of $1.1 million
over the prior year for the three month period ended March 31, 2010.
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.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 securities available-for-sale, the ability to sell loans in the secondary market
and to pledge loans to access secured borrowing lines of credit with the Federal Home Loan Bank,
Federal Reserve 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. Additional funding is provided by long-term debt (including trust preferred
securities).
The Companys consolidated liquidity position remains adequate to meet short-term and long-term
future contingencies. At March 31, 2010, the Company had available lines of credit at the Federal
Home Loan bank and Federal Reserve Bank of San Francisco of approximately $108.7 million and $58.7
million, respectively. The Company also has a $10.0 million federal funds borrowing line with a
correspondent bank.
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.
On March 23, 2010, we filed a Form S-1/A Registration Statement (the Registration Statement) with
the SEC to offer 7,200,000 shares of our common stock in an underwritten public offering
(Offering). In the Registration Statement, we set out our intent to use the net proceeds of the
Offering for general corporate purposes, including contributing additional capital to the Bank,
supporting our ongoing and future anticipated growth, which may include opportunistic acquisitions
of all or parts of other financial institutions, including FDIC-assisted transactions, and
positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement. On March 29, 2010 the Company announced
the successful closing of the Offering. The Company received net proceeds from the Offering of
approximately $28.8 million, after underwriting discounts and commissions and estimated expenses.
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.
As of March 31, 2010, 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.
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
March 31, 2010 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
109,035,988 |
|
|
|
13.59 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
109,035,988 |
|
|
|
14.90 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Total Risk-Based |
|
|
118,226,009 |
|
|
|
16.16 |
% |
|
|
n/a |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
102,055,282 |
|
|
|
12.72 |
% |
|
|
5.0 |
% |
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
102,055,282 |
|
|
|
15.35 |
% |
|
|
6.0 |
% |
|
|
4.0 |
% |
Total Risk-Based |
|
|
110,418,793 |
|
|
|
16.61 |
% |
|
|
10.0 |
% |
|
|
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 March 31, 2010, the Companys FHLB
advances were of fixed term borrowings without call or put option features.
At March 31, 2010, the Bank had $70 million in FHLB advances outstanding at an average rate of
0.18% compared to $120 million at an average rate of 1.92% at March 31, 2009. Deposit growth
provided for the repayment of $50.0 million in short term borrowings.
Allowance 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 non-performing loans and cash. 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. 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 March 31, 2010 and December 31, 2009, the
Company had pledged $196,687,478 and $101,271,858, 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.
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 and regulatory reviews.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 $2,250,000 were provided for the three-months ended March
31, 2010 compared with $1,425,000 for the three-months ended March 31, 2009. The Companys
allowance for loan and lease losses was 2.0% of total loans at March 31, 2010, 1.86% at December
31, 2009 and 1.45% at March 31, 2009, while its ratio of non-performing assets to total assets was
2.02% at March 31, 2010, 2.27% at December 31, 2009, and 2.94% at March 31, 2010.
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 2009 Annual Report
on Form 10-K.
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 2009 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.
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Our significant accounting principles are essential to understanding Managements Discussion and
Analysis of Results of Operations and Financial Condition and are described the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in the Companys 2009 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 2009 Annual Report on Form 10-K require management to make difficult,
subjective or complex judgments or estimates.
General
Bank of Commerce Holdings consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP). The financial
information contained within our statements is, to a significant extent, financial information that
is based on measures of the financial effects of transactions and events that have already
occurred. Some of our accounting principles require significant judgment to estimate values of
assets or liabilities. In addition, certain accounting principles require significant judgment in
applying the complex accounting principles to transactions to determine the most appropriate
treatment.
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 2009
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 a material adverse 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) loss in the results of operations in the period in which
the determination occurred. An investment is impaired if the fair value of the investment is less
than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized
loss. When an investment is impaired, the impairment is evaluated to determine whether it is
temporary or other-than-temporary. 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 differences 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.
42
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 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) our intent and ability to retain the 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.
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) Losses are to be accrued when they are probable of occurring and estimable and
(2) 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 managements estimate of credit losses inherent in the loan portfolio at the
balance sheet date and excludes loans carried at fair value. The process for determining adequacy
of the allowance for loan and lease losses is critical to our financial results. It requires
difficult, subjective and complex judgments, as a result of the need to make estimates about the
effect of matters that are uncertain. Managements estimate of each 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 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 (weighted heavily towards
the current economic cycle), 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, 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, we 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 economic and environmental factors.
