e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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 o
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 þ
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Smaller Reporting Company o |
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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 October 31, 2010: 16,991,495
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
September 30, 2010 (unaudited), December 31, 2009 and September 30, 2009 (unaudited)
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September 30, |
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December 31, |
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September 30, |
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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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$ |
27,763 |
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$ |
36,902 |
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$ |
20,224 |
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Interest bearing due from banks |
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43,188 |
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31,338 |
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56,208 |
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Cash and cash equivalents |
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70,951 |
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68,240 |
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76,432 |
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Securities available-for-sale, at fair value (including
pledged collateral of $43,772 at September 30, 2010,
$55,672 at December 31, 2009 and $61,345 at September 30,
2009) |
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166,925 |
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80,062 |
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86,499 |
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Portfolio Loans, net of the allowance for loan losses of
$15,452 at September 30, 2010, $11,207 at December 31,
2009 and $8,899 at September 30, 2009 |
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595,575 |
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590,023 |
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590,885 |
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Mortgage loans held for sale |
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41,025 |
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27,288 |
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16,787 |
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Bank premises and equipment, net |
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9,842 |
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9,980 |
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10,201 |
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Goodwill |
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3,695 |
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3,727 |
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3,727 |
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Other real estate owned |
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2,020 |
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2,880 |
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2,934 |
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Other assets |
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34,239 |
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31,206 |
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27,215 |
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TOTAL ASSETS |
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$ |
924,272 |
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$ |
813,406 |
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$ |
814,680 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Demand noninterest bearing |
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$ |
90,613 |
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$ |
69,448 |
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$ |
70,491 |
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Demand interest bearing |
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161,154 |
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163,814 |
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156,233 |
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Savings accounts |
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82,761 |
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65,414 |
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59,982 |
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Certificates of deposit |
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305,503 |
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341,788 |
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312,968 |
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Total deposits |
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640,031 |
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640,464 |
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599,674 |
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Securities sold under agreements to repurchase |
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11,328 |
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9,621 |
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10,038 |
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Federal Home Loan Bank and Federal Reserve Bank borrowings |
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141,000 |
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70,000 |
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100,000 |
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Mortgage warehouse lines of credit |
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12,285 |
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Other liabilities |
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11,669 |
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9,050 |
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8,967 |
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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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819,493 |
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744,600 |
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746,429 |
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Commitments and contingencies
Stockholders Equity: |
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Preferred stock (liquidation preference of $1,000 per
share; issued 2008) 2,000,000 authorized; 17,000 shares
issued and outstanding on September 30, 2010, December
31, 2009, and September 30, 2009 |
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16,708 |
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16,641 |
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16,619 |
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Common stock , no par value, 50,000,000 shares
authorized; 16,991,495 shares issued and outstanding at
September 30, 2010, 8,711,495 issued and outstanding on
December 31, 2009 and at September 30, 2009 |
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42,741 |
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9,730 |
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9,709 |
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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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40,845 |
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39,004 |
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38,355 |
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Accumulated other comprehensive income, net of tax |
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1,717 |
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657 |
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827 |
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Total Equity Bank of Commerce Holdings |
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102,460 |
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66,481 |
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65,959 |
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Non controlling interest in subsidiary |
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2,319 |
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2,325 |
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2,292 |
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Total stockholders equity |
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104,779 |
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68,806 |
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68,251 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
924,272 |
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$ |
813,406 |
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$ |
814,680 |
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See accompanying notes to condensed consolidated financial statements.
3
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2010 and September 30, 2009 (Unaudited)
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For Three Months Ended: |
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For Nine Months Ended: |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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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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2010 |
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2009 |
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Interest income: |
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Interest and fees on loans |
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$ |
9,414 |
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$ |
9,355 |
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$ |
27,767 |
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$ |
26,676 |
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Interest on tax-exempt securities |
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465 |
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278 |
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1,168 |
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853 |
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Interest on U.S. government securities |
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633 |
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628 |
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1,578 |
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2,774 |
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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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2 |
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31 |
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Interest on other securities |
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471 |
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309 |
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1,085 |
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557 |
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Total interest income |
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10,984 |
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10,571 |
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31,600 |
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30,891 |
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Interest expense: |
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Interest on demand deposits |
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251 |
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240 |
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707 |
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786 |
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Interest on savings deposits |
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237 |
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223 |
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677 |
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|
742 |
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Interest on certificates of deposit |
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1,453 |
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1,941 |
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4,768 |
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5,722 |
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Securities sold under agreements to repurchase |
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13 |
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13 |
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40 |
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38 |
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Interest on FHLB and other borrowings |
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186 |
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514 |
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460 |
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1,634 |
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Interest on junior subordinated debt payable
to unconsolidated subsidiary grantor trust |
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204 |
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234 |
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619 |
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665 |
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Total interest expense |
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2,344 |
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3,165 |
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7,271 |
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9,587 |
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Net interest income |
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8,640 |
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7,406 |
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24,329 |
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21,304 |
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Provision for loan and lease losses |
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4,450 |
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1,844 |
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8,300 |
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6,325 |
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Net interest income after provision for loan losses |
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4,190 |
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5,562 |
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16,029 |
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14,979 |
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Noninterest income: |
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Service charges on deposit accounts |
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63 |
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108 |
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207 |
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296 |
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Payroll and benefit processing fees |
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107 |
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109 |
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335 |
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347 |
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Earnings on cash surrender value
Bank owned life insurance |
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112 |
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108 |
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|
327 |
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311 |
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Net gain on sale of securities available-for-sale |
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179 |
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|
506 |
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1,243 |
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1,984 |
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Net gain on transfer of financial assets |
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340 |
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Gain on settlement of put reserve |
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1,750 |
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1,750 |
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Mortgage brokerage fee income |
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3,293 |
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1,913 |
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8,585 |
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|
3,215 |
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Other income |
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|
179 |
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|
200 |
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|
515 |
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|
511 |
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Total noninterest income |
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5,683 |
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2,944 |
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12,962 |
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7,004 |
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Noninterest expense: |
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Salaries and related benefits |
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4,162 |
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2,902 |
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11,238 |
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7,673 |
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Occupancy and equipment expense |
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|
952 |
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1,124 |
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2,805 |
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|
2,426 |
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Write down of other real estate owned |
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129 |
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1,374 |
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FDIC insurance premium |
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250 |
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421 |
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|
755 |
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|
995 |
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Data processing fees |
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52 |
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52 |
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205 |
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|
231 |
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Professional service fees |
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216 |
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|
220 |
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1,159 |
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|
|
674 |
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Deferred compensation expense |
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126 |
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|
118 |
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|
366 |
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|
360 |
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Stationery and supplies |
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35 |
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62 |
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|
211 |
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|
141 |
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Postage |
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58 |
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|
145 |
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|
111 |
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Directors expense |
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56 |
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|
75 |
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|
208 |
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|
|
232 |
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Goodwill impairment |
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32 |
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Other expenses |
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|
1,257 |
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|
|
680 |
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|
|
3,490 |
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|
1,664 |
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Total noninterest expense |
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7,293 |
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|
5,654 |
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21,988 |
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14,507 |
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Income before provision for income taxes |
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|
2,580 |
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|
2,852 |
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|
|
7,003 |
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|
|
7,476 |
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Provision for income taxes |
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|
916 |
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|
1,010 |
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|
2,410 |
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|
2,647 |
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Net Income |
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1,664 |
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|
|
1,842 |
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|
|
4,593 |
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|
|
4,829 |
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Less: Net income (loss) attributable to non-controlling
interest |
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|
105 |
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|
|
129 |
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(6 |
) |
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|
230 |
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
1,559 |
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|
$ |
1,713 |
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|
$ |
4,599 |
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|
$ |
4,599 |
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|
|
|
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|
|
|
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|
|
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Less: preferred dividend and accretion on preferred stock |
|
|
235 |
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|
|
235 |
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|
|
706 |
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|
|
707 |
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Income available to common shareholders |
|
$ |
1,324 |
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|
$ |
1,478 |
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|
$ |
3,893 |
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|
$ |
3,892 |
|
Basic earnings per share |
|
$ |
0.08 |
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|
$ |
0.17 |
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|
$ |
0.27 |
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|
$ |
0.45 |
|
Weighted average shares basic |
|
|
16,991 |
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|
|
8,711 |
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|
|
14,263 |
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|
|
8,711 |
|
Diluted earnings per share |
|
$ |
0.08 |
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|
$ |
0.17 |
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|
$ |
0.27 |
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|
$ |
0.45 |
|
Weighted average shares diluted |
|
|
16,991 |
|
|
|
8,711 |
|
|
|
14,263 |
|
|
|
8,712 |
|
Cash Dividends declared |
|
$ |
0.03 |
|
|
$ |
0.12 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
4
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
Three and Nine Months Ended September 30, 2010 (Unaudited)
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Accumulated Other |
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Comp- Income |
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Subtotal |
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Non Controlling |
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Preferred |
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Common |
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Stock |
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(Loss), |
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Bank of Commerce |
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Interest in |
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|
|
(Dollars in Thousands) |
|
Comprehensive Income |
|
|
Amount |
|
|
Warrant |
|
|
Shares |
|
|
Amount |
|
|
Retained Earnings |
|
|
net of tax |
|
|
Holdings |
|
|
Subsidiary |
|
|
Total |
|
Balance at December 31, 2009 |
|
|
|
|
|
$ |
16,641 |
|
|
$ |
449 |
|
|
|
8,711,495 |
|
|
$ |
9,730 |
|
|
$ |
39,004 |
|
|
$ |
657 |
|
|
$ |
66,481 |
|
|
$ |
2,325 |
|
|
$ |
68,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
1,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,535 |
|
|
|
|
|
|
|
1,535 |
|
|
|
(255 |
) |
|
|
1,280 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities, net of tax |
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income, net of tax |
|
|
(549 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other Comprehensive loss non-controlling interest |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income BOCH |
|
$ |
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,505 |
|
|
|
|
|
|
|
1,505 |
|
|
|
144 |
|
|
|
1,649 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities, net of tax |
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income, net of tax |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other Comprehensive income non-controlling interest |
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income BOCH |
|
$ |
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
90 |
|
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred Stock |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividends
($0.06 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,019 |
) |
|
|
|
|
|
|
(1,019 |
) |
|
|
|
|
|
|
(1,019 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
Compensation expense associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
14 |
|
Issuance of new shares, net of issuance
costs ($4.25 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080,000 |
|
|
|
4,361 |
|
|
|
|
|
|
|
|
|
|
|
4,361 |
|
|
|
|
|
|
|
4,361 |
|
Balance at June 30, 2010 |
|
|
|
|
|
$ |
16,686 |
|
|
$ |
449 |
|
|
|
16,991,495 |
|
|
$ |
42,870 |
|
|
$ |
40,031 |
|
|
$ |
443 |
|
|
$ |
100,479 |
|
|
$ |
2,214 |
|
|
$ |
102,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,559 |
|
|
|
|
|
|
|
1,559 |
|
|
|
105 |
|
|
|
1,664 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities and derivatives, net of tax |
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains included in net income, net of tax |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income |
|
|
2,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other Comprehensive income non-controlling interest |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income BOCH |
|
$ |
2,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,274 |
|
|
|
1,274 |
|
|
|
|
|
|
|
1,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred Stock |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividends
($0.03 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(510 |
) |
|
|
|
|
|
|
(510 |
) |
|
|
|
|
|
|
(510 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
|
|
|
|
|
|
(213 |
) |
Compensation expense associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Additional issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
(141 |
) |
|
|
|
|
|
|
(141 |
) |
Balance at September 30, 2010 |
|
|
|
|
|
$ |
16,708 |
|
|
$ |
449 |
|
|
|
16,991,495 |
|
|
$ |
42,741 |
|
|
$ |
40,845 |
|
|
$ |
1,717 |
|
|
$ |
102,460 |
|
|
$ |
2,319 |
|
|
$ |
104,779 |
|
See accompanying notes to condensed consolidated financial statements.
