e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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 þ 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)
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act)
Yes o No þ
Outstanding shares of Common Stock, no par value, as of June 30, 2011: 16,991,495
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index to Form 10-Q
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PAGE NUMBER |
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FINANCIAL INFORMATION |
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Financial Statements |
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Condensed Consolidated Balance Sheets June 30, 2011, and December 31, 2010 |
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3 |
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Condensed Consolidated Statements of Income Three and six months ended June 30, 2011, and June 30, 2010 |
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4 |
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Condensed Consolidated Statements of Stockholders Equity Twelve and six months ended December 31, 2010 and June 30, 2011 |
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5 |
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Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2011, and June 30, 2010 |
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6 |
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Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2011 and June 30, 2010 |
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7 |
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Notes to Unaudited Condensed Consolidated Financial Statements Six months ended June 30, 2011, and June 30, 2010 |
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8 |
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Managements Discussion and Analysis Of Financial Condition and Results of Operations |
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32 |
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Quantitative and Qualitative Disclosure about Market Risk |
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56 |
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Controls and Procedures |
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58 |
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OTHER INFORMATION |
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Legal Proceedings |
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59 |
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Risk Factors |
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59 |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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59 |
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Defaults Upon Senior Securities |
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59 |
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(Removed and Reserved) |
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59 |
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Other Information |
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59 |
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Exhibits |
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59 |
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SIGNATURE PAGE |
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60 |
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EX-31.1 |
EX-31.2 |
EX-32.0 |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010
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(Dollars in thousands) |
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June 30, 2011 |
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December 31, 2010 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
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$ |
19,091 |
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$ |
23,786 |
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Interest bearing due from banks |
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29,225 |
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39,470 |
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Cash and cash equivalents |
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48,316 |
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63,256 |
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Securities available-for-sale, at fair value (including
pledged collateral of $79.1 million at June 30, 2011,
and $101.2 million at December 31, 2010) |
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162,184 |
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189,235 |
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Portfolio loans, net of the allowance for loan losses of
$13.4 million at June 30, 2011, and $12.8 million at
December 31, 2010 |
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582,418 |
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587,865 |
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Mortgage loans held for sale |
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26,067 |
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42,995 |
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Bank premises and equipment, net |
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9,691 |
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9,697 |
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Goodwill |
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3,695 |
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3,695 |
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Other real estate owned |
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1,793 |
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2,288 |
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Other assets |
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34,358 |
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40,102 |
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TOTAL ASSETS |
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$ |
868,522 |
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$ |
939,133 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Demand noninterest bearing |
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$ |
87,643 |
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$ |
91,025 |
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Demand interest bearing |
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149,917 |
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162,258 |
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Savings accounts |
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93,698 |
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83,652 |
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Certificates of deposit |
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294,173 |
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311,767 |
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Total deposits |
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625,431 |
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648,702 |
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Securities sold under agreements to repurchase |
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15,353 |
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13,548 |
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Federal Home Loan Bank borrowings |
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91,000 |
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141,000 |
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Mortgage warehouse lines of credit |
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4,236 |
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4,983 |
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Junior subordinated debentures |
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15,465 |
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15,465 |
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Other liabilities |
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8,843 |
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11,708 |
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Total Liabilities |
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760,328 |
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835,406 |
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Commitments and contingencies |
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Stockholders Equity: |
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Preferred stock (liquidation preference of $1,000 per
share; issued 2008) 2,000,000 authorized; 17,000 shares
issued and outstanding on June 30, 2011 and December 31,
2010 |
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16,776 |
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16,731 |
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Common stock , no par value, 50,000,000 shares