Management considers any and all factors that are likely to cause estimated losses to differ from
historical loss experience, including, but not limited to:
|
|
|
Changes in lending policies and procedures, including underwriting, collection,
charge-off and recovery practices not considered elsewhere in estimating credit losses; |
|
|
|
|
Changes in regional, local and business conditions and developments that affect the
collectability of loans, including the conditions of various market segments; |
|
|
|
|
Changes in the nature and volume of the loan portfolio and in the terms of loans; |
|
|
|
|
Changes in the experience, ability and depth of lending management and other relevant
staff; |
|
|
|
|
Changes in the volume and severity of past due loans, the volume of nonaccrual loans and
the volume and severity of adversely classified or graded loans; |
|
|
|
|
Changes in the quality of the Companys loan review systems or the degree of oversight
by the board of directors; |
|
|
|
|
Changes in the value of underlying collateral for all collateral dependent loans; |
|
|
|
|
The existence and effects of any concentrations of credit and changes in the level of
such concentrations; |
|
|
|
|
The effect of other external factors such as competition and legal and regulatory
requirements on the level of estimated credit losses; |
|
|
|
|
Loan loss history over the past 18 months has contributed significantly to the
percentage of loss allocations. Accordingly the loan loss history component of the
provision for loan and lease losses has been adjusted to weight toward recent history with
80% of the allocation to the last two and one half years. |
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition to the ALLL, an allowance for unfunded loan commitments and letters of credit is
determined using estimates of the probability of funding. Loans with undisbursed proceeds are
monitored and quantified for usage amounts. This reserve is carried as a liability on the
consolidated balance sheet.
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 2009
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
We account 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 2009 Annual Report on Form 10-K.
Mortgages Held for Sale
Through our majority owned subsidiary, Bank of Commerce Mortgage, we originate residential mortgage
loans within Bank of Commerces geographic market, as well as on a nationwide basis. Mortgage loans
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 of fair value. Cost
generally approximates fair value, given the short duration of these assets. 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.
We generally sell all servicing rights associated with the mortgage loans. Accordingly, there are
no separately recognized servicing assets or liabilities resulting from the sale of mortgage loans.
Derivative Loan Commitments
Through our majority owned subsidiary, Bank of Commerce Mortgage, we enter into forward delivery
contracts to sell residential mortgage loans at specific prices and dates in order to hedge the
interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage
loan commitments. Generally, the Company enters into a best efforts interest rate lock commitment
(IRLC) with borrowers and a best efforts forward delivery contract with investors associated with
mortgage loans receivable held for sale. Our derivative instruments consist primarily of IRLCs
executed with borrowers and mandatory forward purchase commitments with investor lenders. These
derivative instruments are accounted for as fair value hedges, with the changes in fair value
reflected in earnings as a component of mortgage brokerage fee income.
44
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans1 |
|
$ |
616,617 |
|
|
$ |
9,051 |
|
|
|
5.87 |
% |
|
$ |
524,367 |
|
|
$ |
8,049 |
|
|
|
6.14 |
% |
Tax-exempt Securities2 |
|
|
31,055 |
|
|
|
322 |
|
|
|
4.15 |
% |
|
|
29,304 |
|
|
|
296 |
|
|
|
4.04 |
% |
US Government Securities |
|
|
19,689 |
|
|
|
144 |
|
|
|
2.93 |
% |
|
|
11,316 |
|
|
|
127 |
|
|
|
4.49 |
% |
Mortgage backed Securities |
|
|
23,058 |
|
|
|
295 |
|
|
|
5.12 |
% |
|
|
80,263 |
|
|
|
1,065 |
|
|
|
5.31 |
% |
Federal Funds Sold |
|
|
968 |
|
|
|
1 |
|
|
|
0.41 |
% |
|
|
38,222 |
|
|
|
25 |
|
|
|
0.26 |
% |
Other Securities |
|
|
38,653 |
|
|
|
270 |
|
|
|
2.79 |
% |
|
|
37,557 |
|
|
|
117 |
|
|
|
1.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
|
730,040 |
|
|
$ |
10,083 |
|
|
|
5.52 |
% |
|
$ |
721,029 |
|
|
$ |
9,679 |
|
|
|
5.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Due From Banks |
|
|
44,374 |
|
|
|
|
|
|
|
|
|
|
$ |
17,614 |
|
|
|
|
|
|
|
|
|
Bank Premises |
|
|
9,887 |
|
|
|
|
|
|
|
|
|
|
|
10,623 |
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
31,337 |
|
|
|
|
|
|
|
|
|
|
|
19,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
815,638 |
|
|
|
|
|
|
|
|
|
|
$ |
768,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
$ |
149,000 |
|
|
$ |
230 |
|
|
|
0.62 |
% |
|
$ |
137,608 |
|
|
$ |
307 |
|
|
|
0.89 |
% |
Savings Deposits |
|
|
70,191 |
|
|
|
219 |
|
|
|
1.25 |
% |
|
|
65,803 |
|
|
|
281 |
|
|
|
1.71 |
% |
Certificates of Deposit |
|
|
338,425 |
|
|
|
1,761 |
|
|
|
2.08 |
% |
|
|
265,296 |
|
|
|
1,881 |
|
|
|
2.84 |
% |
Repurchase Agreements |
|
|
10,257 |
|
|
|
12 |
|
|
|
0.47 |
% |
|
|
11,940 |
|
|
|
14 |
|
|
|
0.47 |
% |
FHLB Borrowings |
|
|
70,000 |
|
|
|
136 |
|
|
|
0.78 |
% |
|
|
120,000 |
|
|
|
581 |
|
|
|
1.94 |
% |
Trust Preferred Borrowings |
|
|
15,465 |
|
|
|
208 |
|
|
|
5.38 |
% |
|
|
15,000 |
|
|
|
215 |
|
|
|
5.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest Bearing Liability |
|
|
653,338 |
|
|
$ |
2,566 |
|
|
|
1.57 |
% |
|
|
615,647 |
|
|
$ |
3,279 |
|
|
|
2.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
|
73,217 |
|
|
|
|
|
|
|
|
|
|
|
74,637 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
19,006 |
|
|
|
|
|
|
|
|
|
|
|
5,219 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
70,077 |
|
|
|
|
|
|
|
|
|
|
|
73,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and Stockholders
Equity |
|
$ |
815,638 |
|
|
|
|
|
|
|
|
|
|
$ |
768,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net Interest Margin |
|
|
|
|
|
$ |
7,517 |
|
|
|
4.12 |
% |
|
|
|
|
|
$ |
6,400 |
|
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes fee (expense) income of approximately $25,000 and
$62,000 for the period ended March 31, 2010 and 2009, respectively.