5
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,593 |
|
|
$ |
4,829 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
8,300 |
|
|
|
6,325 |
|
Provision for depreciation and amortization |
|
|
718 |
|
|
|
943 |
|
Goodwill impairment |
|
|
32 |
|
|
|
|
|
Compensation expense associated with stock options |
|
|
39 |
|
|
|
60 |
|
Gain on transfer of financial assets |
|
|
|
|
|
|
(340 |
) |
Gross proceeds from sales of loans held for sale |
|
|
482,641 |
|
|
|
286,885 |
|
Gross originations of loans held for sale |
|
|
(496,378 |
) |
|
|
(291,609 |
) |
Gain on sale of securities available-for-sale |
|
|
(1,243 |
) |
|
|
(1,984 |
) |
Amortization of investment premiums and accretion of discounts, net |
|
|
261 |
|
|
|
(90 |
) |
Gain on settlement of put reserve |
|
|
(1,750 |
) |
|
|
|
|
Loss (Gain) on sale of other real estate owned |
|
|
139 |
|
|
|
(20 |
) |
Write down of other real estate owned |
|
|
1,374 |
|
|
|
|
|
(Increase) in deferred income taxes |
|
|
(2,656 |
) |
|
|
(580 |
) |
Increase in cash surrender value of bank owned life policies |
|
|
(278 |
) |
|
|
(1,471 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(825 |
) |
|
|
(723 |
) |
Deferred compensation |
|
|
321 |
|
|
|
337 |
|
Deferred loan fees |
|
|
(85 |
) |
|
|
145 |
|
Other liabilities |
|
|
3,461 |
|
|
|
(5,226 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,336 |
) |
|
|
(2,519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities and payments of available for sale securities |
|
|
25,805 |
|
|
|
22,653 |
|
Proceeds from sales of available-for-sale securities |
|
|
38,707 |
|
|
|
67,874 |
|
Purchases of available-for-sale securities |
|
|
(148,000 |
) |
|
|
(41,468 |
) |
Purchase of ITIN loan portfolio |
|
|
|
|
|
|
(66,696 |
) |
Purchases of home equity loan portfolio |
|
|
(14,801 |
) |
|
|
|
|
Loan origination, net of principal repayments |
|
|
151 |
|
|
|
(11,431 |
) |
Purchases of premises and equipment, net |
|
|
(586 |
) |
|
|
(286 |
) |
Proceeds from the sales of other real estate owned |
|
|
229 |
|
|
|
315 |
|
Cash acquired in merger, net of cash consideration paid |
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(98,495 |
) |
|
|
(28,774 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase (decrease) in demand deposits and savings accounts |
|
|
35,853 |
|
|
|
(4,289 |
) |
Net (decrease) increase in certificates of deposit |
|
|
(36,286 |
) |
|
|
48,681 |
|
Net increase (decrease) in securities sold under agreement to repurchase |
|
|
1,707 |
|
|
|
(3,815 |
) |
Net change in FHLB advances |
|
|
71,000 |
|
|
|
(20,000 |
) |
Net change in other short term borrowings |
|
|
|
|
|
|
4,375 |
|
Cash dividends paid on common stock |
|
|
(2,065 |
) |
|
|
(1,742 |
) |
Cash dividends paid on preferred stock |
|
|
(639 |
) |
|
|
(640 |
) |
Net proceeds from issuance of common stock |
|
|
32,972 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities |
|
|
102,542 |
|
|
|
212,534 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,711 |
|
|
|
(8,759 |
) |
Cash and cash equivalents, beginning of period |
|
|
68,240 |
|
|
|
85,191 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
70,951 |
|
|
$ |
76,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,711 |
|
|
$ |
2,189 |
|
Interest |
|
|
7,369 |
|
|
|
9,635 |
|
Transfer of loans to other real estate owned |
|
|
882 |
|
|
|
3,229 |
|
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 fourteen offices in two
different states and licenses in California, Oregon, Washington, Idaho and Colorado. 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:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Goodwill |
|
|
|
|
|
Total consideration at fair value |
|
$ |
2,465 |
|
Fair value of non-controlling interest |
|
|
2,062 |
|
|
|
|
|
|
|
$ |
4,527 |
|
|
|
|
|
|
Acquisition date fair value of net assets acquired |
|
$ |
(800 |
) |
|
|
|
|
|
|
Goodwill at date of acquisition |
|
$ |
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
Pro-Forma Income Statement |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Intercompany |
|
|
Consolidated |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
30,663 |
|
|
$ |
|
|
|
$ |
246 |
|
|
$ |
(18 |
) |
|
$ |
30,891 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
8,955 |
|
|
|
41 |
|
|
|
638 |
|
|
|
(18 |
) |
|
|
9,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
21,708 |
|
|
|
(41 |
) |
|
|
(392 |
) |
|
|
|
|
|
|
21,275 |
|
Provision for loan and lease losses |
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
15,383 |
|
|
|
(41 |
) |
|
|
(392 |
) |
|
|
|
|
|
|
14,950 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
27 |
|
|
|
5,898 |
|
|
|
|
|
|
|
|
|
|
|
5,925 |
|
Other noninterest income |
|
|
3,789 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
3,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,816 |
|
|
|
5,900 |
|
|
|
|
|
|
|
|
|
|
|
9,716 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
6,209 |
|
|
|
2,768 |
|
|
|
98 |
|
|
|
|
|
|
|
9,075 |
|
Occupancy and equipment expense |
|
|
1,872 |
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
2,712 |
|
Other noninterest expense |
|
|
3,743 |
|
|
|
1,062 |
|
|
|
153 |
|
|
|
|
|
|
|
4,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
11,824 |
|
|
|
4,670 |
|
|
|
251 |
|
|
|
|
|
|
|
16,745 |
|
Income before provision for income taxes |
|
|
7,375 |
|
|
|
1,189 |
|
|
|
(643 |
) |
|
|
|
|
|
|
7,921 |
|
Provision for income taxes |
|
|
2,373 |
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
2,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
5,002 |
|
|
|
914 |
|
|
|
(643 |
) |
|
|
|
|
|
|
5,273 |
|
Less: Net income attributable to non-controlling interest |
|
|
|
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce Holdings |
|
$ |
5,002 |
|
|
$ |
466 |
|
|
$ |
(643 |
) |
|
|
|
|
|
$ |
4,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on preferred stock |
|
|
|
|
|
|
|
|
|
|
707 |
|
|
|
|
|
|
|
707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
5,002 |
|
|
$ |
466 |
|
|
$ |
(1,350 |
) |
|
|
|
|
|
$ |
4,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
3. Recent Accounting Pronouncements
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance will significantly
expand the disclosures that the Company must make about the credit quality of financing receivables
and the allowance for credit losses. The objectives of the enhanced disclosures are to provide
financial statement users with additional information about the nature of credit risks inherent in
the Companys financing receivables, how credit risk is analyzed and assessed when determining the
allowance for credit losses, and the reasons for the change in the allowance for credit losses.
The disclosures as of the end of the reporting period are effective for the Companys interim and
annual periods ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period are effective for the Companys interim and annual periods beginning on
or after December 15, 2010. The adoption of this Update requires enhanced disclosures and is not
expected to have a significant effect on the Companys financial statements.
FASB ASU 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is
Accounted for as a Single Asset (Topic 310), was issued April 2010 and is effective for
modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first
interim or annual period ending after July 15, 2010. As a result of the amendments in this Update,
modification of loans within the pool does not result in the removal of those loans from the pool
even if the modification of those loans would otherwise be considered a trouble debt restructuring.
An entity will continue to be required to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change. However, loans within the scope of
Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled
debt restructuring accounting provisions.
The provisions of this Update will be applied prospectively with early application permitted. Upon
initial adoption of the guidance in this Update, an entity may make a one-time election to
terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a
pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent
acquisitions of loans with credit deterioration.
The Company does not have any pools of loans accounted for in accordance with Subtopic 310-30, and
therefore, the adoption of this Update will not have a significant effect on the Companys
financial statements.
FASB
ASU 2010-13 Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the
consensus reached in EITF No. 09-J. The amendments to the codification clarify that an employee
share-based payment award with an exercise price in the currency of a market in which a substantial
portion of the entitys equity shares trades should not be considered to contain a condition that
is not market, performance or service condition. Therefore, equity would not classify such an award
as a liability if it otherwise classifies as equity. As our current share-based payment awards are
equity awards (exercise price is denominated in dollars in the U.S. where our stock is traded),
this ASU does not have an impact on our financial condition or results of operations.
FASB ASU 2010-09 Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements was issued on February 24, 2010. 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.
9
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
FASB ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements was issued in January 2010. 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.
FASB ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash was also issued in January 2010 and 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.
10
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
4. Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted in the
issuance of common stock that subsequently shared in the earnings of the entity. Net income
available to common stockholders is based on the net income attributable to Bank of Commerce
Holdings adjusted for dividend payments and accretion associated with Preferred Stock. The
following table displays the computation of earnings per share for the three and nine months ended
September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
Earnings Per Share |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce
Holdings |
|
$ |
1,559 |
|
|
$ |
1,713 |
|
|
$ |
4,599 |
|
|
$ |
4,599 |
|
Less: dividend on Preferred Stock |
|
|
213 |
|
|
|
213 |
|
|
|
639 |
|
|
|
640 |
|
Less: accretion on Preferred Stock |
|
|
22 |
|
|
|
22 |
|
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,324 |
|
|
$ |
1,478 |
|
|
$ |
3,893 |
|
|
$ |
3,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
16,991 |
|
|
|
8,711 |
|
|
|
14,263 |
|
|
|
8,711 |
|
Basic earnings per Share |
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
$ |
0.27 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of Commerce
Holdings |
|
$ |
1,559 |
|
|
$ |
1,713 |
|
|
$ |
4,599 |
|
|
$ |
4,599 |
|
Less: dividend on Preferred Stock |
|
|
213 |
|
|
|
213 |
|
|
|
639 |
|
|
|
640 |
|
Less: accretion on Preferred Stock |
|
|
22 |
|
|
|
22 |
|
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,324 |
|
|
$ |
1,478 |
|
|
$ |
3,893 |
|
|
$ |
3,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
16,991 |
|
|
|
8,711 |
|
|
|
14,263 |
|
|
|
8,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus incremental shares from assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Share |
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
$ |
0.27 |
|
|
$ |
0.45 |
|
Anti-dilutive options not included in EPS Calculation |
|
|
282,080 |
|
|
|
621,605 |
|
|
|
282,080 |
|
|
|
621,605 |
|
Anti-dilutive warrants not included in EPS Calculation |
|
|
405,405 |
|
|
|
405,405 |
|
|
|
405,405 |
|
|
|
405,405 |
|
|
5. Stock Option Plans
For the nine months of 2010, stock option compensation expense charged against income was
$39,296 compared to $59,504 at September 30, 2009. At September 30, 2010, there were $60,007 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 3.9 years. No options were
granted or exercised during the first nine months of 2010. Stock options totaling 4,200 at an
average price of $5.06 expired during the period ended September 30, 2010.
11
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 securities. The portfolio is
comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed securities, and
obligations of states and political subdivisions, and other asset backed securities. 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. 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.
Total available-for-sale securities increased $87 million or 109% at September 30, 2010 compared to
December 31, 2009. As of September 30, 2010, the Company held $140.2 million in securities with
safekeep institutions for pledging purposes. Of this amount, $43.8 million are currently pledged
for treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements;
Federal Home Loan Bank borrowings and interest rate swap contracts.
The following table summarizes the amortized cost of the Companys available-for-sale securities
at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
31,083 |
|
|
$ |
186 |
|
|
$ |
|
|
|
$ |
31,269 |
|
Obligations of state and political subdivisions |
|
|
62,964 |
|
|
|
2,168 |
|
|
|
(16 |
) |
|
|
65,116 |
|
Residential mortgage backed securities and
collateralized mortgage obligations |
|
|
64,628 |
|
|
|
1,247 |
|
|
|
(142 |
) |
|
|
65,733 |
|
Other asset backed securities |
|
|
4,746 |
|
|
|
61 |
|
|
|
|
|
|
|
4,807 |
|
|
Total |
|
$ |
163,421 |
|
|
$ |
3,662 |
|
|
$ |
(158 |
) |
|
$ |
166,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Total |
|
$ |
78,962 |
|
|
$ |
1,517 |
|
|
$ |
(417 |
) |
|
$ |
80,062 |
|
|
The amortized cost and estimated fair value of available-for-sale securities at September 30, 2010
are shown below.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
20,787 |
|
|
|
21,089 |
|
Due after five years through ten years |
|
|
23,905 |
|
|
|
24,321 |
|
Due after ten years |
|
|
118,729 |
|
|
|
121,515 |
|
|
|
|
|
|
|
|
Total |
|
$ |
163,421 |
|
|
$ |
166,925 |
|
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 expected future
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.
12
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
September 30, 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 September 30, 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 September 30, 2010 |
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
(Dollars in thousands) |
|
Value |
|
|
Unrealized Losses |
|
|
Value |
|
|
Unrealized Losses |
|
|
Value |
|
|
Losses |
|
Obligations of state and
political subdivisions |
|
$ |
4,175 |
|
|
$ |
(16 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,175 |
|
|
|
(16 |
) |
Residential mortgage
backed securities and
collateralized mortgage
obligations |
|
|
11,826 |
|
|
|
(99 |
) |
|
|
3,644 |
|
|
|
(43 |
) |
|
|
15,470 |
|
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities |
|
$ |
16,001 |
|
|
$ |
(115 |
) |
|
$ |
3,644 |
|
|
$ |
(43 |
) |
|
$ |
19,645 |
|
|
$ |
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
(Dollars in thousands) |
|
Value |
|
|
Unrealized Losses |
|
|
Value |
|
|
Unrealized Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury and agencies |
|
$ |
3,994 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,994 |
|
|
$ |
|
|
Obligations of state and
political subdivisions |
|
|
8,517 |
|
|
|
(84 |
) |
|
|
500 |
|
|
|
(1 |
) |
|
|
9,017 |
|
|
|
(85 |
) |
Residential mortgage
backed securities and
collateralized mortgage
obligations |
|
|
7,516 |
|
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
7,516 |
|
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities |
|
$ |
20,027 |
|
|
$ |
(416 |
) |
|
$ |
500 |
|
|
$ |
(1 |
) |
|
$ |
20,527 |
|
|
$ |
(417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
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.
13
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.
Residential mortgage-backed securities and collateralized mortgage obligations
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. As of September 30, 2010, there were two non agency collateralized
mortgage obligations in unrealized loss positions greater than twelve months.
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
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). The
following table summarizes the changes in the Companys goodwill for the years ended December 31,
2008, 2009, and the period ending September 30, 2010. All recorded goodwill is related to the
Mortgage Services segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services |
|
|
|
|
|
|
|
Accumulated |
|
|
(Dollars in thousands) |
|
Gross |
|
|
Impairment |
|
|
Total |
|
|
Balance, December 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net additions |
|
|
3,727 |
|
|
|
|
|
|
|
3,727 |
|
|
|
|
Balance, December 31, 2009 |
|
|
3,727 |
|
|
|
|
|
|
|
3,727 |
|
Impairment |
|
|
|
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
Balance, September 30, 2010 |
|
$ |
3,727 |
|
|
$ |
(32 |
) |
|
$ |
3,695 |
|
|
|
|
At September 30, 2010, the Company had recorded goodwill of $3,695,012 as compared to $3,727,052 at
December 31, 2009. The goodwill recorded in connection with the acquisition of mortgage services
represents the excess of the purchase price over the estimated fair value of the net assets
acquired. Goodwill and other intangible assets with indefinite lives are not amortized but instead
are periodically tested for impairment.