authorized; 16,991,495 shares issued and outstanding on
June 30, 2011, and December 31, 2010 |
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42,773 |
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42,755 |
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Common stock warrant |
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449 |
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449 |
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Retained earnings |
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43,383 |
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41,722 |
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Accumulated other comprehensive income (loss), net of tax |
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2,252 |
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(509 |
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Total Equity Bank of Commerce Holdings |
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105,633 |
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101,148 |
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Noncontrolling interest in subsidiary |
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2,561 |
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2,579 |
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Total Stockholders Equity |
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108,194 |
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103,727 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
868,522 |
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$ |
939,133 |
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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 six months ended June 30, 2011 and June 30, 2010 (Unaudited)
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For the three months |
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For the six months ended |
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ended June 30, |
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June 30, |
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(Amounts in thousands) |
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2011 |
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2010 |
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2011 |
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2010 |
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Interest income: |
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Interest and fees on loans |
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$ |
8,958 |
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$ |
9,511 |
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$ |
17,991 |
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$ |
18,689 |
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Interest on tax-exempt securities |
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478 |
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381 |
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1,010 |
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703 |
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Interest on U.S. government securities |
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633 |
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507 |
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1,311 |
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945 |
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Interest on other securities |
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577 |
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342 |
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1,228 |
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615 |
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Total interest income |
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10,646 |
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10,741 |
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21,540 |
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20,952 |
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Interest expense: |
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Interest on demand deposits |
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204 |
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226 |
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430 |
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456 |
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Interest on savings deposits |
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229 |
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221 |
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475 |
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440 |
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Interest on certificates of deposit |
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1,272 |
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1,554 |
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2,585 |
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3,315 |
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Securities sold under agreements to repurchase |
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13 |
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15 |
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27 |
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27 |
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Interest on FHLB borrowings |
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148 |
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138 |
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312 |
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267 |
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Interest on other borrowings |
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263 |
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406 |
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529 |
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719 |
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Total interest expense |
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2,129 |
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2,560 |
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4,358 |
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5,224 |
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Net interest income |
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8,517 |
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8,181 |
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17,182 |
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15,728 |
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Provision for loan losses |
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2,580 |
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1,600 |
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4,980 |
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3,850 |
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Net interest income after provision for loan losses |
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5,937 |
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6,581 |
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12,202 |
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11,878 |
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Noninterest income: |
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Service charges on deposit accounts |
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52 |
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62 |
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102 |
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144 |
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Payroll and benefit processing fees |
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102 |
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100 |
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230 |
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228 |
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Earnings on cash surrender value Bank owned life
insurance |
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119 |
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107 |
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230 |
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215 |
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Net gain on sale of securities available-for-sale |
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655 |
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133 |
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913 |
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1,064 |
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Merchant credit card service income, net |
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33 |
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64 |