|
|
|
1 |
|
Average non accrual loans and average loans held for sale of $7.9 and $15.3 million are included respectively |
|
2 |
|
The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis. |
45
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
Over |
|
|
March 31, 2009 |
|
(Dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
Increase(decrease) In Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans |
|
$ |
1,158 |
|
|
$ |
(156 |
) |
|
|
1,002 |
|
Tax-exempt Securities |
|
|
18 |
|
|
|
8 |
|
|
|
26 |
|
US Government Securities |
|
|
61 |
|
|
|
(44 |
) |
|
|
17 |
|
Mortgage Back Securities |
|
|
(732 |
) |
|
|
(38 |
) |
|
|
(770 |
) |
Federal Funds Sold |
|
|
(38 |
) |
|
|
14 |
|
|
|
(24 |
) |
Other Securities |
|
|
7 |
|
|
|
146 |
|
|
|
153 |
|
|
|
|
Total Increase (Decrease) |
|
|
474 |
|
|
|
(70 |
) |
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase(decrease) In Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand |
|
|
17 |
|
|
|
(94 |
) |
|
|
(77 |
) |
Savings Deposits |
|
|
14 |
|
|
|
(76 |
) |
|
|
(62 |
) |
Certificates of Deposit |
|
|
380 |
|
|
|
(500 |
) |
|
|
(120 |
) |
Repurchase Agreements |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
FHLB Borrowings |
|
|
(97 |
) |
|
|
(348 |
) |
|
|
(445 |
) |
Trust Preferred Borrowings |
|
|
7 |
|
|
|
(14 |
) |
|
|
(7 |
) |
|
|
|
Total Increase (Decrease) |
|
|
319 |
|
|
|
(1,032 |
) |
|
|
(713 |
) |
|
|
|
Net Increase |
|
$ |
155 |
|
|
$ |
962 |
|
|
$ |
1,117 |
|
|
|
|
Average earning assets for the three-months ended March 31, 2010 increased $9.0 million or 1.2%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $92.3 million or 17.6% on average compared with the prior year period.
Average loan yields decreased by 27 basis points to 5.87% during the period; the decrease in
average loan yields is primarily due to the repricing of existing loans.
Average deposits and borrowings increased by $37.7 million over the same period a year ago. The
yield on funding costs decreased to 1.57% compared with 2.13% for the same period a year ago. The
downward repricing of deposits, especially time deposits, and Federal Home Loan Bank borrowings are
the main contributors to the overall reduction in the companys cost of funds.
A combination of reduced funding costs and an increase in the volume of higher yielding earning
assets significantly improved the Companys net interest margin. Average interest bearing
liabilities increased $37.7 million while total interest expense decreased $0.7 million or 56 basis
points to 1.57% from the same period a year ago. Average loans increased by $92.3 and contributed
over $1.0 million to the margin in comparison to the same period a year ago. The additional
interest income from the loan portfolio offset the $0.6 million decrease in interest income from
the investment portfolio. The net result was an increase to the net interest margin of $1.1 million
over the prior year for the three month period ended March 31, 2010.
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth a summary of noninterest income for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(Dollars in thousands) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
82 |
|
|
$ |
92 |
|
Payroll and benefit processing fees |
|
|
128 |
|
|
|
134 |
|
Earnings on cash surrender value -
Bank owned insurance |
|
|
108 |
|
|
|
86 |
|
Net gain on sale of securities
available-for-sale |
|
|
931 |
|
|
|
404 |
|
Net gain on transfer of financial assets |
|
|
|
|
|
|
|
|
Merchant credit card service income, net |
|
|
54 |
|
|
|
74 |
|
Mortgage brokerage fee income |
|
|
2,539 |
|
|
|
|
|
Other Income |
|
|
100 |
|
|
|
75 |
|
|
|
|
|
|
|
|
Total Noninterest income |
|
$ |
3,942 |
|
|
$ |
865 |
|
Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings
on key life investments, gains on the sale of securities investments, and mortgage brokerage fee
income. Noninterest income for the three months ending March 31, 2010 was approximately $4.0
million or 356% greater than the same period a year ago. The $3.1 million increase is primarily due
to an increase in mortgage brokerage fee income associated with our purchase of an equity interest
in the Simonich Corporation (See Acquisition below). Mortgage brokerage fee income is primarily
derived from origination fees on residential mortgage loans and from the sale of mortgage loans to
financial institutions. Loan origination fees and sales fees earned on brokered loans are recorded
as income when the loans are sold. Our investment strategy requires that we reposition our
investment portfolio within certain parameters to minimize risks to comprehensive income. This
repositioning resulted in a $527 thousand increase in securities gains over the three months ending
March 31, 2009.