The Company performs a goodwill impairment analysis on an annual basis as of April 30th.
Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events
or circumstances indicate impairment potentially exists. A significant amount of judgment is
involved in determining if an indicator of impairment has occurred. Such indicators may include,
among others, a significant decline in our expected cash flows; a sustained, significant decline in
our stock price and market capitalization; a significant adverse change in legal factors or in the
business climate; adverse action or assessment by regulator; and unanticipated competition.
The goodwill impairment test involves a two-step process. The first step compares the fair value of
a reporting unit to its carrying value. If the reporting units fair value is less than its
carrying value, the Company would be required to proceed to the second step. In the second step the
Company calculates the implied fair value of the reporting units goodwill. The implied fair value
of goodwill is determined in the same manner as goodwill recognized in a business combination. The
estimated fair value of the Company is allocated to all of the Companys assets and liabilities,
based on their relative fair values, including any unrecognized identifiable intangible assets, as
if the Company had been acquired in a business combination and the estimated fair value of the
reporting unit is the price paid to acquire it.
14
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Any excess of the estimated fair value of the Company over the fair value of the reporting units
net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is
greater than the implied fair value of that goodwill, an impairment loss would be recognized as a
charge to earnings in an amount equal to that excess.
The Company performed its annual goodwill impairment analysis of the Mortgage Brokerage Services
operating segment as of April 30, 2010. The Company engaged an independent valuation consultant to
assist in determining whether and to what extent our goodwill asset was impaired. The results of
the Companys and valuation specialists step one impairment test indicated that the reporting
units fair value was less than its carrying value, and therefore the Company performed step two of
the analysis.
In the second step of the goodwill impairment analysis, we calculated the fair value of the
reporting units assets and liabilities. There were no unrecognized identifiable intangible assets
associated with the reporting unit. We determined the implied fair value of goodwill pertaining to
the reporting unit was less than the carrying amount of goodwill recorded. In accordance to
accounting standards, the carrying amount of goodwill was written down to its implied fair value.
Accordingly, the Company recognized an impairment loss of $32,039.
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 September 30, 2010 was 3.83%. 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 simultaneously issued $310,000 of the Trusts common securities
of beneficial interest to the Company. The Trust Preferred Securities mature on September 15,
2035, and are redeemable at the Companys option on any March 15, June 15, September 15 or
December 15 on or after September 15, 2010.
In addition, the Trust Preferred Securities require quarterly distributions by the Trust to the
holder of the Trust Preferred Securities at a rate of 6.12%, until September 10, 2010 after which
the rate will reset quarterly to equal 3-Month LIBOR plus 1.58%. On September 10, 2010 the rate
reset to 1.87%.
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, an additional
$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.
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.
15
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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.
The preferred stock proceeds from the Treasury Department were 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.
16
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 September 30, 2010
are below:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
Operating Leases |
|
|
|
|
|
|
|
|
2010 |
|
$ |
200 |
|
2011 |
|
|
775 |
|
2012 |
|
|
606 |
|
2013 |
|
|
488 |
|
2014 |
|
|
499 |
|
Thereafter |
|
|
434 |
|
|
|
|
|
Total |
|
$ |
3,002 |
|
|
|
|
|
Legal Proceedings - The Company is involved in various pending and threatened legal actions arising
in the ordinary course of business. The Company maintains reserves for losses from legal actions,
which are both probable and estimable. In the opinion of management, the disposition of claims,
currently pending will not have a material adverse affect on the Companys financial position or
results of operations.
FHLB Advances The Company has advances from the Federal Home Loan Bank of San Francisco (FHLB)
totaling $141 million as of September 30, 2010 and $100 million as of September 30, 2009. The
Company has two fixed rate advances for $6 million and $120 million, with interest payable at
maturity and monthly respectively. In addition, the Company has one floating rate advance for $15
million. 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:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
FHLB Advances |
|
|
|
|
|
|
Advance Amount |
|
Interest Rate |
|
|
Maturity |
|
$ |
6,000 |
|
|
|
0.25 |
% |
|
|
12/7/2010 |
|
|
120,000 |
|
|
|
0.28 |
% |
|
|
12/7/2010 |
|
|
15,000 |
|
|
|
0.30 |
% |
|
|
3/5/2013 |
|
The borrowings are secured by an investment in FHLB stock, certain real estate mortgage loans which
have been specifically pledged to the FHLB pursuant to their collateral requirements, and
securities held in the Banks available for sale securities portfolio. Based upon the level of
FHLB advances, the Company was required to hold an investment in FHLB stock of $6.9 million.
Furthermore, the Company has pledged $190 million of its commercial and real estate mortgage loans,
and has borrowed $135 million against the pledged loans. As of September 30, 2010, the Company held
$80.7 million in securities with the FHLB for pledging purposes. Of this amount $6.0 million are
pledged as collateral against borrowings, and the remaining securities are considered unpledged.
At September 30, 2010, the Company had available borrowing lines at the FHLB of $79.4 million 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 September 30, 2010 and $0
as of September 30, 2009. The FRBs discount window credit facility is limited to overnight
borrowings. The Company has pledged $82.4 million in commercial and industrial loans as collateral
as of September 30, 2010, and had available borrowing lines at the FRB of $50.3 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.
17
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Credit Commitments |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Unfunded loan commitments |
|
$ |
121,164 |
|
|
$ |
137,964 |
|
Standby letters of credit |
|
|
3,858 |
|
|
|
5,489 |
|
Guaranteed commitments outstanding |
|
|
1,299 |
|
|
|
1,325 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
126,321 |
|
|
$ |
144,778 |
|
|
|
|
|
|
|
|
|
|
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 $264,000,000 loan volume
over the period from April 1, 2010 through May 31, 2011. Upon failure to deliver minimum loan
volume quarterly, the Company is responsible to pay a non-delivery fee to the purchaser.
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 September 30, 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 34.38% for the nine months ending September 2010,
compared with 34.35% for the nine months ending September 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.
18
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 net income attributable to non controlling interest.
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 goodwill. 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.
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.
19
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents information about the Companys assets and liabilities measured at
fair value on a recurring basis as of September 30, 2010, and indicate the fair value hierarchy of
the valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Recurring basis |
|
Fair Value at September 30, 2010 |
|
|
Gains |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
(Losses) |
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
65,116 |
|
|
$ |
|
|
|
$ |
65,116 |
|
|
$ |
|
|
|
$ |
|
|
Other investment securities (1) |
|
|
101,809 |
|
|
|
|
|
|
|
101,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
166,925 |
|
|
$ |
|
|
|
$ |
166,925 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
602 |
|
|
|
|
|
|
$ |
602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
602 |
|
|
$ |
|
|
|
$ |
602 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage-backed securities
issued or guaranteed by governmental agencies. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Recurring basis |
|
Fair Value at December 31, 2009 |
|
|
Gains |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
(Losses) |
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
32,646 |
|
|
$ |
|
|
|
$ |
32,646 |
|
|
$ |
|
|
|
$ |
|
|
Other investment securities (1) |
|
|
47,416 |
|
|
|
|
|
|
|
47,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
80,062 |
|
|
$ |
|
|
|
$ |
80,062 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage-backed
securities issued or guaranteed by governmental agencies |
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.
Derivative Assets and Liabilities The valuation of the Companys interest rate swaps are
obtained from a third-party pricing service. The fair values are determined by using a discounted
cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on
observable inputs for the contractual terms of the derivatives, including the period to maturity
and interest rate curves. The Company has determined that the source of the derivative fair values
fall with Level 2 of the fair value hierarchy.
20
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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. No liabilities were measured at fair value on a non recurring basis at
September 30, 2010 or December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Non recurring basis |
|
Fair Value at September 30, 2010 |
|
|
Losses as of September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
(Losses) |
|
|
(Losses) |
|
Impaired loans |
|
$ |
20,698 |
|
|
$ |
|
|
|
$ |
14,399 |
|
|
$ |
6,299 |
|
|
$ |
(1,289 |
) |
|
$ |
(4,946 |
) |
Other real estate owned |
|
|
2,020 |
|
|
|
|
|
|
|
|
|
|
|
2,020 |
|
|
|
(125 |
) |
|
|
(1,374 |
) |
Goodwill |
|
|
3,695 |
|
|
|
|
|
|
|
|
|
|
|
3,695 |
|
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at
fair value |
|
$ |
26,413 |
|
|
$ |
0 |
|
|
$ |
14,399 |
|
|
$ |
12,014 |
|
|
$ |
(1,414 |
) |
|
$ |
(6,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Non recurring basis |
|
Fair Value at December 31, 2009 |
|
|
Losses as of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three |
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
(Losses) |
|
|
(Losses) |
|
Impaired loans |
|
$ |
5,278 |
|
|
$ |
|
|
|
$ |
2,917 |
|
|
$ |
2,361 |
|
|
$ |
(563 |
) |
|
$ |
(633 |
) |
Other real estate owned |
|
|
2,880 |
|
|
|
|
|
|
|
|
|
|
|
2,880 |
|
|
|
(161 |
) |
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at
fair value |
|
$ |
8,158 |
|
|
$ |
|
|
|
$ |
2,917 |
|
|
$ |
5,241 |
|
|
$ |
(724 |
) |
|
$ |
(794 |
) |
For the nine months ending September 30, 2010:
|
|
|
Impaired loans with a carrying amount of $25,643,581 were written down to their fair
value of $20,697,921, resulting in an impairment charge of $4,945,660 which was included in
earnings for the period. |
|
|
|
|
Other real estate owned with a carrying amount of $3,393,283 was written down to fair
value of $2,019,547 resulting in a loss of $1,373,736 which was included in earnings for
the period. |
|
|
|
|
Goodwill with a carrying amount of $3,727,052 was written down to the fair value of
$3,695,012, resulting in an impairment charge of $32,040, which was included in earnings
for the period. |
The following methods were used to estimate the fair value of each class of financial instrument
above:
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.
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 September 30, 2010, the impaired loans were
evaluated based on the discounted cash flow method or the fair value of the collateral.
21
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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 September 30, 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.
Goodwill The fair value of goodwill is estimated using a market and income approach, and is
provided to the Company by a third party independent valuation consultant. See footnote 10 for
further disclosure pertaining to the goodwill impairment analysis.
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.
Derivative assets and liabilities The valuation of the Companys interest rate swaps is obtained
from a third-party pricing service. The fair values are determined by using a discounted cash flow
analysis on the expected cash flows of each derivative. The pricing analysis is based on
observable inputs for the contractual terms of the derivatives, including the period to maturity
and interest rate curves. The Company has determined that the source of the derivative fair values
fall with Level 2 of the fair value hierarchy.
22
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Commitments Loan commitments and standby letters of credit generate ongoing fees, which are
recognized over the term of the commitment period. In situations where the borrowers credit
quality has declined, we record a reserve for these off-balance sheet commitments. Given the
uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of
the fair value of these commitments is the carrying value of the related unamortized loan fees plus
the reserve, which is not material. As such, no disclosures are made on the fair value of
commitments.
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.