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303 |
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117 |
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Mortgage banking revenue, net |
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2,550 |
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2,776 |
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5,083 |
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5,336 |
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Other income |
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|
114 |
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|
85 |
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|
216 |
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|
137 |
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Total noninterest income |
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3,625 |
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3,327 |
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7,077 |
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7,241 |
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Noninterest expense: |
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Salaries and related benefits |
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4,068 |
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3,365 |
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8,321 |
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7,076 |
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Occupancy and equipment expense |
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800 |
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924 |
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1,528 |
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1,853 |
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Write down of other real estate owned |
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370 |
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1,064 |
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557 |
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1,245 |
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FDIC insurance premium |
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363 |
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254 |
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|
735 |
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|
505 |
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Data processing fees |
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91 |
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64 |
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190 |
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153 |
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Professional service fees |
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595 |
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543 |
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1,169 |
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|
943 |
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Director deferred fee compensation plan |
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131 |
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122 |
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|
258 |
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|
240 |
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Stationery and supplies |
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|
88 |
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|
96 |
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|
139 |
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|
176 |
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Postage |
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44 |
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|
45 |
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|
90 |
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|
87 |
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Directors expense |
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67 |
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|
68 |
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|
141 |
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|
152 |
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Goodwill impairment |
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32 |
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32 |
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Other expenses |
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|
1,237 |
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|
932 |
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|
2,372 |
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|
2,234 |
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Total noninterest expense |
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7,854 |
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|
7,509 |
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|
15,500 |
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|
14,696 |
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Income before provision for income taxes |
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1,708 |
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|
|
2,399 |
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|
3,779 |
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|
4,423 |
|
Provision for income taxes |
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|
216 |
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|
|
750 |
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|
|
647 |
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|
|
1,494 |
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|
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|
|
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|
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Net Income |
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|
1,492 |
|
|
|
1,649 |
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|
|
3,132 |
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|
|
2,929 |
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Less: Net income (loss) attributable to noncontrolling
interest |
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6 |
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|
144 |
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(18 |
) |
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(111 |
) |
Net income attributable to Bank of Commerce Holdings |
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$ |
1,486 |
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|
$ |
1,505 |
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|
$ |
3,150 |
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$ |
3,040 |
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|
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Less: preferred dividend and accretion on preferred stock |
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|
235 |
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|
|
236 |
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|
|
470 |
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|
|
471 |
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Income available to common shareholders |
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$ |
1,251 |
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$ |
1,269 |
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$ |
2,680 |
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$ |
2,569 |
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Basic earnings per share |
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$ |
0.07 |
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$ |
0.08 |
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|
$ |
0.16 |
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$ |
0.20 |
|
Weighted average shares basic |
|
|
16,991 |
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|
|
16,837 |
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|
|
16,991 |
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|
|
12,877 |
|
Diluted earnings per share |
|
$ |
0.07 |
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|
$ |
0.08 |
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|
$ |
0.16 |
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$ |
0.20 |
|
Weighted average shares diluted |
|
|
16,991 |
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|
|
16,837 |
|
|
|
16,991 |
|
|
|
12,877 |
|
Cash dividends declared |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
4
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
Twelve months ended December 31, 2010 and six months ended June 30, 2011 (Unaudited)
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(Dollars in thousands) |
|
Preferred Amount |
|
|
Warrant |
|
|
Common
Shares |
|
|
Stock
Amount |
|
|
Retained
Earnings |
|
|
Accumulated
Other Comp-
Income
(Loss), net of