The following table sets forth a summary of noninterest expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(Dollars in thousands) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
$ |
3,711 |
|
|
$ |
2,127 |
|
Occupancy and equipment expense |
|
|
1,110 |
|
|
|
572 |
|
FDIC insurance premium |
|
|
251 |
|
|
|
273 |
|
Data processing fees |
|
|
89 |
|
|
|
111 |
|
Professional service fees |
|
|
400 |
|
|
|
159 |
|
Payroll and Benefit fees |
|
|
29 |
|
|
|
34 |
|
Deferred compensation expense |
|
|
118 |
|
|
|
119 |
|
Stationery and Supplies |
|
|
80 |
|
|
|
53 |
|
Postage |
|
|
42 |
|
|
|
81 |
|
Directors expense |
|
|
84 |
|
|
|
37 |
|
Other expenses |
|
|
1,271 |
|
|
|
394 |
|
|
|
|
|
|
|
|
Total Noninterest expense |
|
$ |
7,185 |
|
|
$ |
3,960 |
|
Noninterest expense increased $3.2 million or 81.4% over the same period in 2009. The increase is
associated with our purchase of an equity interest in the Simonich Corporation, and is centered in
salaries and related benefits, occupancy related to the mortgage company offices. The increase in
professional service fees is related to increased legal and accounting fees in connection with
valuation of the first quarter loan swap, and collection of bad debts. The increase in other
expenses is attributed to general operating expenses including loan losses of approximately
$480,000 attributable to the mortgage company subsidiary.
47
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes
Our provision for income taxes includes both federal and state income taxes and reflects the
application of federal and state statutory rates to our income before taxes. The principal
difference between statutory tax rates and our effective tax rate is the benefit derived investing
in tax-exempt securities and preferential state tax treatment for qualified enterprise zone loans.
We continue to participate in a California Affordable Housing project which affords federal and
state tax credits. Increases and decreases in the provision for taxes reflect changes in our income
before taxes.
Non-controlling interests are presented in the income statement such that the consolidated income
statement includes income and income tax expense from both the Company and non-controlling
interests. The effective tax rate is calculated by dividing income tax expense by income before tax
expense for the consolidated entity.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Income Taxes |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Tax provision |
|
$ |
744 |
|
|
$ |
610 |
|
Effective tax rate |
|
|
32.50 |
% |
|
|
32.41 |
% |
The Company had a net deferred tax asset of $6.6 million at March 31, 2010. 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 March 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Deferred Tax Assets |
|
|
|
|
|
|
|
|
State Franchise taxes |
|
$ |
89,433 |
|
|
$ |
(72,047 |
) |
Deferred compensation |
|
|
2,391,936 |
|
|
|
2,174,628 |
|
Loan loss reserves |
|
|
5,561,483 |
|
|
|
3,848,649 |
|
Other |
|
|
270,260 |
|
|
|
24,768 |
|
|
|
|
Total Deferred Tax Assets |
|
$ |
8,313,112 |
|
|
$ |
5,975,998 |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities |
|
|
|
|
|
|
|
|
Unrealized gain on
available-for-sale investment
securities |
|
|
(247,080 |
) |
|
|
(108,560 |
) |
Depreciation |
|
|
(261,636 |
) |
|
|
(1,128,350 |
) |
Deferred loan origination costs |
|
|
(395,228 |
) |
|
|
|
|
Deferred state taxes |
|
|
(618,136 |
) |
|
|
|
|
Other |
|
|
(155,512 |
) |
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
$ |
(1,677,592 |
) |
|
$ |
(1,236,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Deferred Tax Asset |
|
$ |
6,635,520 |
|
|
$ |
4,739,088 |
|
|
|
|
48
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Asset Quality
We concentrate our lending activities primarily within El Dorado, Placer, Sacramento, Shasta, and
Tehama counties in California, and the location of the Banks four full services branches,
specifically identified as Northern California. We manage our credit risk through diversification
of our loan portfolio and the application of underwriting policies and procedures and credit
monitoring practices. Although we have a diversified loan portfolio, a significant portion of our
borrowers 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
located in California and are expected to be repaid from cash flows of the borrowers business or
cash flows from real estate investments.