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 table below is a summary of fair value estimates for financial instruments as of September 30,
2010 and December 31, 2009, excluding financial instruments recorded at fair value on a recurring
basis (summarized in a separate table). The carrying amounts in the following table are recorded
in the statement of condition under the indicated captions. We have excluded non-financial assets
and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), such as Bank premises
and equipment, deferred taxes and other liabilities. In addition, we have not disclosed the fair
value of financial instruments specifically excluded from disclosure requirements of the Financial
Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance
policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
|
(Dollars in thousands) |
|
Amounts |
|
|
Fair Value |
|
|
Amounts |
|
|
Fair Value |
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
70,951 |
|
|
$ |
70,951 |
|
|
$ |
68,240 |
|
|
$ |
68,240 |
|
Portfolio loans, net |
|
|
595,575 |
|
|
|
605,500 |
|
|
|
590,023 |
|
|
|
611,099 |
|
Mortgages held for sale |
|
|
41,025 |
|
|
|
41,025 |
|
|
|
27,288 |
|
|
|
27,288 |
|
Interest receivable |
|
|
3,862 |
|
|
|
3,862 |
|
|
|
3,087 |
|
|
|
3,087 |
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
640,031 |
|
|
|
641,588 |
|
|
|
640,465 |
|
|
|
642,917 |
|
Securities sold under agreement to repurchase |
|
|
11,328 |
|
|
|
11,328 |
|
|
|
9,621 |
|
|
|
9,621 |
|
Federal home loan borrowings |
|
|
141,000 |
|
|
|
141,000 |
|
|
|
70,000 |
|
|
|
70,000 |
|
Subordinated debenture |
|
|
15,465 |
|
|
|
15,465 |
|
|
|
15,465 |
|
|
|
15,465 |
|
Earn out payable |
|
|
976 |
|
|
|
976 |
|
|
|
965 |
|
|
|
965 |
|
Interest payable |
|
|
397 |
|
|
|
397 |
|
|
|
495 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
Contract |
|
Off balance sheet financial instruments: |
|
Amount |
|
|
Amount |
|
Commitments to extend credit |
|
$ |
121,164 |
|
|
$ |
122,872 |
|
Standby letters of credit |
|
$ |
3,858 |
|
|
$ |
4,844 |
|
Guaranteed commitments outstanding |
|
$ |
1,299 |
|
|
$ |
1,325 |
|
23
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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 fourteen offices in two different
states. Furthermore, the subsidiary is licensed 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 tables represent a reconciliation of the Companys reportable segments income
and expenses to the Companys consolidated net income for the three months and nine months ending
September 30, 2009 and September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Net interest income (expense) |
|
$ |
8,920 |
|
|
$ |
|
|
|
$ |
(141 |
) |
|
$ |
(139 |
) |
|
$ |
8,640 |
|
Provision for loan and lease losses |
|
|
4,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,450 |
|
Total noninterest income |
|
|
2,391 |
|
|
|
3,153 |
|
|
|
|
|
|
|
139 |
|
|
|
5,683 |
|
Total noninterest expense |
|
|
4,609 |
|
|
|
2,732 |
|
|
|
(48 |
) |
|
|
|
|
|
|
7,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,252 |
|
|
|
421 |
|
|
|
(93 |
) |
|
|
|
|
|
|
2,580 |
|
Provision for income taxes |
|
|
709 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,543 |
|
|
|
214 |
|
|
|
(93 |
) |
|
|
|
|
|
|
1,664 |
|
Less: Net income attributable to
non-controlling interest |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of
Commerce Holdings |
|
$ |
1,543 |
|
|
$ |
109 |
|
|
$ |
(93 |
) |
|
$ |
|
|
|
$ |
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Net interest income (expense) |
|
$ |
25,121 |
|
|
$ |
(1 |
) |
|
$ |
(437 |
) |
|
$ |
(354 |
) |
|
$ |
24,329 |
|
Provision for loan and lease losses |
|
|
8,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,300 |
|
Total noninterest income |
|
|
4,394 |
|
|
|
8,214 |
|
|
|
|
|
|
|
354 |
|
|
|
12,962 |
|
Total noninterest expense |
|
|
13,914 |
|
|
|
7,634 |
|
|
|
440 |
|
|
|
|
|
|
|
21,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
7,301 |
|
|
|
579 |
|
|
|
(877 |
) |
|
|
|
|
|
|
7,003 |
|
Provision for income taxes |
|
|
2,079 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
2,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
5,222 |
|
|
|
248 |
|
|
|
(877 |
) |
|
|
|
|
|
|
4,593 |
|
Less: Net income attributable to
non-controlling interest |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of
Commerce Holdings |
|
$ |
5,222 |
|
|
$ |
254 |
|
|
$ |
(877 |
) |
|
$ |
|
|
|
$ |
4,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Net interest income (expense) |
|
$ |
7,586 |
|
|
$ |
(9 |
) |
|
$ |
(171 |
) |
|
$ |
|
|
|
$ |
7,406 |
|
Provision for loan and lease losses |
|
|
1,850 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
1,844 |
|
Total noninterest income |
|
|
1,050 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
|
|
|
2,944 |
|
Total noninterest expense |
|
|
4,042 |
|
|
|
1,525 |
|
|
|
87 |
|
|
|
|
|
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,744 |
|
|
|
366 |
|
|
|
(258 |
) |
|
|
|
|
|
|
2,852 |
|
Provision for income taxes |
|
|
907 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,837 |
|
|
|
263 |
|
|
|
(258 |
) |
|
|
|
|
|
|
1,842 |
|
Less: Net income attributable to
non-controlling interest |
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of
Commerce Holdings |
|
$ |
1,837 |
|
|
$ |
134 |
|
|
$ |
(258 |
) |
|
$ |
|
|
|
$ |
1,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Net interest income (expense) |
|
$ |
21,736 |
|
|
$ |
(12 |
) |
|
$ |
(420 |
) |
|
$ |
|
|
|
$ |
21,304 |
|
Provision for loan and lease losses |
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,325 |
|
Total noninterest income |
|
|
3,816 |
|
|
|
3,188 |
|
|
|
|
|
|
|
|
|
|
|
7,004 |
|
Total noninterest expense |
|
|
11,825 |
|
|
|
2,432 |
|
|
|
250 |
|
|
|
|
|
|
|
14,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
7,402 |
|
|
|
744 |
|
|
|
(670 |
) |
|
|
|
|
|
|
7,476 |
|
Provision for income taxes |
|
|
2,373 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
2,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
5,029 |
|
|
|
470 |
|
|
|
(670 |
) |
|
|
|
|
|
|
4,829 |
|
Less: Net income attributable to
non-controlling interest |
|
|
|
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributable to Bank of
Commerce Holdings |
|
$ |
5,029 |
|
|
$ |
240 |
|
|
$ |
(670 |
) |
|
$ |
|
|
|
$ |
4,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables represent a reconcilement Companys reportable segment total assets, gross
loans, and deposits to the consolidated balance sheet items for the periods ending September 30,
2010, December 31, 2010 and September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Total assets |
|
$ |
915,924 |
|
|
$ |
18,448 |
|
|
$ |
9,351 |
|
|
$ |
(19,451 |
) |
|
$ |
924,272 |
|
Total loans, gross |
|
$ |
618,617 |
|
|
$ |
|
|
|
$ |
2,336 |
|
|
$ |
(9,926 |
) |
|
$ |
611,027 |
|
Total deposits |
|
$ |
647,655 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,624 |
) |
|
$ |
640,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Total assets |
|
$ |
807,216 |
|
|
$ |
15,001 |
|
|
$ |
3,873 |
|
|
$ |
(12,684 |
) |
|
$ |
813,406 |
|
Total loans, gross |
|
$ |
606,472 |
|
|
$ |
|
|
|
$ |
2,470 |
|
|
$ |
(7,712 |
) |
|
$ |
601,230 |
|
Total deposits |
|
$ |
643,582 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,118 |
) |
|
$ |
640,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
Total assets |
|
$ |
795,326 |
|
|
$ |
23,490 |
|
|
$ |
4,280 |
|
|
$ |
(8,416 |
) |
|
$ |
814,680 |
|
Total loans, gross |
|
$ |
601,171 |
|
|
$ |
|
|
|
$ |
2,513 |
|
|
$ |
(3,900 |
) |
|
$ |
599,784 |
|
Total deposits |
|
$ |
602,664 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,990 |
) |
|
$ |
599,674 |
|
25
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
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.
In addition, on April 14, 2010 the Company announced that the underwriters of the public offering
of common shares fully exercised their over-allotment option, which resulted in the issuance of an
additional 1,080,000 shares of common stock, and approximately $4.4 million in additional net
proceeds. The option was granted in connection with the Companys public offering of 7,200,000
shares of common stock at a public offering price of $4.25 per share. With the additional proceeds
from the exercise of the over-allotment option, the Company realized total net proceeds from the
offering of approximately $33.1 million, after deducting the underwriting discount and offering
expenses. The exercise of the over-allotment option brings the total number of shares of common
stock sold by the Company in the offering to 8,280,000.
During the three months ending September 30, 2010 the Company recognized an additional $141,604 in
professional fees directly related to the common stock offering. The billings for the professional
fees were received subsequent to the offering, but pertained directly to the offering.
Accordingly, these expenses were netted out of the proceeds from the offering during the current
period.
17. Other Real Estate Owned
Other real estate owned represents real estate which the Bank has taken control of in partial or
full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the
lower of the carrying amount of the loan or fair value less costs to sell, which becomes the
propertys new basis. Any write-downs based on the assets fair value at the date of acquisition
are charged to the allowance for loan and lease losses. After foreclosure, management periodically
performs valuations such that the real estate is carried at the lower of its new cost basis or fair
value, net of estimated costs to sell. Subsequent valuation adjustments are recognized within net
loss on other real estate owned. Revenue and expenses from operations and subsequent adjustments to
the carrying amount of the property are included in non-interest expense in the Consolidated
Statements of Income.
At September 30, 2010 and December 31, 2009, the recorded investment in other real estate owned
(OREO) was $2,019,547 and $2,879,956, respectively. For the nine months ended September 30, 2010,
the Company transferred property from ten loans in the amount of $882,156 to OREO, sold five
properties with balances of $368,829 for a net loss of $139,463, recorded $1,373,736 in write downs
of OREO in other noninterest expense, and adjusted the balances through charges to the allowance
for loan and lease losses in the amount of $194,683. The September 30, 2010 OREO balance of
$2,019,547 consists of eight properties with seven being residential real estate in the amount of
$589,410 and one property representing residential land in the amount of $1,430,137.
18. Derivatives
As part of the Companys risk management strategy, the Company enters into interest rate swap
agreements to mitigate the interest rate risk inherent in certain of the Companys assets and
liabilities. Presently, the Company does not use derivatives for trading or speculative purposes.
The primary underlying risk exposure of the derivative instruments are changes in interest rates
counter to the Companys longer term interest rate expectations. Furthermore, interest rate swap
agreements involve the risk of dealing with institutional derivative counterparties and their
ability to adhere to contractual terms. The agreements are entered into with counterparties that
meet established credit standards and contain master netting and collateral provisions protecting
the at-risk party. Oversight of the Derivatives and Hedging Program is the responsibility of the
Asset-Liability Committee of the Companys Board of Directors. Based on adherence to the Companys
credit standards and the presence of the netting and collateral provisions, the Company believes
that the credit risk inherent in these contracts was not significant at September 30, 2010.
26
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Cash flow hedges
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash
flow hedges are reported in other comprehensive income and subsequently reclassified to earnings
when gains or losses are realized. Each quarter, the Company assesses the effectiveness of each
hedging relationship by comparing the changes in cash flows of the derivative hedging instrument
with the changes in cash flows of the designated hedged item or transaction. The ineffective
portion of changes in the fair value of the derivatives is recognized directly in earnings.
As of September 30, 2010, the Company held derivatives with a total notional amount of $75 million.
The total $75 million represents interest rate swaps designated as cash flow hedges.
The following table summarizes the notional amount, effective date and maturity dates of the
forward starting interest rate contracts the Company has outstanding with counterparties as of
September 30, 2010.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
Description |
|
Notional Amount |
|
|
Effective Date |
|
Maturity |
|
Forward starting interest rate swap |
|
$ |
75,000 |
|
|
March 1, 2012 |
|
September 1, 2012 |
Forward starting interest rate swap |
|
$ |
75,000 |
|
|
September 4, 2012 |
|
September 1, 2013 |
Forward starting interest rate swap |
|
$ |
75,000 |
|
|
September 3, 2013 |
|
September 1, 2014 |
Forward starting interest rate swap |
|
$ |
75,000 |
|
|
September 2, 2014 |
|
September 1, 2015 |
Forward starting interest rate swap |
|
$ |
75,000 |
|
|
September 1, 2015 |
|
March 1, 2017 |
|
The hedge strategy converts the LIBOR based floating rate of interest on certain FHLB advances to
fixed interest rates, thereby protecting the Company from floating interest rate variability.
Pursuant to the interest rate swap agreements, the Company pledged collateral to counterparties in
the form of securities totaling $3.0 million with an amortized cost of $3.1 million and a fair
value of $3.1 million as of September 30, 2010. No collateral was posted from counterparties to the
Company as of September 30, 2010. There is the possibility that the Company may need to post
additional collateral in the future in proportion to potential increases in unrealized loss
positions.
As of September 30, 2010 there were no cash flows exchanged with the counterparties of the interest
rate swap contracts. As such, there was no ineffectiveness. For the three months ending September
30, 2010 the derivatives carried a negative fair value of $602,233, of which $355,317 was
recognized as a loss in other comprehensive income. There were no reclassifications into earnings
for the period ending September 30, 2010.
The following table summarizes the type of derivative and their location on the Condensed
Consolidated Balance Sheet, and the fair values of such derivatives as of September 30, 2010. The
Company did not carry any derivatives as of December 31, 2009 or September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
Underlying |
|
|
|
Balance Sheet |
|
Sept 30, |
|
|
|
Risk Exposure |
|
Description |
|
Location |
|
2010 |
|
|
Maturity |
|
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other liabilities |
|
$ |
(108 |
) |
|
September 1, 2012 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other liabilities |
|
$ |
(235 |
) |
|
September 1, 2013 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other liabilities |
|
$ |
(195 |
) |
|
September 1, 2014 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other liabilities |
|
$ |
(103 |
) |
|
September 1, 2015 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other liabilities |
|
$ |
39 |
|
|
March 1, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(602 |
) |
|
|
|
Fair values of the derivatives are obtained from a third-party pricing service, see footnote 13 for
further disclosures pertaining to fair value calculations of derivatives.
27
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
20. Gain on Settlement of Put Reserve
During the three months ending September 30, 2010, the Company received a written release to the
put reserve provided on the ITIN loan pool purchase. Prior to the release, the put reserve carried
a balance of $2.1 million; approximately $398,627 of the reserve was paid to the private equity
firm as consideration. As a result of the settlement, the Company received $1.8 million in net
proceeds and was not required to transfer the outstanding principal balance of any additional ITIN
loans. The Company recorded a $1.8 million gain on settlement.
The put reserve was part of the April 17, 2009 loan swap transaction in which the Company
purchased a pool of Individual Tax Identification Number (ITIN) residential mortgages in exchange
for a combination of certain nonperforming loans and cash. The put reserve or credit enhancement
originally totaled $3.5 million; the Company had the right but not the obligation to put back the
outstanding principal balance of any ITIN loan that became sixty days or more delinquent over a
period not to exceed three years from the transaction date. As a result of the settlement, the
Company is now entirely dependent on the general Allowance for Loan Losses and any specific
valuation allowances held against the ITIN portfolio. The Company has increased its allocations to
the Allowance for Loan Losses for its ITIN portfolio. The Company recorded a gain of $1.8 million
on settlement.
21. Subsequent Events
The Company has evaluated the effects of subsequent events that have occurred subsequent to period
end September 30, 2010 and has determined that there was no material recognized or non-recognized
subsequent events that require recognition or disclosure during the third quarter 2010 consolidated
financial statements or Notes to the financial statements.
28
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 September 30, 2010. Also discussed
are significant trends and changes in the Companys results of operations for the three and nine
months ended September 30, 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 fourteen offices in two 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.
29
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 our capital 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 September 30, 2010, we had $28 million in
nonperforming assets, including other real estate owned of $2.0 million, which as a percentage of
total assets was 3.03%. We also seek to maintain a prudent allowance for loan losses, which at
September 30, 2010 was $15.5 million, representing 2.53% of our loan portfolio.
30
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 1901Churn 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.