tax |
|
|
Subtotal
Bank of
Commerce
Holdings |
|
|
Noncontrolling
Interest in
Subsidiary |
|
|
Total |
|
|
|
|
Balance at January 1, 2010 |
|
$ |
16,641 |
|
|
$ |
449 |
|
|
|
8,711 |
|
|
$ |
9,730 |
|
|
$ |
39,004 |
|
|
$ |
658 |
|
|
$ |
66,482 |
|
|
$ |
2,325 |
|
|
$ |
68,807 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,220 |
|
|
|
|
|
|
|
6,220 |
|
|
|
254 |
|
|
|
6,474 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
|
|
(1,167 |
) |
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,053 |
|
|
|
|
|
|
|
5,307 |
|
Accretion on preferred stock |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividend ($0.18 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
(2,562 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
(850 |
) |
Compensation expense associated with
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
54 |
|
Issuance of new shares, net of
issuance costs ($4.25 per share) |
|
|
|
|
|
|
|
|
|
|
8,280 |
|
|
|
32,971 |
|
|
|
|
|
|
|
|
|
|
|
32,971 |
|
|
|
|
|
|
|
32,971 |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
16,731 |
|
|
$ |
449 |
|
|
|
16,991 |
|
|
$ |
42,755 |
|
|
$ |
41,722 |
|
|
$ |
(509 |
) |
|
$ |
101,148 |
|
|
$ |
2,579 |
|
|
$ |
103,727 |
|
|
|
|
Condensed Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Preferred Amount |
|
|
Warrant |
|
|
Common
Shares |
|
|
Stock
Amount |
|
|
Retained
Earnings |
|
|
Accumulated
Other Comp-
Income
(Loss), net of
tax |
|
|
Subtotal
Bank of
Commerce
Holdings |
|
|
Noncontrolling
Interest in
Subsidiary |
|
|
Total |
|
|
|
|
Balance at January 1, 2011 |
|
$ |
16,731 |
|
|
$ |
449 |
|
|
|
16,991 |
|
|
$ |
42,755 |
|
|
$ |
41,722 |
|
|
$ |
(509 |
) |
|
$ |
101,148 |
|
|
$ |
2,579 |
|
|
$ |
103,727 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,150 |
|
|
|
|
|
|
|
3,150 |
|
|
|
(18 |
) |
|
|
3,132 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,761 |
|
|
|
2,761 |
|
|
|
|
|
|
|
2,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,911 |
|
|
|
|
|
|
|
5,893 |
|
Accretion on preferred stock |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividend ($0.03 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,019 |
) |
|
|
|
|
|
|
(1,019 |
) |
|
|
|
|
|
|
(1,019 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(425 |
) |
|
|
|
|
|
|
(425 |
) |
|
|
|
|
|
|
(425 |
) |
Compensation expense associated with
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
18 |
|
|
|
|
Balance at June 30, 2011 |
|
$ |
16,776 |
|
|
$ |
449 |
|
|
|
16,991 |
|
|
$ |
42,773 |
|
|
$ |
43,383 |
|
|
$ |
2,252 |
|
|
$ |
105,633 |
|
|
$ |
2,561 |
|
|
$ |
108,194 |
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2011 and June 30, 2010 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(Dollars in thousands) |
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
1,492 |
|
|
$ |
1,649 |
|
|
$ |
3,132 |
|
|
$ |
2,929 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period |
|
|
2,786 |
|
|
|
285 |
|
|
|
4,793 |
|
|
|
699 |
|
Reclassification adjustments for net gains realized in earnings, net of tax |
|
|
(308 |
) |
|
|
(79 |
) |
|
|
(452 |
) |
|
|
(627 |
) |
Income tax expense related to unrealized gains |
|
|
(1,142 |
) |
|
|
(117 |
) |
|
|
(1,968 |
) |
|
|
(288 |
) |
|
|
|
Net change in unrealized gains |
|
|
1,336 |
|
|
|
89 |
|
|
|
2,373 |
|
|
|
(216 |
) |
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period |
|
|
|
|
|
|
|
|
|
|
659 |
|
|
|
|
|
Reclassification adjustment for net gains realized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense related to unrealized gains |
|
|
|
|
|
|
|
|
|
|
(271 |
) |
|
|
|
|
|
|
|
Net change in unrealized gains |
|
|
|
|
|
|
|
|
|
|
388 |
|
|
|
|
|
|
|
|
Total other comprehensive income, net of tax |
|
|
2,828 |
|
|
|
1,738 |
|
|
|
5,893 |
|
|
|
2,713 |
|
Less: Other comprehensive income noncontrolling interest |
|
|
6 |
|
|
|
144 |
|
|
|
(18 |
) |
|
|
(111 |
) |
|
|
|
Total other comprehensive income Bank of Commerce Holdings |
|
$ |
2,822 |
|
|
$ |
1,594 |
|
|
$ |
5,911 |
|
|
$ |
2,824 |
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30, 2011 and 2010
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,132 |
|
|
$ |
2,929 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
4,980 |
|
|
|
3,850 |
|
Provision for depreciation and amortization |
|
|
439 |
|
|
|
473 |
|
Goodwill impairment |
|
|
|
|
|
|
32 |
|
Compensation expense associated with stock options |
|
|
18 |
|
|
|
27 |
|
Gain on sale of loans |
|
|
(5,662 |
) |
|
|
(6,582 |
) |
Gross proceeds from sales of loans held for sale |
|
|
275,425 |
|
|
|
298,271 |
|
Gross originations of loans held for sale |
|
|
(252,835 |
) |
|
|
(291,276 |
) |
Gain on sale of securities available-for-sale |
|
|
(913 |
) |
|
|
(1,064 |
) |
Amortization of investment premiums and accretion of discounts, net |
|
|
567 |
|
|
|
42 |
|
Loss on sale of other real estate owned |
|
|
365 |
|
|
|
84 |
|
Write down of other real estate owned |
|
|
557 |
|
|
|
1,249 |
|
Increase in deferred income taxes |
|
|
(547 |
) |
|
|
(861 |
) |
Increase in cash surrender value of bank owned life insurance policies |
|
|
(576 |
) |
|
|
(184 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
Decrease (increase) in other assets |
|
|
2,602 |
|
|
|
(3,086 |
) |
Deferred compensation |
|
|
244 |
|
|
|
240 |
|
Decrease in deferred loan fees |
|
|
(39 |
) |
|
|
(15 |
) |
(Decrease) increase in other liabilities |
|
|
(3,111 |
) |
|
|
322 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
24,646 |
|
|
|
4,451 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities and payments of available-for-sale securities |
|
|
15,061 |
|
|
|
14,808 |
|
Proceeds from sales of available-for-sale securities |
|
|
76,883 |
|
|
|
24,205 |
|
Purchases of available-for-sale securities |
|
|
(60,514 |
) |
|
|
(134,296 |
) |
Purchases of home equity loan portfolio |
|
|
|
|
|
|
(14,801 |
) |
Loan origination, net of principal repayments |
|
|
(1,999 |
) |
|
|
1,050 |
|
Purchases of premises and equipment, net |
|
|
(438 |
) |
|
|
(551 |
) |
Proceeds from the sales of other real estate owned |
|
|
2,078 |
|
|
|
175 |
|
Proceeds from the termination of interest rate swaps |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
34,071 |
|
|
|
(109,410 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in demand deposits and savings accounts |
|
|
(5,677 |
) |
|
|
9,673 |
|
Net decrease in certificates of deposit |
|
|
(17,594 |
) |
|
|
(7,112 |
) |
Net increase in securities sold under agreement to repurchase |
|
|
1,805 |
|
|
|
3,823 |
|
Advances on term debt |
|
|
239,253 |
|
|
|
1,234,000 |
|
Repayment of term debt |
|
|
(290,000 |
) |
|
|
(1,159,000 |
) |
Cash dividends paid on common stock |
|
|
(1,019 |
) |
|
|
(1,045 |
) |
Cash dividends paid on preferred stock |
|
|
(425 |
) |
|
|
(426 |
) |
Net proceeds from issuance of common stock |
|
|
|
|
|
|
33,113 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(73,657 |
) |
|
|
113,026 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(14,940 |
) |
|
|
8,067 |
|
Cash and cash equivalents, beginning of period |
|
|
63,256 |
|
|
|
68,240 |
|
|
|
|
|
|
|
|
|
|
$ |
48,316 |
|
|
$ |
76,307 |
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow activity: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
2,018 |
|
|
|
2,382 |
|
Interest |
|
|
4,364 |
|
|
|
4,848 |
|
Supplemental disclosures of non cash investing activities: |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned |
|
|
2,506 |
|
|
|
667 |
|
Changes in unrealized (loss) gain on investment securities available-for-sale |
|
|
4,033 |
|
|
|
(366 |
) |
Changes in deferred tax asset related to changes in unrealized (loss) gain on investment securities |
|
|
(1,660 |
) |
|
|
150 |
|
|
|
|
|
|
|
|
Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on
investment securities |
|
|
2,373 |
|
|
|
(216 |
) |
See accompanying notes to condensed consolidated financial statements.
7
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank of Commerce Holdings (the Holding Company) 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 the Holding Company and its wholly owned subsidiaries Redding Bank of Commerce and
Roseville Bank of Commerce, a division of Redding 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 following condensed balance sheet
as of December 31, 2010, which has been derived from audited financial statements, and the
unaudited interim condensed financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information and note
disclosures normally included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the company believes that the disclosures made are adequate to make the
information not misleading.
The financial information contained in this report reflects all adjustments that in the opinion of
management are necessary for a fair presentation of the results of the interim periods. All such
adjustments are of a normal recurring nature. Certain reclassifications have been made to the prior
period condensed consolidated financial statements to conform to the current financial statement
presentation with no effect on previously reported equity and net income.