Although we have 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. 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 |
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
Commercial and financial loans |
|
$ |
129,891 |
|
|
$ |
133,080 |
|
Real estate construction loans |
|
|
56,625 |
|
|
|
59,524 |
|
Real estate commercial (investor) |
|
|
182,908 |
|
|
|
197,023 |
|
Real estate commercial (owner
occupied) |
|
|
71,634 |
|
|
|
63,001 |
|
Real estate ITIN loan pool |
|
|
74,728 |
|
|
|
78,250 |
|
Real estate other mortgage |
|
|
20,672 |
|
|
|
20,526 |
|
Real estate equity lines |
|
|
68,806 |
|
|
|
45,601 |
|
Installment |
|
|
2,367 |
|
|
|
2,223 |
|
Other loans |
|
|
1,525 |
|
|
|
2,211 |
|
Less: |
|
|
|
|
|
|
|
|
Net deferred loan fees |
|
|
172 |
|
|
|
209 |
|
Allowance for loan losses |
|
|
12,197 |
|
|
|
11,207 |
|
|
|
|
Total net portfolio loans |
|
$ |
596,787 |
|
|
$ |
590,023 |
|
|
|
|
The following table provides a breakdown of our real estate construction portfolio as of March 31,
2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total loan |
|
Loan Type |
|
Balance |
|
|
portfolio |
|
Commercial lots and entitled commercial land |
|
$ |
19,070 |
|
|
|
3.20 |
% |
Commercial real estate construction |
|
|
27,067 |
|
|
|
4.54 |
% |
1-4 family subdivision loans |
|
|
7,366 |
|
|
|
1.23 |
% |
1-4 family individual residential lots |
|
|
2,154 |
|
|
|
0.36 |
% |
1-4 family construction speculative |
|
|
968 |
|
|
|
0.16 |
% |
|
|
|
|
|
|
|
Total real estate- construction |
|
$ |
56,625 |
|
|
|
9.49 |
% |
Our practice, is to place an asset on non-accrual status when one of the following events occurs:
(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
or impaired loans may be on non-accrual, are 90 days past due and still accruing, or have been
restructured. Accruals are resumed on loans only when they are brought fully current with respect
to interest and principal and when the loan is estimated to be fully collectible. Restructured
loans are those loans on which concessions in terms have been granted due to the borrowers
financial or legal difficulties.
49
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Mortgages held for sale
Bank of Commerce Mortgage originates residential mortgage loans within Bank of Commerces
footprint and on a nationwide basis. Mortgage loans 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 or cost or fair value until a sale to the third party is
completed.
As of March 31, 2010, $16.6 million in mortgages are held for sale. These loans are not included in
net portfolio loans listed in the above table.
Non performing Assets
The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Non performing assets |
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Nonaccrual loans |
|
$ |
10,253 |
|
|
$ |
7,667 |
|
|
|
|
|
|
|
|
|
|
90 days past due and still accruing interest |
|
|
3,099 |
|
|
|
5,052 |
|
Other real estate owned |
|
|
3,395 |
|
|
|
2,880 |
|
|
|
|
Total non performing assets |
|
$ |
16,747 |
|
|
$ |
15,599 |
|
|
|
|
Nonperforming assets adversely affect our net income in various ways. Until economic and market
conditions improve, we may expect to continue to incur losses relating to an increase in
nonperforming assets. We generally do not record interest income on nonperforming loans or other
real estate owned, thereby adversely affecting our income, and increasing our loan administration
costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the
related asset to the then fair market value of the collateral, which may ultimately result in a
loss. An increase in the level of nonperforming assets increases our risk profile and may impact
the capital levels our regulators believe are appropriate in light of the ensuing risk profile.
While we reduce problem assets through loan sales, workouts, restructurings and otherwise,
decreases in the value of the underlying collateral, or in these borrowers performance or
financial condition, whether or not due to economic and market conditions beyond our control, could
adversely affect our business, results of operations and financial condition. In addition, the
resolution of nonperforming assets requires significant commitments of time from management and our
directors, which can be detrimental to the performance of their other responsibilities.
ITIN loans are residential mortgage loans made to legal United States residents without a social
security number and are geographically dispersed throughout the United States. This is our first
ITIN loan transaction, and as such, is serviced through a third party. Worsening economic
conditions in the United States may cause us to suffer higher default rates on our ITIN loans and
reduce the value of the assets that we hold as collateral. In addition, if we are forced to
foreclose and service these ITIN properties ourselves, we may realize additional monitoring,
servicing and appraisal costs due to the geographic dispersement of the portfolio which will
adversely affect our noninterest expense.
Non-performing assets were 2.02% of total assets as of March 31, 2010; 2.27% at December 31, 2009
and 2.94% at March 31, 2009. There are 27 loans in nonaccrual status as of March 31, 2010, $904,000
or fifteen of which are ITIN loans with a weighted average balance of approximately $60,000 each,
all in various stages of collection. Approximately $2.4 million in put-back reserves are available
to cover the ITIN loans in nonaccrual status. The remaining nonaccrual loans consist of two
residential lot loans, seven home equity lines of credit and three commercial real estate loans
secured by first deeds of trust.
The Companys foreclosed assets are carried at the lower of cost or fair value, less estimated
costs to dispose of the properties.
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is managements most significant accounting estimate. It is
an 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 allowance is based upon two principals of accounting. (1) Losses are to be accrued when they
are probable of occurring and estimable and (2) 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 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.
The process for determining adequacy of the allowance for loan and lease losses is critical to our
financial results. Higher credit losses could require the Company to increase the allowance for
loan and lease losses through a charge to earnings. There is no assurance that our allowance for
loan and lease losses will be adequate to cover future credit losses, especially if credit markets,
housing prices and unemployment do not stabilize.