31
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 disbursement 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 frequently asset sensitive. However,
presently we are liability sensitive, because many of the variable rate loans are presently at
their floors.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
As a result, we are frequently adversely affected by declining interest rates, however in our
present rate environment we could potentially be adversely affected by rising rates as well. 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.
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 equity holdings consist of shares of the Federal Home Loan Bank of San Francisco (FHLB). As
of September 30, 2010, we held stock in the FHLB totaling $6.9 million. The stock is carried at
cost and is subject to recoverability testing under applicable accounting standards. As of
September 30, 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.
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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.
34
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 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.
35
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. |
36
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 $2.6 million on September 30, 2010. There
can be no assurance that the FDIC will not increase premiums 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 16,991,495 shares were outstanding
as of September 30, 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.
37
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 April 14, 2010 the Company announced that the underwriters of the public offering of common
shares fully exercised their over-allotment option, which resulted in the issuance of an additional
1,080,000 shares of common stock, and approximately $4.4 million in additional net proceeds. The
option was granted in connection with the Companys public offering of 7,200,000 shares of common
stock at a public offering price of $4.25 per share. With the additional proceeds from the exercise
of the over-allotment option, the Company realized total net proceeds from the offering of
approximately $33.4 million, after deducting the underwriting discount and offering expenses. The
exercise of the over-allotment option brings the total number of shares of common stock sold by the
Company in the offering to 8,280,000.
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.
38
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 September 30, 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 above $0.08 per share 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.
39
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 September 30, 2010, time certificates of deposit in excess of $100,000 represented approximately
35.57% 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 overall weakness in the economy and the deteriorating housing market, even if
interest rates were to fall, mortgage originations may also fall, with a corresponding impact on
origination fees.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Impact of New Financial Reform Legislation is Yet to be Determined
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Act), a landmark financial reform bill comprised of new rules and
restrictions that will impact banks going forward. It includes key provisions aimed at preventing a
repeat of the 2008 financial crisis and a new process for winding down failing, systemically
important institutions in a manner as close to a controlled bankruptcy as possible. The Act
includes other key provisions as follows:
(1) The Act establishes a new Financial Stability Oversight Council to monitor systemic financial
risks. The Board of Governors of the Federal Reserve (Fed) are given extensive new authorities to
impose strict controls on large bank holding companies with total consolidated assets equal to or
in excess of $50 billion and systemically significant nonbank financial companies to limit the risk
they might pose for the economy and to other large interconnected companies. The Fed can also take
direct control of troubled financial companies that are considered systemically significant.
(2) The Act also establishes a new independent Federal regulatory body for consumer protection
within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the
Bureau), which will assume responsibility for most consumer protection laws (except the Community
Reinvestment Act). It will also be in charge of setting appropriate consumer banking fees and caps.
The Office of Comptroller of the Currency will continue to have authority to preempt state banking
and consumer protection laws if these laws prevent or significantly interfere with the business
of banking.
(3) The Act restricts the amount of trust preferred securities (TPS) that may be considered as
Tier 1 Capital. For depository institution holding companies below $15 billion in total assets, TPS
issued before May 19, 2010 will be grandfathered, so their status as Tier 1 capital does not
change. However going forward, TPS will be disallowed as Tier 1 capital. Beginning January 1, 2013,
Bank holding companies above $15 billion in assets will have a three-year phase-in period to fill
the capital gap caused by the disallowance of the TPS issued before May 19, 2010.
(4) The Act effects changes in the FDIC assessment base with stricter oversight. A new council of
regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must
keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive to
January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction
accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes
the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a
depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction
account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion
that is over $250 thousand coverage limit.
(5) The Act places certain limitations on investment and other activities by depository
institutions, holding companies and their affiliates.
The impact of the Act on our banking operations is still uncertain due to the massive volume of new
rules still subject to adoption and interpretation.
41
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 stockholders.
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 frequently considered asset sensitive, and generally we are affected adversely by
declining interest rates. However, in the present interest rate environment, many of our variable
rate loans are priced at their floors. As a result, we would not experience an immediate benefit in
a rising rate environment.
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.
42
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 fourteen offices in two different
states. Furthermore, the subsidiary is licensed 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.
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
Nine months ending |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
Profitability |
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.70 |
% |
|
|
0.77 |
% |
Return on average equity |
|
|
6.61 |
% |
|
|
8.88 |
% |
Average earning assets to total average assets |
|
|
89.86 |
% |
|
|
93.56 |
% |
Interest Margin |
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.14 |
% |
|
|
3.81 |
% |
Asset Quality |
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
|
|
2.53 |
% |
|
|
1.48 |
% |
Nonperforming assets to total assets |
|
|
3.03 |
% |
|
|
3.28 |
% |
Net charge-offs to average loans |
|
|
0.67 |
% |
|
|
0.99 |
% |
Liquidity |
|
|
|
|
|
|
|
|
Loans to deposits |
|
|
93.05 |
% |
|
|
98.53 |
% |
Liquidity ratio |
|
|
47.30 |
% |
|
|
36.38 |
% |
Capital |
|
|
|
|
|
|
|
|
Tier 1 risk-based capital Bank |
|
|
14.28 |
% |
|
|
11.58 |
% |
Total risk-based capital Bank |
|
|
15.54 |
% |
|
|
12.83 |
% |
Tier 1 risk-based capital Company |
|
|
14.58 |
% |
|
|
11.79 |
% |
Total risk-based capital Company |
|
|
15.84 |
% |
|
|
13.01 |
% |
Efficiency |
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
58.96 |
% |
|
|
51.25 |
% |
Financial Highlights Results of Operations
Balance Sheet
As of September 30, 2010, the Company had total consolidated assets of $924.3 million, total net
portfolio loans of $596 million, an allowance for loan and lease losses of $15.5 million, or 2.53%
of total portfolio loans, deposits outstanding of $640 million and stockholders equity of $104.8
million.
The real estate development and construction related portfolios are beginning to stabilize, but
remain under stress. Furthermore, the Companys Commercial and Industrial portfolio has weakened,
particularly for loan which the borrow is tied to real estate. The 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 $4.1 million for
the nine month period ended at September 30, 2010 compared to net charge offs of $5.9 million for
the same period a year ago. The charge-offs were centered in real estate loans and commercial &
industrial loans. OREO was $2.0 million at September 30, 2010 and $3.0 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 $8.3 million in provisions for loan and lease losses for the nine months
ended September 30, 2010 compared to $6.3 million for the same period a year ago. The Companys
allowance for loan losses was 2.53% of total portfolio loans at September 30, 2010 compared to
1.48% of total loans for the same period a year ago.
Our Company continues to maintain a relatively low-risk, liquid 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 period the Company leveraged the proceeds of the
common stock issuance and purchased U.S agencies, municipals, and residential mortgage backed
securities. As such, available for sales securities increased from $86.5 million as of September
30, 2009 to $166.9 million as of September 30, 2010.
During the nine months ended September 30, 2010, the Company has recorded approximately $1.2
million in realized gains on sales of securities. Proceeds from the sales were used to fund
additional provisions to the allowance for loan and lease losses as well as general
operational expenses.
44
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 April 14, 2010 the Company announced that the underwriters of its recent public offering of
common shares have fully exercised their over-allotment option, which resulted in the issuance of
an additional 1,080,000 shares of common stock. The option was granted in connection with the
Companys public offering of 7,200,000 shares of common stock at a public offering price of $4.25
per share, which closed on March 29, 2010. The exercise of the over-allotment option resulted in
additional net proceeds of approximately $4.4 million, bringing the expected total net proceeds of
the offering to approximately $33.1 million, after deducting the underwriting discount and
estimated offering expenses. The exercise of the over-allotment option brings the total number of
shares of common stock sold by the Company in the offering to 8,280,000.
During the three months ending September 30, 2010 the Company recognized an additional $141,604 in
professional fees directly related to the common stock offering. The billings for the professional
fees were received subsequent to the offering, but pertained directly to the offering.
Accordingly, these expenses were netted out of the proceeds from the offering during the current
period.
Income Statement
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 three quarters of 2010 we recorded net income attributable to Bank of Commerce Holdings of
$4.6 million, and net income available to common stockholders of $3.9 million, or $0.27 per diluted
share, after deducting preferred dividend payments made to the Treasury and accretion of preferred
shares under the TARP Capital Purchase Program. Net income attributable to Bank of Commerce
Holdings and net income available to common shareholders for the nine months ending September 30,
2010 was relatively unchanged compared to the period ending September 30, 2009. However, earnings
per share decreased from $0.45 per diluted share in the prior period to $0.27 per diluted share in
the current period. The decrease in earnings per diluted share is due to the disproportional
increase in common shares outstanding during the period.
Net income attributable to the Company for the three months ending September 30, 2010 totaled $1.6
million compared to $1.7 million for the three months ending September 30, 2009. Diluted earnings
per common share for the third quarter 2010 was $0.08, compared to $0.17 for the same period of
2009. The decrease in earnings per diluted share is due to the disproportional increase in common
shares outstanding during the period. Return on average assets (ROA) and return on average equity
(ROE) for the three months ending September 30, 2010 were 0.67% and 5.95%, respectively, compared
with 0.86% and 9.21%, respectively, for the three months ending September 30, 2009. The decrease in
return on assets is directly related to the decrease in market interest rates as well as the
spreads on investment securities. The decrease in ROE is attributed to the increase in common
equity related to the capital offering, while net income attributable to the Company remained
relatively unchanged.
Net income attributable to the Company for the nine-month period ended September 30, 2010 totaled
$4.6 million which is relatively unchanged compared to the nine-month period ended September 30,
2009.
On the same basis, diluted earnings per common share for the nine-months ended September 30, 2010
was $0.27, compared to $0.45 for the nine-month period ending September 30, 2009. ROA was 0.70% and
ROE was 6.61% for the first nine-months of 2010 compared with 0.77% and 8.88%, respectively, for
the same nine-month period ending September 30, 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, certificates
of deposits and Excess Reserves held at the Federal Reserve) 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 September 30, 2010 was $8.6 million
compared with $7.4 million for the same period in 2009, an increase of 16.7%. Net interest income
for the nine-months ended September 30, 2010 was $24.3 million compared with $21.3 million for the
same nine-month period in 2009, an increase of 14.2%.
45
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Average earning assets for the nine-months ended September 30, 2010 increased $39.7 million or 5.3%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $35.6 million or 6.0% compared with the prior year period. During the
period, yields on average earning assets decreased by 16 basis points to 5.37%. The decrease in
yields on average earning assets is primarily due to two factors; relatively higher yielding loans
either maturing or being reclassified as nonaccrual, and the repositioning of the investment
portfolio. The Company repositioned the investment portfolio for liquidity purposes and to mitigate
interest rate risk. As a result, the Company purchased securities at current market yields that
were lower than the stated yields of the securities sold.
Average deposits and borrowings increased by $8.4 million over the same period a year ago. The
yield on funding costs decreased to 1.45% compared with 1.94% for the same period a year ago. The
Company utilizes retail deposits, brokered deposits and FHLB borrowings as its main source of
funding.
A combination of reduced funding costs and an increase in the volume of earning assets
significantly improved the Companys net interest margin. The increased volume of earning assets
contributed an additional $2.0 million in interest income. The majority of this increases in volume
of earning assets resulted from increases in average portfolio loans. In addition, the continued
decline in interest rates on earning assets resulted in a reduction of $1.3 million to interest
income. Accordingly, the net effect of changes in rate and volume of earning assets resulted in an
increase of $709,000 in interest income.
The Companys volume in average deposits and borrowings remained relatively unchanged to prior
period ending September 30, 2009, however the Company did benefit from the continued decline in
interest expense relating to retail and wholesale fundings. As a result, the Company realized a
decrease in interest expense of $2.7 million due to decreased interest rates. This increase was
slightly offset by a $347,000 increase in interest expense due to volume. Specifically, the
reduction in costs for FHLB borrowings, and the Companys time deposits resulted in the majority of
the decrease in interest expense. Accordingly, the net effect of changes in rate and volume of
interest bearing liabilities resulted in a decrease of $2.3 million in interest expense.
Liquidity
The objective of liquidity management is to ensure that the Company can efficiently meet the
borrowing needs of our customers, withdrawals of our depositors and other cash commitments under
both normal operating conditions and under unforeseen and unpredictable circumstances of industry
or market stress.
The Asset Liability Management Committee (ALCO) establishes and monitors liquidity guidelines
that require sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid
resources of cash and due from banks and federal funds sold, asset liquidity is supported by debt
securities in the 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 September 30, 2010, the Company had available lines of credit at the
Federal Home Loan bank and Federal Reserve Bank of San Francisco of approximately $79.4 million and
$50.3 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.
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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, and on April 14, 2010 the
underwriters exercised their over allotment option adding an additional net proceeds of
approximately $4.4 million to the Companys equity.
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 September 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
September 30, 2010 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
114,723,030 |
|
|
|
12.59 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
$ |
114,723,030 |
|
|
|
14.58 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Total Risk-Based |
|
$ |
124,630,793 |
|
|
|
15.84 |
% |
|
|
n/a |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
105,470,141 |
|
|
|
11.52 |
% |
|
|
5.0 |
% |
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
$ |
105,470,141 |
|
|
|
14.28 |
% |
|
|
6.0 |
% |
|
|
4.0 |
% |
Total Risk-Based |
|
$ |
114,786,085 |
|
|
|
15.54 |
% |
|
|
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 September 30, 2010, the Companys
FHLB advances were of fixed term and variable term borrowings without call or put option features.
At September 30, 2010, the Bank had $141 million in FHLB advances outstanding at an average rate of
0.28% compared to $100 million at an average rate of 2.04% at September 30, 2009.
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.
47
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
In addition the Company purchased an ITIN loan portfolio from a private equity firm in exchange for
a combination of nonperforming 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.
On March 12, 2010, the Company purchased a pool of residential mortgage home equity loans with a
par value of $22.0 million. At the settlement date the mortgage home equity loan pool consisted of
562 loans with an average principle balance of approximately $39,200, a weighted average credit
score of 744, a weighted average loan to value of 86.44%, and a weighted average yield of 7.76%.