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America. Additionally, where applicable, the policies conform to
the accounting and reporting guidelines prescribed by bank regulatory authorities. In preparing
the consolidated financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Material estimates that are particularly
susceptible to significant change including the determination of the allowance for loan losses
(ALL), the valuation of other real estate owned (OREO), other-than-temporary impairment of
investment securities, accounting for income taxes, and fair value measurements are discussed in
the notes to consolidated financial statements. Actual results could differ from those estimates.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes contained in Bank of
Commerce Holdings 2010 Annual Report on Form 10-K. The results of operations and cash flows for the
2011 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.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
FASB ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective
Control for Repurchase Agreements
The amendments in this Update apply to all entities, both public and nonpublic. The amendments
affect all entities that enter into agreements to transfer financial assets that both entitle and
obligate the transferor to repurchase or redeem the financial assets before their maturity. The
amendments do not affect other transfers of financial assets. The amendments in this Update remove
from the assessment of effective control (1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the
event of default by the transferee, and (2) the collateral maintenance implementation guidance
related to that criterion. The guidance in this Update is effective for the first interim
or annual period
beginning on or after December 15, 2011. The guidance should be applied prospectively to
transactions or modifications of existing transactions that occur on or after the effective date.
Early adoption is not permitted. The adoption of this Update is not expected to have a significant
effect on the Companys reported consolidated financial position and results of operations.
FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. G AAP and IFRSs. The amendments in this
Update apply to all reporting entities that are required or permitted to measure or disclose the
fair value of an asset, a liability, or an instrument classified in a reporting entitys
shareholders equity in the financial statements. The amendments in this Update result in common
fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the
amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring
fair value and for disclosing information about fair value measurements. For many of the
requirements, the Board does not intend for the amendments in this Update to result in a change in
the application of the requirements in Topic 820. The amendments in this Update are to be applied
prospectively. For public entities, the amendments are effective during interim and annual periods
beginning after December 15, 2011. The Company is currently evaluating the expected impact of the
new standard on consolidated reported financial position and results of operations.
8
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
FASB ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income.
All entities that report items of other comprehensive income, in any period presented, will be
affected by the changes in this Update. Under the amendments to Topic 220, FASB eliminated the
option to present components of other comprehensive income as part of the statement of changes in
stockholders equity. In this Update an entity has the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present each component of net income along with total net
income, each component of other comprehensive income along with a total for other comprehensive
income, and a total amount for comprehensive income. In a single continuous statement, the entity
is required to present the components of net income and total net income, the components of other
comprehensive income and a total for other comprehensive income, along with the total of
comprehensive income in that statement. The amendments in this Update do not change the items that
must be reported in other comprehensive income or when an item of other comprehensive income must
be reclassified to net income. The amendments in this Update should be applied retrospectively. For
public entities, the amendments are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the
amendments is already permitted. The amendments do not require any transition disclosures. As this
ASU is disclosure related only, the adoption of this ASU will not impact consolidated reported
financial position or results of operations.
FASB ASU No. 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional
guidance to assist creditors in determining whether a restructuring of a receivable meets the
criteria to be considered a troubled debt restructuring. This amendment applies to all creditors,
both public and nonpublic, that restructure receivables that fall within the scope of Subtopic
310-40, ReceivablesTroubled Debt Restructurings by Creditors. The amendments in this Update are
effective for the first interim or annual period beginning on or after June 15, 2011, and should be
applied retrospectively to the beginning of the annual period of adoption. As a result of applying
these amendments, an entity may identify receivables that are newly considered impaired. For
purposes of measuring impairment of those receivables, the Company will apply the amendments
prospectively for the first interim or annual period beginning on or after June 15, 2011.
Additional disclosures will be required to disclose the total amount of receivables and the
allowance for credit losses as of the end of the period of adoption related to those receivables
that are newly considered impaired under Section 310-10-35 for which impairment was previously
measured under Subtopic 450-20, ContingenciesLoss Contingencies. The Company will be required to
disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by
Accounting Standards Update No.2011-01, Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual
periods beginning on or after June 15, 2011. The Company is currently evaluating the expected
impact of the new standard on consolidated reported financial position and results of operations.
9
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3. EARNINGS PER SHARE
Basic earnings per share (EPS) 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.
During late first and early second quarter of 2010, through a successful Offering, the Company
issued 8.3 million shares of their common stock. In accordance to the Offering, average common
shares outstanding increased for the six months ended June 30, 2011 compared to the same period in
2010.
The following table displays the computation of earnings per share for the three months and six
months ended June 30, 2011 and 2010.