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 Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. Managements estimate of each 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 components over time. 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 (weighted heavily towards the current economic cycle), 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.
Management considers any and all factors that are likely to cause estimated losses to differ from
historical loss experience, including, but not limited to:
|
|
|
Changes in lending policies and procedures, including underwriting, collection,
charge-off and recovery practices not considered elsewhere in estimating credit losses; |
|
|
|
|
Changes in regional, local and business conditions and developments that affect the
collectability of loans, including the conditions of various market segments; |
|
|
|
|
Changes in the nature and volume of the loan portfolio and in the terms of loans; |
|
|
|
|
Changes in the experience, ability and depth of lending management and other relevant
staff; |
|
|
|
|
Changes in the volume and severity of past due loans, the volume of nonaccrual loans and
the volume and severity of adversely classified or graded loans; |
|
|
|
|
Changes in the quality of the Companys loan review systems or the degree of oversight
by the board of directors; |
|
|
|
|
Changes in the value of underlying collateral for all collateral dependent loans; |
|
|
|
|
The existence and effects of any concentrations of credit and changes in the level of
such concentrations; |
|
|
|
|
The effect of other external factors such as competition and legal and regulatory
requirements on the level of estimated credit losses; |
|
|
|
|
Loan loss history over the past 18 months has contributed significantly to the
percentage of loss allocations. Accordingly the loan loss history component of the
provision for loan and lease losses has been adjusted to weight toward recent history with
80% of the allocation to the last two and one half years. |
In addition to the ALLL, an allowance for unfunded loan commitments and letters of credit is
determined using estimates of the probability of funding. Loans with undisbursed proceeds are
monitored and quantified for usage amounts. This reserve is carried as a liability on the
consolidated balance sheet.
51
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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) |
|
|
|
|
|
|
Allowance for Loan and Lease |
|
|
|
|
|
|
Losses |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Beginning balance for Loan Losses |
|
$ |
11,207 |
|
|
$ |
8,429 |
|
Provision for Loan Losses |
|
|
2,250 |
|
|
|
1,425 |
|
Charge offs: |
|
|
|
|
|
|
|
|
Commercial |
|
|
(390 |
) |
|
|
(1,658 |
) |
Real Estate |
|
|
(1,298 |
) |
|
|
(497 |
) |
|
|
|
|
|
|
|
Total Charge offs |
|
|
(1,688 |
) |
|
|
(2,155 |
) |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Commercial |
|
|
396 |
|
|
|
1 |
|
Real Estate |
|
|
31 |
|
|
|
0 |
|
Other |
|
|
1 |
|
|
|
1 |
|
|
|
|
Total Recoveries |
|
|
428 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
12,197 |
|
|
$ |
7,701 |
|
ALLL to total loans |
|
|
2.00 |
% |
|
|
1.45 |
% |
Net Charge offs to average loans |
|
|
0.20 |
% |
|
|
0.41 |
% |
|
|
|
The allowance for loan and lease losses are established through a provision charged to expense.
Loans are charged off against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb losses inherent in existing loans and overdrafts based on evaluations of
collectability and prior loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, and current economic conditions that may affect the borrowers ability to
pay. Material estimates relating to the determination of the allowance for loan losses are
particularly susceptible to significant change in the near term. While management uses available
information to recognize losses on loans, future additions to the allowance may be necessary based
on changes in economic conditions.
The allowance for loan and lease losses totaled $12.2 million at March 31, 2010 compared to $11.2
million at December 31, 2009 and $7.7 million at March 31, 2009. The Companys allowance for loan
losses was 2.0% of total loans at March 31, 2010, 1.86% at December 31, 2009 and 1.45% at March 31,
2009. Provisions for loan losses for the three-months ended March 31, 2010 were $2,250,000 compared
to $1,425,000 for the same period in 2009.
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.