Fifty one percent of the mortgage home equity loan pool is located in the state of Michigan; the
remaining balance 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 September 30, 2010 and December 31, 2009,
the Company had pledged $190,018,301 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.
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 $8,300,000 were provided for the nine-months ended September
30, 2010 compared with $6,325,000 for the nine-months ended September 30, 2009. The Companys
allowance for loan and lease losses was 2.53% of total loans at September 30, 2010, 1.86% at
December 31, 2009 and 1.48% at September 30, 2009, while its ratio of nonperforming assets to total
assets was 3.03% at September 30, 2010, 1.92% at December 31, 2009, and 3.28% at September 30,
2009. Nonperforming assets consist of loans and other real estate owned. The Company classifies
assets as nonperforming when they are either placed on nonaccrual status, classified as other real
estate owned, or are restructured as a troubled debt restructuring and the borrower is not
performing as agreed based on their restructured terms.
The increased level of the Companys allowance for loan and lease losses is primarily a direct
reflection in the increased level of nonperforming assets since December 31, 2009. In addition, an
increase in nonperforming assets inherently results in an increasing number of impairment reviews
and consequently identified impairment. To a lesser extent, management has increased the level of
the unallocated portion of the allowance for loan and lease losses due to ongoing economic
uncertainty.
48
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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.
49
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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.
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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. |
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)
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.
Other Real Estate Owned
Other real estate owned represents real estate which the Bank has taken control of in partial or
full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the
lower of the carrying amount of the loan or fair value less costs to sell, which becomes the
propertys new basis. Any write-downs based on the assets fair value at the date of acquisition
are charged to the allowance for loan and lease losses. After foreclosure, management periodically
performs valuations such that the real estate is carried at the lower of its new cost basis or fair
value, net of estimated costs to sell. Subsequent valuation adjustments are recognized within net
loss on other real estate owned. Revenue and expenses from operations and subsequent adjustments to
the carrying amount of the property are included in non-interest expense in the Consolidated
Statements of Income.
52
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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans1 |
|
$ |
625,396 |
|
|
$ |
27,767 |
|
|
|
5.92 |
% |
|
$ |
589,802 |
|
|
$ |
26,676 |
|
|
|
6.03 |
% |
Tax-exempt Securities2 |
|
|
38,452 |
|
|
|
1,168 |
|
|
|
4.05 |
% |
|
|
27,859 |
|
|
|
853 |
|
|
|
4.08 |
% |
US Government Securities |
|
|
26,631 |
|
|
|
478 |
|
|
|
2.39 |
% |
|
|
7,721 |
|
|
|
252 |
|
|
|
4.33 |
% |
Mortgage backed Securities |
|
|
45,368 |
|
|
|
1,100 |
|
|
|
3.23 |
% |
|
|
59,892 |
|
|
|
2,522 |
|
|
|
5.61 |
% |
Other Securities |
|
|
47,644 |
|
|
|
1,085 |
|
|
|
3.04 |
% |
|
|
17,499 |
|
|
|
557 |
|
|
|
1.77 |
% |
Federal Funds Sold |
|
|
995 |
|
|
|
2 |
|
|
|
0.27 |
% |
|
|
41,996 |
|
|
|
31 |
|
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
$ |
784,486 |
|
|
$ |
31,600 |
|
|
|
5.37 |
% |
|
$ |
744,769 |
|
|
$ |
30,891 |
|
|
|
5.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Due From Banks |
|
$ |
37,178 |
|
|
|
|
|
|
|
|
|
|
$ |
21,890 |
|
|
|
|
|
|
|
|
|
Bank Premises |
|
|
9,875 |
|
|
|
|
|
|
|
|
|
|
|
10,435 |
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
41,518 |
|
|
|
|
|
|
|
|
|
|
|
23,755 |
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
873,057 |
|
|
|
|
|
|
|
|
|
|
$ |
800,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Interest Bearing |
|
$ |
133,494 |
|
|
$ |
707 |
|
|
|
0.71 |
% |
|
$ |
141,493 |
|
|
$ |
786 |
|
|
|
0.74 |
% |
Savings Deposits |
|
|
74,310 |
|
|
|
677 |
|
|
|
1.21 |
% |
|
|
62,554 |
|
|
|
742 |
|
|
|
1.58 |
% |
Certificates of Deposit |
|
|
329,456 |
|
|
|
4,768 |
|
|
|
1.93 |
% |
|
|
305,237 |
|
|
|
5,722 |
|
|
|
2.50 |
% |
Repurchase Agreements |
|
|
11,971 |
|
|
|
40 |
|
|
|
0.45 |
% |
|
|
11,202 |
|
|
|
38 |
|
|
|
0.45 |
% |
FHLB Borrowings |
|
|
102,271 |
|
|
|
460 |
|
|
|
0.60 |
% |
|
|
122,601 |
|
|
|
1,634 |
|
|
|
1.81 |
% |
Trust Preferred Borrowings |
|
|
15,000 |
|
|
|
619 |
|
|
|
5.50 |
% |
|
|
15,000 |
|
|
|
665 |
|
|
|
5.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
666,502 |
|
|
$ |
7,271 |
|
|
|
1.45 |
% |
|
|
658,087 |
|
|
$ |
9,587 |
|
|
|
1.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
|
92,204 |
|
|
|
|
|
|
|
|
|
|
|
71,718 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
21,621 |
|
|
|
|
|
|
|
|
|
|
|
5,800 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
92,730 |
|
|
|
|
|
|
|
|
|
|
|
65,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Liabilities and Stockholders Equity |
|
$ |
873,057 |
|
|
|
|
|
|
|
|
|
|
$ |
800,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net Interest Margin |
|
|
|
|
|
$ |
24,329 |
|
|
|
4.14 |
% |
|
|
|
|
|
$ |
21,304 |
|
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes fee (expense) income of approximately $130,759 and
($79,648) for the period ended September 30, 2010 and 2009, respectively.
Average earning assets for the three months ending September 30, 2010 was $853.3 million
compared to $732 million for the three months ending September 30, 2009. The net interest
margin for the three months ending September 30, 2010 was 4.05%, which was unchanged from
the three months ending September 30, 2009.
|
|
|
1 |
|
Average nonaccrual loans and average
loans held for sale of $15 million and $23.2 million are included respectively |
|
2 |
|
The yield on tax-exempt securities has not
been adjusted to a tax-equivalent yield basis. |
53
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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
Over |
|
|
September 30, 2009 |
|
(Dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
Increase (decrease) in interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans |
|
$ |
1,580 |
|
|
$ |
(489 |
) |
|
$ |
1,091 |
|
Tax-exempt Securities |
|
|
322 |
|
|
|
(7 |
) |
|
|
315 |
|
US Government Securities |
|
|
339 |
|
|
|
(112 |
) |
|
|
227 |
|
Mortgage Back Securities |
|
|
(352 |
) |
|
|
(1,071 |
) |
|
|
(1,423 |
) |
Other Securities |
|
|
129 |
|
|
|
399 |
|
|
|
528 |
|
Federal Funds Sold |
|
|
(33 |
) |
|
|
4 |
|
|
|
(29 |
) |
|
|
|
Total Increase (Decrease) |
|
|
1,985 |
|
|
|
(1,276 |
) |
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand |
|
|
(42 |
) |
|
|
(37 |
) |
|
|
(79 |
) |
Savings Deposits |
|
|
107 |
|
|
|
(172 |
) |
|
|
(65 |
) |
Certificates of Deposit |
|
|
351 |
|
|
|
(1,305 |
) |
|
|
(954 |
) |
Repurchase Agreements |
|
|
3 |
|
|
|
(1 |
) |
|
|
2 |
|
FHLB Borrowings |
|
|
(91 |
) |
|
|
(1,083 |
) |
|
|
(1,174 |
) |
Trust Preferred Borrowings |
|
|
19 |
|
|
|
(65 |
) |
|
|
(46 |
) |
|
|
|
Total Increase (Decrease) |
|
|
347 |
|
|
|
(2,663 |
) |
|
|
(2,316 |
) |
|
|
|
Net Increase |
|
$ |
1,638 |
|
|
$ |
1,387 |
|
|
$ |
3,025 |
|
|
|
|
Average earning assets for the nine-months ended September 30, 2010 increased $39.7 million or 5.3%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $35.6 million or 6.0% compared with the prior year period. During the
period, yields on average earning assets decreased by 16 basis points to 5.37%. The decrease in
yields on average earning assets is primarily due to two factors; relatively higher yielding loans
either maturing or being reclassified as nonaccrual, and the repositioning of the investment
portfolio. The Company repositioned the investment portfolio for liquidity purposes and to mitigate
interest rate risk. As a result, the Company purchased securities at current market yields that
were lower than the stated yields of the securities sold.
Average deposits and borrowings increased by $8.4 million over the same period a year ago. The
yield on funding costs decreased to 1.45% compared with 1.94% for the same period a year ago. The
Company utilizes retail deposits, brokered deposits and FHLB borrowings as its main source of
funding.
A combination of reduced funding costs and an increase in the volume of earning assets
significantly improved the Companys net interest margin. The increased volume of earning assets
contributed an additional $2.0 million in interest income. The majority of this increases in volume
of earning assets resulted from increases in average portfolio loans. In addition, the continued
decline in interest rates on earning assets resulted in a reduction of $1.3 million to interest
income. Accordingly, the net effect of changes in rate and volume of earning assets resulted in an
increase of $709,000 in interest income.
The Companys volume in average deposits and borrowings remained relatively unchanged to prior
period ending September 30, 2009. However the Company did benefit from the continued decline in
interest expense relating to retail and wholesale fundings. As a result of the decline in interest
rates, the Company realized a decrease in interest expense of $2.7 million. This increase was
slightly offset by a $347,000 increase in interest expense due to volume. Specifically, the
reduction in costs for FHLB borrowings, and the Companys time deposits resulted in the majority of
the decrease in interest expense. Accordingly, the net effect of changes in rate and volume of
interest bearing liabilities resulted in a decrease of $2.3 million in interest expense.
54
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
63 |
|
|
$ |
108 |
|
|
$ |
207 |
|
|
$ |
296 |
|
Payroll and benefit processing fees |
|
|
107 |
|
|
|
109 |
|
|
|
335 |
|
|
|
347 |
|
Earnings on cash surrender value -
Bank owned insurance |
|
|
112 |
|
|
|
108 |
|
|
|
327 |
|
|
|
311 |
|
Net gain on sale of securities available-for-sale |
|
|
179 |
|
|
|
506 |
|
|
|
1,243 |
|
|
|
1,984 |
|
Net on transfer of financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340 |
|
Net gain on settlement of put reserve |
|
|
1,750 |
|
|
|
|
|
|
|
1,750 |
|
|
|
|
|
Mortgage brokerage fee income |
|
|
3,293 |
|
|
|
1,913 |
|
|
|
8,585 |
|
|
|
3,215 |
|
Other Income |
|
|
179 |
|
|
|
200 |
|
|
|
515 |
|
|
|
511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest income |
|
$ |
5,683 |
|
|
$ |
2,944 |
|
|
|
12,962 |
|
|
$ |
7,004 |
|
|
Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings
on key life investments, gains on the sale of securities investments, mortgage brokerage fee
income, and income pertaining to the settlement of the put reserve.
Noninterest income for the three months ending September 30, 2010 was approximately $5.7 million or
93.0% greater than the same period a year ago. The increase in noninterest income 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), and our settlement of the put reserve.
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. Mortgage
Services brokerage fee income increased substantially as a result of increased origination volume,
due to the current historically low interest rate environment.
During the three months ending September 30, 2010, the Company received a written release to the
put reserve provided on the ITIN loan pool purchase. Prior to the release, the put reserve carried
a balance of $2.1 million; approximately $398,627 of the reserve was paid to the private equity
firm as consideration. As a result, the Company recorded a $1.8 million gain on settlement.
The put reserve was part of the April 17, 2009 loan swap transaction in which the Company
purchased a pool of Individual Tax Identification Number (ITIN) residential mortgages in exchange
for a combination of certain nonperforming loans and cash. The put reserve or credit enhancement
originally totaled $3.5 million; the Company had the right but not the obligation to put back the
outstanding principal balance of any ITIN loan that became sixty days or more delinquent over a
period not to exceed three years from the transaction date. As a result of the settlement, the
company is now entirely dependent on the general Allowance for Loan Losses and any specific
valuation allowances held against the ITIN portfolio.
Our investment strategy requires that we reposition our investment portfolio within certain
parameters to minimize risks to comprehensive income, and to mitigate interest rate risk. The
Company continued to reposition the portfolio during the current period, however market conditions
were not as favorable compared to prior periods. As a result, the Company realized less gain on
sales of securities compared to prior periods. Accordingly, net gains on available for sale
securities decreased by $327,000 compared to the three months ending September 30, 2009.
Noninterest income for the nine-months ending September 30, 2010 was approximately $13 million or
85.1% greater than the same period a year ago. The significant increase is primarily derived from
increased mortgage origination volume, gains from the settlement of the put reserve, and a
consolidation of nine months of mortgage brokerage fee income compared to four months during the
nine months ending September 30, 2010.