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
Earnings Per Share |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
1,486 |
|
|
$ |
1,505 |
|
|
$ |
3,150 |
|
|
$ |
3,040 |
|
Less: dividend on preferred stock |
|
|
212 |
|
|
|
213 |
|
|
|
425 |
|
|
|
426 |
|
Less: accretion on preferred stock |
|
|
23 |
|
|
|
23 |
|
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: earnings available to common shareholders |
|
$ |
1,251 |
|
|
$ |
1,269 |
|
|
$ |
2,680 |
|
|
$ |
2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
16,991,495 |
|
|
|
16,837,209 |
|
|
|
16,991,495 |
|
|
|
12,876,357 |
|
Basic earnings per share |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,486 |
|
|
$ |
1,505 |
|
|
$ |
3,150 |
|
|
$ |
3,040 |
|
Less: dividend on preferred stock |
|
|
212 |
|
|
|
213 |
|
|
|
425 |
|
|
|
426 |
|
Less: accretion on preferred stock |
|
|
23 |
|
|
|
23 |
|
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: earnings available to common shareholders |
|
$ |
1,251 |
|
|
$ |
1,269 |
|
|
$ |
2,680 |
|
|
$ |
2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
16,991,495 |
|
|
|
16,837,209 |
|
|
|
16,991,495 |
|
|
|
12,876,357 |
|
Plus incremental shares from assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,991,495 |
|
|
|
16,837,209 |
|
|
|
16,991,495 |
|
|
|
12,876,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.16 |
|
|
$ |
0.20 |
|
Anti-dilutive options not included in EPS calculation |
|
|
256,580 |
|
|
|
282,080 |
|
|
|
256,580 |
|
|
|
282,080 |
|
Anti-dilutive warrants not included in EPS calculation |
|
|
435,410 |
|
|
|
405,405 |
|
|
|
435,410 |
|
|
|
405,405 |
|
|
10
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4. SECURITIES
The following table presents the amortized costs, unrealized gains, unrealized losses and
approximate fair values of investment securities at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
As of June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
Available-for-sale securities |
|
Costs |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
21,959 |
|
|
$ |
84 |
|
|
$ |
(61 |
) |
|
$ |
21,982 |
|
Obligations of state and political subdivisions |
|
|
57,337 |
|
|
|
854 |
|
|
|
(310 |
) |
|
|
57,881 |
|
Residential mortgage backed securities and collateralized
mortgage obligations |
|
|
39,080 |
|
|
|
318 |
|
|
|
(89 |
) |
|
|
39,309 |
|
Corporate securities |
|
|
23,342 |
|
|
|
191 |
|
|
|
(101 |
) |
|
|
23,432 |
|
Other asset backed securities |
|
|
19,656 |
|
|
|
26 |
|
|
|
(102 |
) |
|
|
19,580 |
|
|
Total |
|
$ |
161,374 |
|
|
$ |
1,473 |
|
|
$ |
(663 |
) |
|
$ |
162,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
Available-for-sale securities |
|
Costs |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
26,814 |
|
|
$ |
6 |
|
|
$ |
(489 |
) |
|
$ |
26,331 |
|
Obligations of state and political subdivisions |
|
|
67,004 |
|
|
|
82 |
|
|
|
(2,935 |
) |
|
|
64,151 |
|
Residential mortgage backed securities and collateralized
mortgage obligations |
|
|
65,052 |
|
|
|
446 |
|
|
|
(251 |
) |
|
|
65,247 |
|
Corporate securities |
|
|
29,019 |
|
|
|
28 |
|
|
|
(90 |
) |
|
|
28,957 |
|
Other asset backed securities |
|
|
4,569 |
|
|
|
|
|
|
|
(20 |
) |
|
|
4,549 |
|
|
Total |
|
$ |
192,458 |
|
|
$ |
562 |
|
|
$ |
(3,785 |
) |
|
$ |
189,235 |
|
|
The amortized cost and estimated fair value of available-for-sale securities as of June 30, 2011
are shown below.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Available-for-sale |
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
AMOUNTS MATURING IN: |
|
|
|
|
|
|
|
|
One year or less |
|
$ |
248 |
|
|
$ |
249 |
|
One year through five years |
|
|
25,562 |
|
|
|
25,531 |
|
Five years through ten years |
|
|
60,370 |
|
|
|
60,907 |
|
After ten years |
|
|
75,194 |
|
|
|
75,497 |
|
|
|
|
$ |
161,374 |
|
|
$ |
162,184 |
|
|
The amortized cost and fair value of collateralized mortgage obligations and mortgage backed
securities are presented by their expected average life, rather than contractual maturity, in the
preceding table. Expected maturities may differ from contractual.
As of June 30, 2011, the Company held $79.1 million in securities with safekeeping institutions for
pledging purposes. Of this amount, $29.5 million is currently pledged for public funds collateral,
collateralized repurchase agreements, and Federal Home Loan Bank (FHLB) borrowings.
The following table presents the cash proceeds from sales of securities and their associated gross
realized gains and gross realized losses that have been included in earnings for the three and six
months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three months ended |
|
|
Six months ended |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Proceeds from sales of securities |
|
$ |
53,835 |
|
|
$ |
6,047 |
|
|
$ |
76,883 |
|
|
$ |
24,205 |
|
Gross realized gains on sales of securities |
|
$ |
719 |
|
|
$ |
145 |
|
|
$ |
987 |
|
|
$ |
1,078 |
|
Gross realized losses on sales of securities |
|
$ |
(64 |
) |
|
$ |
(12 |
) |
|
$ |
(74 |
) |
|
$ |
(14 |
) |
|
11
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Other-Than-Temporarily Impaired Debt Securities
For each security in an unrealized loss position, we assess whether we intend 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 in which we do not intend
and will not be required to sell prior to recovery of our amortized cost basis, impairment is
separated 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 the amount due to factors
not credit related is recognized in other comprehensive income.