52
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Dollars in thousands, except for per share data |
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
9,051 |
|
|
$ |
9,184 |
|
|
$ |
9,355 |
|
|
$ |
9,272 |
|
|
$ |
8,049 |
|
Interest on tax-exempt securities |
|
|
322 |
|
|
|
311 |
|
|
|
278 |
|
|
|
279 |
|
|
|
296 |
|
Interest on U.S. government securities |
|
|
439 |
|
|
|
676 |
|
|
|
628 |
|
|
|
954 |
|
|
|
1,192 |
|
Interest on federal funds sold and
securities repurchased under agreements to
resell |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
|
25 |
|
Interest on other securities |
|
|
270 |
|
|
|
266 |
|
|
|
309 |
|
|
|
131 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
10,083 |
|
|
|
10,438 |
|
|
|
10,571 |
|
|
|
10,641 |
|
|
|
9,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
230 |
|
|
|
229 |
|
|
|
240 |
|
|
|
239 |
|
|
|
307 |
|
Interest on savings deposits |
|
|
219 |
|
|
|
221 |
|
|
|
223 |
|
|
|
238 |
|
|
|
281 |
|
Interest on certificates of deposit |
|
|
1,761 |
|
|
|
1,906 |
|
|
|
1,941 |
|
|
|
1,900 |
|
|
|
1,881 |
|
Securities sold under repurchase agreements |
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
11 |
|
|
|
14 |
|
Interest on FHLB and other borrowings |
|
|
136 |
|
|
|
172 |
|
|
|
514 |
|
|
|
539 |
|
|
|
581 |
|
Interest on junior subordinated debt
payable to unconsolidated subsidiary
grantor trust |
|
|
208 |
|
|
|
208 |
|
|
|
234 |
|
|
|
216 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,566 |
|
|
|
2,749 |
|
|
|
3,165 |
|
|
|
3,143 |
|
|
|
3,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
7,517 |
|
|
|
7,689 |
|
|
|
7,406 |
|
|
|
7,498 |
|
|
|
6,400 |
|
Provision for loan and lease losses |
|
|
2,250 |
|
|
|
3,150 |
|
|
|
1,844 |
|
|
|
3,056 |
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan and lease losses |
|
|
5,267 |
|
|
|
4,539 |
|
|
|
5,562 |
|
|
|
4,442 |
|
|
|
4,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
82 |
|
|
|
94 |
|
|
|
108 |
|
|
|
96 |
|
|
|
92 |
|
Payroll and benefit processing fees |
|
|
128 |
|
|
|
105 |
|
|
|
109 |
|
|
|
104 |
|
|
|
134 |
|
Earnings on cash surrender value bank
owned life insurance |
|
|
108 |
|
|
|
107 |
|
|
|
108 |
|
|
|
117 |
|
|
|
86 |
|
Net gain on sale of securities |
|
|
931 |
|
|
|
454 |
|
|
|
506 |
|
|
|
1,074 |
|
|
|
404 |
|
available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
340 |
|
|
|
|
|
Merchant credit card service income, net |
|
|
54 |
|
|
|
68 |
|
|
|
80 |
|
|
|
75 |
|
|
|
74 |
|
Mortgage brokerage fee income |
|
|
2,539 |
|
|
|
2,112 |
|
|
|
1,913 |
|
|
|
1,302 |
|
|
|
|
|
Other income |
|
|
100 |
|
|
|
119 |
|
|
|
120 |
|
|
|
87 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,942 |
|
|
|
3,060 |
|
|
|
2,944 |
|
|
|
3,195 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
3,711 |
|
|
|
3,209 |
|
|
|
2,902 |
|
|
|
2,644 |
|
|
|
2,127 |
|
Occupancy and equipment expense |
|
|
1,110 |
|
|
|
1,339 |
|
|
|
1,124 |
|
|
|
730 |
|
|
|
572 |
|
FDIC insurance premium |
|
|
251 |
|
|
|
279 |
|
|
|
421 |
|
|
|
301 |
|
|
|
273 |
|
Data processing fees |
|
|
89 |
|
|
|
51 |
|
|
|
52 |
|
|
|
68 |
|
|
|
111 |
|
Professional service fees |
|
|
400 |
|
|
|
146 |
|
|
|
220 |
|
|
|
295 |
|
|
|
159 |
|
Payroll processing fees |
|
|
29 |
|
|
|
26 |
|
|
|
27 |
|
|
|
27 |
|
|
|
34 |
|
Deferred compensation expense |
|
|
118 |
|
|
|
118 |
|
|
|
118 |
|
|
|
123 |
|
|
|
119 |
|
Stationery and supplies |
|
|
80 |
|
|
|
44 |
|
|
|
62 |
|
|
|
26 |
|
|
|
53 |
|
Postage |
|
|
42 |
|
|
|
36 |
|
|
|
|
|
|
|
76 |
|
|
|
81 |
|
Directors expense |
|
|
84 |
|
|
|
67 |
|
|
|
75 |
|
|
|
120 |
|
|
|
37 |
|
Other expenses |
|
|
1,271 |
|
|
|
802 |
|
|
|
653 |
|
|
|
483 |
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,185 |
|
|
|
6,117 |
|
|
|
5,654 |
|
|
|
4,893 |
|
|
|
3,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,024 |
|
|
|
1,482 |
|
|
|
2,852 |
|
|
|
2,744 |
|
|
|
1,880 |
|
Provision for income taxes |
|
|
744 |
|
|
|
43 |
|
|
|
1,010 |
|
|
|
1,027 |
|
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,280 |
|
|
|
1,439 |
|
|
|
1,842 |
|
|
|
1,717 |
|
|
|
1,270 |
|
Less: (Loss) income non-controlling interest |
|
|
(255 |
) |
|
|
33 |
|
|
|
129 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce
Holdings |
|
$ |
1,535 |
|
|
$ |
1,406 |
|
|
$ |
1,713 |
|
|
$ |
1,616 |
|
|
$ |
1,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred dividend and accretion on
preferred stock |
|
$ |
(235 |
) |
|
$ |
(235 |
) |
|
$ |
(235 |
) |
|
$ |
(235 |
) |
|
$ |
(237 |
) |
Income available to common stockholders |
|
$ |
1,300 |
|
|
$ |
1,171 |
|
|
$ |
1,478 |
|
|
$ |
1,381 |
|
|
$ |
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.17 |
|
|
$ |
0.16 |
|
|
$ |
0.12 |
|
Weighted average shares basic |
|
|
8,871 |
|
|
|
8,711 |
|
|
|
8,711 |
|
|
|
8,711 |
|
|
|
8,711 |
|
Diluted earnings per share |
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.17 |
|
|
$ |
0.16 |
|
|
$ |
0.12 |
|
Weighted average shares diluted |
|
|
8,871 |
|
|
|
8,711 |
|
|
|
8,711 |
|
|
|
8,712 |
|
|
|
8,711 |
|
Cash dividends per share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.06 |
|
53
|
|
|
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 interest rates. 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 represents the most significant market risk exposure to our financial
instruments. 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 gathering creates 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. We do not operate a trading account and do not hold a position with exposure
to foreign currency exchange or commodities. We face market risk through interest rate volatility.