55
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table sets forth a summary of noninterest expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
Noninterest Expense |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
Salaries and related benefits |
|
$ |
4,162 |
|
|
$ |
2,902 |
|
|
$ |
11,238 |
|
|
$ |
7,673 |
|
Occupancy and equipment expense |
|
|
952 |
|
|
|
1,124 |
|
|
|
2,805 |
|
|
|
2,426 |
|
Write down of other real estate owned |
|
|
129 |
|
|
|
|
|
|
|
1,374 |
|
|
|
|
|
FDIC insurance premium |
|
|
250 |
|
|
|
421 |
|
|
|
755 |
|
|
|
995 |
|
Data processing fees |
|
|
52 |
|
|
|
52 |
|
|
|
205 |
|
|
|
231 |
|
Professional service fees |
|
|
216 |
|
|
|
220 |
|
|
|
1,159 |
|
|
|
674 |
|
Deferred compensation expense |
|
|
126 |
|
|
|
118 |
|
|
|
366 |
|
|
|
360 |
|
Stationery and Supplies |
|
|
35 |
|
|
|
62 |
|
|
|
211 |
|
|
|
141 |
|
Postage |
|
|
58 |
|
|
|
|
|
|
|
145 |
|
|
|
111 |
|
Directors expense |
|
|
56 |
|
|
|
75 |
|
|
|
208 |
|
|
|
232 |
|
Goodwill Impairment |
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
Other expenses |
|
|
1,257 |
|
|
|
680 |
|
|
|
3,490 |
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest expense |
|
$ |
7,293 |
|
|
$ |
5,654 |
|
|
$ |
21,988 |
|
|
$ |
14,507 |
|
|
Noninterest expense includes salaries and benefits, occupancy, FDIC insurance assessments, director
fees, and other expenses. Noninterest expense for the three months ending September 30, 2010 was
approximately $7.3 million or 29% greater than the same period a year ago.
The $1.6 million increase in noninterest expense is primarily due to increased salaries and related
benefits pertaining to the Mortgage Services subsidiary. In the three month period ending September
30, 2010, Mortgage Services transitioned existing independent contractors to FTEs, resulting in an
increase in salaries and related benefits. Furthermore, due to continued growth in Mortgage
Services operations, there was additional staff added to payroll.
During the three months ending September 30, 2010 the Company determined that a valuation
adjustment to the carrying value of the Companys other real estate owned was necessary. The values
were adjusted downward, reflecting the continued deterioration in local real estate market
conditions. As a result, the Company recognized $129,000 impairment charge to earnings.
Other expenses increased by approximately $577,000 during the three months ending September 30,
2010. The increase is primarily due to increased appraisal expenses associated with the Companys
real estate loan portfolio, prior period tax expenses, and overall increased activities associated
with the Mortgage Services general operations.
Noninterest expense for the nine-months ending September 30, 2010 was approximately $22 million or
51.6% greater than the same period a year ago. The increase in noninterest income is primarily due
to increased salary and related benefits, write downs of other real estate owned, professional fees
associated with loan credit quality evaluations, and a full nine months consolidation of the
Mortgage Services.
The increase in salaries and related benefits is primarily due to the timing of the purchase of an
equity interest in the Simonich Corporation. The Company consolidated an additional $3.2 million in
related salaries and benefits of the Mortgage Services for the nine months ending September 30,
2010 compared to a consolidation of four months of expense for the nine months ending September 30,
2009. In addition, during the current nine month period, Mortgage Services transitioned existing
independent contractors to FTEs, and increased staff due to growth in general operations. As a
result, the Company experienced an increase in salaries and related benefits for the period.
During the nine months ending September 30, 2010 the Company determined that a valuation adjustment
to the carrying value of the Companys other real estate owned was necessary. The values were
adjusted downward, reflecting the continued deterioration in local real estate market conditions.
As a result the Company recognized a $1.4 million impairment charge to earnings.
During the nine months ending September 30, 2010, professional fess increased approximately
$485,000. During the reporting period, the Company increased the solicitation of outside
professionals to conduct credit quality reviews pertaining to the Companys loan portfolio. In
addition, during the reporting period, the Company increased the engagements of legal counsel. The
increase in these services coincides with the continued monitoring of the Companys nonperforming
loans.
Other expenses increased by $1.8 million during the nine months ending September 30, 2010. The
increase is primarily due to increased appraisal expense associated with the Companys real estate
loan portfolio, prior period tax expenses, and overall increased activities associated with the
Mortgage Services general operations.
56
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Furthermore, due to the timing of the purchase of Simonich Corporation, the Company consolidated
nine months of Mortgage Services related other expenses, compared to approximately four months in
the prior period. Other expenses recorded by the mortgage company include expenses for business
travel, telephone, insurance and licensing fees.
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 less income attributable to non-controlling interest.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
Income Taxes |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
Tax provision |
|
$ |
916 |
|
|
$ |
1,010 |
|
|
$ |
2,410 |
|
|
$ |
2,647 |
|
Effective tax rate |
|
|
37.01 |
% |
|
|
31.73 |
% |
|
|
34.38 |
% |
|
|
34.35 |
% |
|
The Company had a net deferred tax asset of $7.2 million at September 30, 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 September 30, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Deferred Tax Assets |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
State Franchise taxes |
|
$ |
390 |
|
|
$ |
173 |
|
Deferred compensation |
|
|
2,474 |
|
|
|
2,289 |
|
Loan loss reserves |
|
|
7,006 |
|
|
|
3,990 |
|
Other |
|
|
338 |
|
|
|
184 |
|
|
|
|
Total Deferred Tax Assets |
|
$ |
10,208 |
|
|
$ |
6,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities |
|
|
|
|
|
|
|
|
State Franchise taxes |
|
|
|
|
|
|
(473 |
) |
Unrealized gain on
available-for-sale investment
securities |
|
|
(1,511 |
) |
|
|
(578 |
) |
Depreciation |
|
|
(120 |
) |
|
|
(146 |
) |
Deferred loan origination costs |
|
|
(425 |
) |
|
|
(406 |
) |
Deferred state taxes |
|
|
(757 |
) |
|
|
|
|
Other |
|
|
(154 |
) |
|
|
(156 |
) |
|
|
|
Total Deferred Tax Liabilities |
|
$ |
(2,967 |
) |
|
|
(1,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Deferred Tax Asset |
|
$ |
7,241 |
|
|
$ |
4,877 |
|
|
57
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 |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
Commercial & financial loans |
|
$ |
136,258 |
|
|
$ |
133,080 |
|
Real estate construction loans |
|
|
43,942 |
|
|
|
59,524 |
|
Real estate commercial (investor) |
|
|
183,620 |
|
|
|
197,023 |
|
Real estate
commercial (owner occupied) |
|
|
72,093 |
|
|
|
63,001 |
|
Real estate ITIN loan pool |
|
|
72,299 |
|
|
|
78,250 |
|
Real estate other mortgage |
|
|
19,345 |
|
|
|
20,525 |
|
Real estate equity lines |
|
|
79,460 |
|
|
|
45,601 |
|
Installment |
|
|
2,371 |
|
|
|
2,223 |
|
Other loans |
|
|
1,763 |
|
|
|
2,212 |
|
Less: |
|
|
|
|
|
|
|
|
Net deferred loan fees |
|
|
124 |
|
|
|
209 |
|
Allowance for loan losses |
|
|
15,452 |
|
|
|
11,207 |
|
|
|
|
Total net portfolio loans |
|
$ |
595,575 |
|
|
$ |
590,023 |
|
|
The following table provides a breakdown of our real estate construction portfolio as of September
30, 2010:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
% of Total |
|
Loan Type |
|
Balance |
|
|
net portfolio loans |
|
Commercial lots and entitled commercial land |
|
$ |
17,945 |
|
|
|
3.01 |
% |
Commercial real estate construction |
|
|
17,626 |
|
|
|
2.96 |
% |
1-4 family subdivision loans |
|
|
5,692 |
|
|
|
0.96 |
% |
1-4 family individual residential lots |
|
|
2,016 |
|
|
|
0.34 |
% |
1-4 family construction speculative |
|
|
663 |
|
|
|
0.11 |
% |
|
|
|
|
|
|
|
Total real estate- construction |
|
$ |
43,942 |
|
|
|
7.38 |
% |
Our practice, is to place an asset on nonaccrual 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 nonaccrual, 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.
58
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 September 30, 2010, $41 million in mortgages are held for sale. These loans are
not included in net portfolio loans listed in the table above.
Nonperforming Assets
The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Nonperforming assets |
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
Commercial & Industrial |
|
$ |
4,952 |
|
|
$ |
237 |
|
Secured by 1-4 family, closed end 1st lien |
|
|
1,204 |
|
|
|
623 |
|
Secured by 1-4 family Revolving |
|
|
194 |
|
|
|
199 |
|
Secured by NFNR Other |
|
|
9,617 |
|
|
|
5,759 |
|
Secured by RE - 1-4 Construction |
|
|
261 |
|
|
|
849 |
|
Secured by RE Other Construction |
|
|
2,251 |
|
|
|
|
|
|
|
|
Nonaccrual Loan Portfolio |
|
$ |
18,479 |
|
|
$ |
7,667 |
|
|
|
|
|
|
|
|
|
|
Nonaccrual ITIN Loan Pool |
|
|
6,751 |
|
|
|
|
|
Nonaccrual Home Equity Loan Pool |
|
|
42 |
|
|
|
|
|
90 days past due and still accruing interest |
|
|
682 |
|
|
|
5,052 |
|
Other real estate owned |
|
|
2,020 |
|
|
|
2,880 |
|
|
|
|
Total nonperforming assets |
|
$ |
27,974 |
|
|
$ |
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 disbursement of the portfolio which will
adversely affect our noninterest expense.
As part of the ITIN loan swap transaction agreement, the Company received a credit enhancement (put
reserve) in the amount of $3.5 million; the Company had the right but not the obligation to put
back the outstanding principal balance of any ITIN loan that became sixty days or more delinquent
over a period not to exceed three years from the transaction date. During the three months ending
September 30, 2010, the put reserve was mutually terminated by both parties, resulting in a $1.8
million settlement gain.
59
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The $1.7 million settlement gain from the ITIN put reserve was effectively expensed in provisions
for loan losses. These monies were specifically allocated in the Allowance for Loan Losses (ALLL)
against the ITIN portfolio. As a result, the specific ALLL allocation now represents approximately
4% of total outstanding principal compared to 1.56% as of December 31, 2009. The increased ALLL
allocation stems from the general economic uncertainty including the continuing depressed housing
market
Nonperforming assets were 3.03% of total assets as of September 30, 2010; 1.92% at December 31,
2009 and 3.28% at September 30, 2009. For the period ending September 30, 2010 there were $38.1
million in impaired loans, of which $25.3 million were in nonaccrual status. Of these, $6.8 million
or eighty two of which are ITIN loans with a weighted average balance of approximately $82,334
each, all in various stages of collection. The remaining nonaccrual loans consist of seven
commercial and industrial loans, two commercial lot loan, two residential lot loans, seven
commercial real estate loans, four residential mortgages, and three home equity lines of credit.
The Company periodically restructures loans and grants concessions to borrowers due to economic or
legal reasons relating to the borrowers financial condition that it would not otherwise consider.
Accordingly, loans restructured in these situations are classified as troubled debt restructurings.
The Company does not necessarily place a troubled debt restructuring on nonaccrual status. Rather,
if the borrower is current at the time of the restructuring, and continues to pay as agreed, the
loan is reported as current.
As of September 30, 2010, the Company has eighty restructured loans that qualified as troubled debt
restructurings, of which fifty-three were performing according to their restructured terms, and are
considered performing loans. As of September 30, 2010, the Company had $24.7 million in troubled
debt restructurings compared to $10.7 million as of December 31, 2009.
The following table sets forth a summary of the Companys restructured loans that qualify as
troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Troubled debt restructurings |
|
September 30, 2010 |
|
|
|
December 31, 2009 |
|
Nonaccrual |
|
|
12,587 |
|
|
|
$ |
4,937 |
Accruing |
|
|
12,162 |
|
|
|
|
5,730 |
|
|
|
Total troubled debt restructurings |
|
$ |
24,749 |
|
|
|
$ |
10,667 |
|
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.
60
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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; |
|
|
|
|
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.
Loans are charged off against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. The ALLL should not be interpreted as an indication
that charge-offs in future periods will occur in the stated amounts or proportions.
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.
Generally, we charge off estimated losses related to impaired loans as losses are identified. The
charged-off portion of impaired loans outstanding at September 30, 2010 totaled approximately $4.8
million.
The Company continues to work diligently to identify nonperforming assets. Elevated provisions are
associated with a reclassification of loans, following completion of a total portfolio review, and
managements prudent stance in recognizing impaired loans.