We do intend to sell temporarily impaired securities, and it is more likely than not that we will
not have to sell those securities before recovery of the cost basis. Additionally, we have
evaluated the credit ratings of our investment securities and their issuers and/or insurers, if
applicable. Based on our evaluation, management has determined that no investment security in our
investment portfolio is other-than-temporarily impaired.
The following tables present the current fair value and associated unrealized losses on investments
with unrealized losses at June 30, 2011 and December 31, 2010. The tables also illustrate whether
these securities have had unrealized losses for less than 12 months or for 12 months or longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 |
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(Dollars in thousands) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury and agencies |
|
$ |
5,948 |
|
|
$ |
(61 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,948 |
|
|
$ |
(61 |
) |
Obligations of state and
political subdivisions |
|
|
19,974 |
|
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
|
19,974 |
|
|
|
(310 |
) |
Residential mortgage backed
securities and
collateralized mortgage
obligations |
|
|
11,242 |
|
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
11,242 |
|
|
|
(89 |
) |
Corporate securities |
|
|
13,131 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
13,131 |
|
|
|
(101 |
) |
Other asset backed securities |
|
|
14,003 |
|
|
|
(102 |
) |
|
|
|
|
|
|
|
|
|
|
14,003 |
|
|
|
(102 |
) |
Total temporarily
impaired securities |
|
$ |
64,298 |
|
|
$ |
(663 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
64,298 |
|
|
$ |
(663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(Dollars in thousands) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury and agencies |
|
$ |
18,829 |
|
|
$ |
(489 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,829 |
|
|
$ |
(489 |
) |
Obligations of state and
political subdivisions |
|
|
52,414 |
|
|
|
(2,935 |
) |
|
|
|
|
|
|
|
|
|
|
52,414 |
|
|
|
(2,935 |
) |
Residential mortgage backed
securities and
collateralized mortgage
obligations |
|
|
26,477 |
|
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
|
26,477 |
|
|
|
(251 |
) |
Corporate securities |
|
|
14,494 |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
14,494 |
|
|
|
(90 |
) |
Other asset backed securities |
|
|
4,549 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
4,549 |
|
|
|
(20 |
) |
Total temporarily
impaired securities |
|
$ |
116,763 |
|
|
$ |
(3,785 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
116,763 |
|
|
$ |
(3,785 |
) |
At June 30, 2011 and December 31, 2010, 62 and 159 securities were in an unrealized loss position,
respectively.
The unrealized losses associated with debt securities of U.S. government agencies and corporate
securities are primarily driven by changes in interest rates and not due to the credit quality of
the securities. Furthermore, securities backed by GNMA, FNMA, or FHLMC have the explicit or
implicit guarantee of the full faith and credit of the U.S. Federal Government. Obligations of U.S.
states and political subdivisions in our portfolio are all investment grade without delinquency
history. These securities will continue to be monitored as part of our ongoing impairment analysis,
but are expected to perform. As a result, we concluded that these securities were not
other-than-temporarily impaired as of June 30, 2011.
12
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The unrealized losses associated with asset backed securities and non agency CMOs were primarily
related to securities backed by commercial and residential mortgages. All of these securities were
above investment grade at June 30, 2011 and December 31, 2010, as rated by at least one major
rating agency. For the CMOs and asset backed securities, we estimate loss projections for each
security by assessing loans collateralizing the security and determining expected default rates and
loss severities. Based upon our assessment of expected credit losses of each security given the
performance of the underlying collateral and credit enhancements where applicable, we concluded
that these securities were not other-than-temporarily impaired as of June 30, 2011.
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding loan balances consist of the following at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
Commercial |
|
$ |
140,610 |
|
|
$ |
130,579 |
|
Real estate construction loans |
|
|
26,357 |
|
|
|
41,327 |
|
Real estate commercial (investor) |
|
|
218,535 |
|
|
|
215,697 |
|
Real estate commercial (owner occupied) |
|
|
68,327 |
|
|
|
68,055 |
|
Real estate 1-4 family ITIN loans |
|
|
67,675 |
|
|
|
70,585 |
|
Real estate 1-4 family mortgage |
|
|
22,116 |
|
|
|
19,299 |
|
Real estate equity lines |
|
|
46,850 |
|
|
|
48,178 |
|
Consumer |
|
|
5,271 |
|
|
|
6,775 |
|
Other |
|
|
91 |
|
|
|
301 |
|
|
|
|
|
|
|
|
Total gross loans |
|
$ |
595,832 |
|
|
$ |
600,796 |
|
Less: |
|
|
|
|
|
|
|
|
Deferred loan fees, net |
|
|
51 |
|
|
|
90 |
|
Allowance for loan losses |
|
|
13,363 |
|
|
|
12,841 |
|
|
Total net loans |
|
$ |
582,418 |
|
|
$ |
587,865 |
|
|
Gross loan balances in the table above include net premiums of $199 thousand and $168 thousand for
the periods ending June 30, 2011 and December 31, 2010, respectively.