The Board of Directors has overall responsibility for our interest rate risk management policies.
We have 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 via 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 + 300 to 300 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero.
The formal policies and practices we adopted 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 to
300 basis points. Because of our predisposition to variable rate pricing and noninterest bearing
demand deposit accounts, we are asset sensitive. As a result, management anticipates that, in a
declining interest rate environment, our net interest income and margin would be expected to
decline, and, in an increasing interest rate environment, our net interest income and margin would
be expected to increase. However, no assurance can be given that under such circumstances we would
experience the described relationships to declining or increasing interest rates. Because we are
asset sensitive, we are adversely affected by declining rates rather than rising rates.
To estimate the effect of interest rate shocks on our 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. The
most recent model results indicate the estimated annualized reduction in net interest income
attributable to a 100, 200, and 300 basis point decline in the federal funds rate was $666,882,
$808,686, and $1,153,615 respectively, with a similar and opposite results attributable to a 100 or
200 basis point increase in the federal funds rate.
The ALCO has established a policy limitation to interest rate risk of -21% of the 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.
Our 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 an off-balance sheet
instrument with the same 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.
54
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
We 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 model utilized by management to create the analysis described in the preceding paragraph uses
balance sheet simulation to estimate the impact of changing rates on our projected annual net
interest income Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and management
strategies. Management believes that the short duration of its rate-sensitive assets and
liabilities contributes to its ability to reprice a significant amount of its rate-sensitive assets
and liabilities and mitigate the impact of rate changes in excess of 100, 200, or 300 basis points.
The models primary benefit to management is its assistance in evaluating the impact that future
strategies with respect to our mix and level of rate-sensitive assets and liabilities will have on
our net interest income.
55
|
|
|
ITEM 4T. |
|
CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding the required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation as of the end of the period covered by this report was carried out under the
supervision and with the participation of our management, including our principal executive officer
and principal financial officer, of the effectiveness of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act). Based on their evaluation, our certifying
officers concluded that these disclosure controls and procedures are effective in providing
reasonable assurance that the information required to be disclosed by us in our periodic reports
filed with the Securities and Exchange Commission (SEC) is recorded, processed, summarized and
reported within the time periods specified by the SECs rules and SEC reports.
During the first quarter of 2010, changes were implemented in our internal control over financial
reporting in connection with the remediation of a material weakness noted at September 30, 2009
related to the selection and application of accounting principles and specifically accounting for
nonrecurring transactions. Changes in internal control over financial reporting that were
implemented during the first quarter of 2010 included increased emphasis on utilizing, completing
and reviewing the appropriate disclosure checklists, increased emphasis on continuing education for
accounting personnel and increased emphasis on reviewing accounting literature relevant to
non-recurring transactions. There have been no additional changes in our internal control over
financial reporting that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the
supervision of, the Companys Chief Executive Officer and the Chief Financial Officer and
implemented by the Companys Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
The Companys internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation from management, including our Chief Executive
Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework and criteria established in
Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). This evaluation included review of the documentation of controls,
testing of operating effectiveness of controls and a conclusion on this evaluation. Based on this
evaluation, management concluded that the Companys internal control over financial reporting was
effective as of March 31, 2010.
PART II. Other Information
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Item 1. |
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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.
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Item 1a. Risk Factors
There have been no material changes from the risk factors previously disclosed in the registrants
Form 10-K.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
On March 23, 2010, the Company filed a Form S-1/A Registration Statement (the Registration
Statement) with the SEC to offer 7,200,000 shares of our common stock in an underwritten public
offering (Offering). In the Registration Statement, we set out our intent to use the net proceeds
of the Offering for general corporate purposes, including contributing additional capital to the
Bank, supporting our ongoing and future anticipated growth, which may include opportunistic
acquisitions of all or parts of other financial institutions, including FDIC-assisted transactions,
and positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement. On March 29, 2010 the Company announced
the successful closing of the Offering. The Company received net proceeds from the Offering of
approximately $28.8 million, after underwriting discounts and commissions and estimated expenses.
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Item 3. |
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Defaults upon Senior Securities |
N/A.
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Item 4. |
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(Removed and Reserved) |
N/A
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Item 5. |
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Other Information |
(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.
BANK OF COMMERCE HOLDINGS
(Registrant)
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Date: May 7, 2010
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/s/ Samuel D. Jimenez |
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Samuel D. Jimenez |
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Senior Vice President and |
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Chief Financial Officer |
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