61
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table summarizes the activity in the ALLL reserves for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousand) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
September 30, 2010 |
|
|
September 30, 2009 |
|
|
Beginning balance |
|
$ |
12,767 |
|
|
$ |
8,496 |
|
|
$ |
11,207 |
|
|
$ |
8,429 |
|
Provision for loan loss charged to expense |
|
|
4,450 |
|
|
|
1,844 |
|
|
|
8,300 |
|
|
|
6,325 |
|
Loans charged off |
|
|
(1,883 |
) |
|
|
(1,461 |
) |
|
|
(4,765 |
) |
|
|
(6,005 |
) |
Loan loss recoveries |
|
|
118 |
|
|
|
20 |
|
|
|
710 |
|
|
|
150 |
|
|
|
|
Ending balance |
|
$ |
15,452 |
|
|
$ |
8,899 |
|
|
$ |
15,452 |
|
|
$ |
8,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross portfolio loans outstanding at period end |
|
|
611,027 |
|
|
|
599,784 |
|
|
|
611,027 |
|
|
|
599,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans |
|
|
2.53 |
% |
|
|
1.48 |
% |
|
|
2.53 |
% |
|
|
1.48 |
% |
Nonaccrual loans at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
2,512 |
|
|
$ |
3,094 |
|
|
$ |
2,512 |
|
|
$ |
3,094 |
|
Commercial real estate |
|
|
9,617 |
|
|
|
6,846 |
|
|
|
9,617 |
|
|
|
6,846 |
|
Commercial |
|
|
4,952 |
|
|
|
271 |
|
|
|
4,952 |
|
|
|
271 |
|
Home equity |
|
|
194 |
|
|
|
202 |
|
|
|
194 |
|
|
|
202 |
|
Residential real estate |
|
|
7,997 |
|
|
|
894 |
|
|
|
7,997 |
|
|
|
894 |
|
|
|
|
Total nonaccrual loans |
|
$ |
25,272 |
|
|
$ |
11,307 |
|
|
|
25,272 |
|
|
|
11,307 |
|
Accruing troubled-debt restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
2,327 |
|
|
$ |
|
|
|
$ |
2,327 |
|
|
$ |
|
|
Commercial real estate |
|
|
2,929 |
|
|
|
|
|
|
|
2,929 |
|
|
|
|
|
Residential real estate |
|
|
6,906 |
|
|
|
|
|
|
|
6,906 |
|
|
|
|
|
|
|
|
Total accruing restructured loans |
|
|
12,162 |
|
|
|
|
|
|
|
12,162 |
|
|
|
|
|
All other accruing impaired loans |
|
|
740 |
|
|
|
|
|
|
|
740 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
38,174 |
|
|
$ |
11,307 |
|
|
$ |
38,174 |
|
|
$ |
11,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonaccrual loans at
period end |
|
|
61.14 |
% |
|
|
78.70 |
% |
|
|
61.14 |
% |
|
|
78.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans to total loans |
|
|
4.14 |
% |
|
|
1.89 |
% |
|
|
4.14 |
% |
|
|
1.89 |
% |
Average recorded investment in impaired loans |
|
$ |
35,046 |
|
|
$ |
10,906 |
|
|
$ |
25,786 |
|
|
$ |
15,731 |
|
Cash receipt on nonaccrual loan interest and
recognized as interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Specific valuation allowances on impaired loans totaled $3.5 million, $245 thousand and $0 at
September 30, 2010, December 31, 2009 and September 30, 2009, respectively. The amount of the
recorded investment in impaired loans that do not have a related specific valuation allowance for
loan losses totaled $11.6 million, $6.4 million and $8.4 million at September 30, 2010, December
31, 2009 and September 30, 2009, respectively. Specific valuation allowances on impaired loans also
classified as Troubled Debt Restructurings (TDRs) represent $1.6 million of the $3.5 million in
total specific valuation allowances.
62
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
(Dollars in thousands, except for per share data) |
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
9,414 |
|
|
$ |
9,302 |
|
|
$ |
9,051 |
|
|
$ |
9,184 |
|
|
$ |
9,355 |
|
Interest on tax-exempt securities |
|
|
465 |
|
|
|
381 |
|
|
|
322 |
|
|
|
311 |
|
|
|
278 |
|
Interest on U.S. government securities |
|
|
633 |
|
|
|
507 |
|
|
|
439 |
|
|
|
676 |
|
|
|
628 |
|
Interest on federal funds sold and securities
repurchased under agreements to resell |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Interest on other securities |
|
|
471 |
|
|
|
343 |
|
|
|
270 |
|
|
|
266 |
|
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
10,984 |
|
|
|
10,533 |
|
|
|
10,083 |
|
|
|
10,438 |
|
|
|
10,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
251 |
|
|
|
226 |
|
|
|
230 |
|
|
|
229 |
|
|
|
240 |
|
Interest on savings deposits |
|
|
237 |
|
|
|
221 |
|
|
|
219 |
|
|
|
221 |
|
|
|
223 |
|
Interest on certificates of deposit |
|
|
1,453 |
|
|
|
1,554 |
|
|
|
1,761 |
|
|
|
1,906 |
|
|
|
1,941 |
|
Securities sold under repurchase agreements |
|
|
13 |
|
|
|
15 |
|
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
Interest on FHLB and other borrowings |
|
|
186 |
|
|
|
138 |
|
|
|
136 |
|
|
|
172 |
|
|
|
514 |
|
Interest on junior subordinated debt |
|
|
204 |
|
|
|
207 |
|
|
|
208 |
|
|
|
208 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,344 |
|
|
|
2,361 |
|
|
|
2,566 |
|
|
|
2,749 |
|
|
|
3,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,640 |
|
|
|
8,172 |
|
|
|
7,517 |
|
|
|
7,689 |
|
|
|
7,406 |
|
Provision for loan and lease losses |
|
|
4,450 |
|
|
|
1,600 |
|
|
|
2,250 |
|
|
|
3,150 |
|
|
|
1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and
lease losses |
|
|
4,190 |
|
|
|
6,572 |
|
|
|
5,267 |
|
|
|
4,539 |
|
|
|
5,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
63 |
|
|
|
62 |
|
|
|
82 |
|
|
|
94 |
|
|
|
108 |
|
Payroll and benefit processing fees |
|
|
107 |
|
|
|
100 |
|
|
|
128 |
|
|
|
105 |
|
|
|
109 |
|
Earnings on cash surrender value bank owned
life insurance |
|
|
112 |
|
|
|
107 |
|
|
|
108 |
|
|
|
107 |
|
|
|
108 |
|
Net gain on sale of securities available-for-sale |
|
|
179 |
|
|
|
133 |
|
|
|
931 |
|
|
|
454 |
|
|
|
506 |
|
Net gain on transfer of financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Gain on settlement of put reserve |
|
|
1,750 |
|
|
|
64 |
|
|
|
54 |
|
|
|
68 |
|
|
|
80 |
|
Mortgage brokerage fee income |
|
|
3,293 |
|
|
|
2,753 |
|
|
|
2,539 |
|
|
|
2,112 |
|
|
|
1,913 |
|
Other income |
|
|
179 |
|
|
|
118 |
|
|
|
100 |
|
|
|
119 |
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
5,683 |
|
|
|
3,337 |
|
|
|
3,942 |
|
|
|
3,060 |
|
|
|
2,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
4,162 |
|
|
|
3,365 |
|
|
|
3,711 |
|
|
|
3,209 |
|
|
|
2,902 |
|
Occupancy and equipment expense |
|
|
952 |
|
|
|
924 |
|
|
|
929 |
|
|
|
1,178 |
|
|
|
1,124 |
|
Write down of other real estate owned |
|
|
129 |
|
|
|
1,064 |
|
|
|
181 |
|
|
|
161 |
|
|
|
|
|
FDIC insurance premium |
|
|
250 |
|
|
|
254 |
|
|
|
251 |
|
|
|
279 |
|
|
|
421 |
|
Data processing fees |
|
|
52 |
|
|
|
64 |
|
|
|
89 |
|
|
|
51 |
|
|
|
52 |
|
Professional service fees |
|
|
216 |
|
|
|
543 |
|
|
|
400 |
|
|
|
146 |
|
|
|
220 |
|
Deferred compensation expense |
|
|
126 |
|
|
|
122 |
|
|
|
118 |
|
|
|
118 |
|
|
|
118 |
|
Stationery and supplies |
|
|
35 |
|
|
|
96 |
|
|
|
80 |
|
|
|
44 |
|
|
|
62 |
|
Postage |
|
|
58 |
|
|
|
45 |
|
|
|
42 |
|
|
|
36 |
|
|
|
|
|
Directors expense |
|
|
56 |
|
|
|
68 |
|
|
|
84 |
|
|
|
67 |
|
|
|
75 |
|
Other expenses |
|
|
1,257 |
|
|
|
965 |
|
|
|
1,300 |
|
|
|
828 |
|
|
|
680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,293 |
|
|
|
7,510 |
|
|
|
7,185 |
|
|
|
6,117 |
|
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,580 |
|
|
|
2,399 |
|
|
|
2,024 |
|
|
|
1,482 |
|
|
|
2,852 |
|
Provision for income taxes |
|
|
916 |
|
|
|
750 |
|
|
|
744 |
|
|
|
43 |
|
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,664 |
|
|
|
1,649 |
|
|
|
1,280 |
|
|
|
1,439 |
|
|
|
1,842 |
|
Less: Net income (loss) attributable to non-controlling interest |
|
|
105 |
|
|
|
144 |
|
|
|
(255 |
) |
|
|
33 |
|
|
|
129 |
|
Net income
attributable to Bank of Commerce Holdings |
|
$ |
1,559 |
|
|
$ |
1,505 |
|
|
$ |
1,535 |
|
|
$ |
1,406 |
|
|
$ |
1,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on preferred
stock |
|
$ |
235 |
|
|
$ |
236 |
|
|
$ |
235 |
|
|
$ |
235 |
|
|
$ |
235 |
|
Income available to common stockholders |
|
$ |
1,324 |
|
|
$ |
1,269 |
|
|
$ |
1,300 |
|
|
$ |
1,171 |
|
|
$ |
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.17 |
|
Weighted average shares basic |
|
|
16,991 |
|
|
|
16,837 |
|
|
|
8,871 |
|
|
|
8,711 |
|
|
|
8,711 |
|
Diluted earnings per share |
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
$ |
0.13 |
|
|
$ |
0.17 |
|
Weighted average shares diluted |
|
|
16,991 |
|
|
|
16,837 |
|
|
|
8,871 |
|
|
|
8,711 |
|
|
|
8,711 |
|
Cash dividends per share |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
63
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 +
400 to - 400 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, 300 or 400 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 increase in net interest income
attributable to a 100 and 200 basis point decreases in the federal funds rate was $340,392 and
$208,556 respectively. For decreases of 300, and 400 basis points in the federal funds rate the
model indicated net interest income would decrease by $292,867, and $385,017 respectively.
The Federal Reserve currently has the federal funds rate targeted between zero to twenty five basis
points. Accordingly, the Company is focused on the affects of interest rate shocks on our net
interest income during a rising rate environment. The most recent model results indicate the
estimated annualized decrease in net interest income attributable to a 100, 200, 300 and 400 basis
point increases in the federal funds rate was $485,020, $893,481, $1,117,830, and $1,290,254
respectively.
The ALCO has established a policy limitation to interest rate risk of -28% of the net interest
margin and -40% 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.
64
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
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.
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, 300 or 400 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.
65
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 September 30, 2010.
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PART II. Other Information
Item 1. Legal Proceedings
The Company is involved in various pending and threatened legal actions arising in the ordinary
course of business. The Company
maintains reserves for losses from legal actions, which are both probable and estimable. In the
opinion of management, the
disposition of claims, currently pending will not have a material adverse affect on the Companys
financial position or results of
operations.
Item 1a. Risk Factors
There was one material addition to the Companys risk factors previously disclosed in the
registrants Form 10-K.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Act), a landmark financial reform bill comprised of new rules and
restrictions that will impact banks going forward. It includes key provisions aimed at preventing a
repeat of the 2008 financial crisis and a new process for winding down failing, systemically
important institutions in a manner as close to a controlled bankruptcy as possible. The Act
includes other key provisions as follows:
(1) The Act establishes a new Financial Stability Oversight Council to monitor systemic financial
risks. The Board of Governors of the Federal Reserve (Fed) are given extensive new authorities to
impose strict controls on large bank holding companies with total consolidated assets equal to or
in excess of $50 billion and systemically significant nonbank financial companies to limit the risk
they might pose for the economy and to other large interconnected companies. The Fed can also take
direct control of troubled financial companies that are considered systemically significant.
(2) The Act also establishes a new independent Federal regulatory body for consumer protection
within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the
Bureau), which will assume responsibility for most consumer protection laws (except the Community
Reinvestment Act). It will also be in charge of setting appropriate consumer banking fees and caps.
The Office of Comptroller of the Currency will continue to have authority to preempt state banking
and consumer protection laws if these laws prevent or significantly interfere with the business
of banking.
(3) The Act restricts the amount of trust preferred securities (TPS) that may be considered as
Tier 1 Capital. For depository institution holding companies below $15 billion in total assets, TPS
issued before May 19, 2010 will be grandfathered, so their status as Tier 1 capital does not
change. However going forward, TPS will be disallowed as Tier 1 capital. Beginning January 1, 2013,
Bank holding companies above $15 billion in assets will have a three-year phase-in period to fill
the capital gap caused by the disallowance of the TPS issued before May 19, 2010.
(4) The Act effects changes in the FDIC assessment base with stricter oversight. A new council of
regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must
keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive to
January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction
accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes
the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a
depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction
account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion
that is over $250 thousand coverage limit.
(5) The Act places certain limitations on investment and other activities by depository
institutions, holding companies and their affiliates.
The impact of the Act on our banking operations is still uncertain due to the massive volume of new
rules still subject to adoption and interpretation.
Item 2. 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). As part of the registration statement the Company represented the intent to
grant the underwriters an option to purchase up to an additional $4.5 million of common stock
offered to cover over-allotments, if any. The common stock will be issued pursuant to a prospectus
filed as part of the Companys registration statement under the Securities Act of 1933.
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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (Continued)
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.
On April 14, 2010, the Company announced that the underwriters of its recent public offering of
common shares have fully exercised their over-allotment option, which will result in the issuance
of an additional 1,080,000 shares of common stock. The option was granted in connection with the
Companys public offering of 7,200,000 shares of common stock at a public offering price of $4.25
per share, which closed on March 29, 2010. The exercise of the over-allotment option has resulted
in additional net proceeds of approximately $4.4 million, bringing the expected total net proceeds
of the offering to approximately $33.2 million, after deducting the underwriting discount and
offering expenses. The exercise of the over-allotment option brings the total number of shares of
common stock sold by the Company in the offering to 8,280,000.
The shares were sold in an underwritten public offering by Howe Barnes Hoefer & Arnett, Inc. acting
as lead manager.
The Company intends to use the net proceeds from the offering for general corporate purposes
including organic growth and opportunistic acquisitions.
Item 3. Defaults Upon Senior Securities
N/A.
Item 4. (Removed and Reserved)
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
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(31.1)
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Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 |
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(31.2)
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Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 |
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(32.0)
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BANK OF COMMERCE HOLDINGS
(Registrant)
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Date: November 12, 2010 |
/s/ Samuel D. Jimenez
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Samuel D. Jimenez |
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Senior Vice President and
Chief Financial Officer |
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