Age analysis of past due loans, segregated by class of loans, as of June 30, 2011 and December 31,
2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
30-59 |
|
|
60-89 |
|
|
Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment > |
|
|
|
Days Past |
|
|
Days Past |
|
|
Than 90 |
|
|
Total Past |
|
|
|
|
|
|
|
|
|
|
90 Days and |
|
(Dollars in thousands) |
|
Due |
|
|
Due |
|
|
Days |
|
|
Due |
|
|
Current |
|
|
Total |
|
|
Accruing |
|
|
June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
163 |
|
|
$ |
|
|
|
$ |
414 |
|
|
$ |
577 |
|
|
$ |
140,033 |
|
|
$ |
140,610 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,874 |
|
|
|
|
|
|
|
26 |
|
|
|
1,900 |
|
|
|
24,457 |
|
|
|
26,357 |
|
|
|
|
|
Other |
|
|
13,839 |
|
|
|
377 |
|
|
|
|
|
|
|
14,216 |
|
|
|
272,646 |
|
|
|
286,862 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
5,646 |
|
|
|
1,004 |
|
|
|
7,486 |
|
|
|
14,136 |
|
|
|
75,655 |
|
|
|
89,791 |
|
|
|
953 |
|
Home equities |
|
|
755 |
|
|
|
744 |
|
|
|
|
|
|
|
1,499 |
|
|
|
45,351 |
|
|
|
46,850 |
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,362 |
|
|
|
5,362 |
|
|
|
|
|
|
Total |
|
$ |
22,277 |
|
|
$ |
2,125 |
|
|
$ |
7,926 |
|
|
$ |
32,328 |
|
|
$ |
563,504 |
|
|
$ |
595,832 |
|
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,625 |
|
|
$ |
|
|
|
$ |
677 |
|
|
$ |
2,302 |
|
|
$ |
128,277 |
|
|
$ |
130,579 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
342 |
|
|
|
40,985 |
|
|
|
41,327 |
|
|
|
|
|
Other |
|
|
5,168 |
|
|
|
|
|
|
|
2,520 |
|
|
|
7,688 |
|
|
|
276,064 |
|
|
|
283,752 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
7,857 |
|
|
|
2,404 |
|
|
|
6,720 |
|
|
|
16,981 |
|
|
|
53,604 |
|
|
|
70,585 |
|
|
|
|
|
Home equities |
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
450 |
|
|
|
67,027 |
|
|
|
67,477 |
|
|
|
|
|
Consumer |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
7,057 |
|
|
|
7,076 |
|
|
|
|
|
|
Total |
|
$ |
15,461 |
|
|
$ |
2,404 |
|
|
$ |
9,917 |
|
|
$ |
27,782 |
|
|
$ |
573,014 |
|
|
$ |
600,796 |
|
|
$ |
|
|
|
13
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Companys practice is to place an asset on nonaccrual status when one of the following events
occur: (1) 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), (2) management
determines the ultimate collection of principal or interest to be unlikely or, (3) the terms of the
loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, 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 because of the borrowers
financial or legal difficulties. Interest is generally accrued on such loans in accordance with
the new terms, after a period of sustained performance by the borrower.
One exception to the 90 days past due policy for nonaccruals is the Companys pool of home equity
loans and lines purchased from a private equity firm. The purchase of this pool of loans included
a put option allowing the bank to sell a portion of the loan pool back to the private equity firm
in the event of default by the borrower. At 90 days past due a loan in this pool will be sold
back to the private equity firm for the outstanding principal balance, unless a workout plan has
been put in place with the borrower. Once this put reserve is exhausted, the bank will charge off
any loans that become 90 days past due. Management believes that charging the loan off at the time
it becomes impaired is more conservative than placing it on nonaccrual status.
Pursuant to Company policy, payments received on loans that are on nonaccrual status are applied to
principal until such time the loan is reclassified to accrual status. It is the Companys policy to
resume the accrual of interest on any loan on nonaccrual status when, at a minimum, six consecutive
payments of the original or modified contractual terms has occurred, and it is more likely than not
that contractual or modified payment amounts will continue into the foreseeable future. Had
nonaccrual loans performed in accordance with their contractual terms, the Company would have
recognized additional interest income, net of tax, of approximately $120 thousand and $108 thousand
for the three months ended June 30, 2011 and 2010, respectively. The Company would have recognized
additional interest income, net of tax, of approximately $218 thousand and $154 thousand during the
six months ended June 30, 2011 and 2010, respectively.
Nonaccrual loans, segregated by loan class, were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
Commercial |
|
$ |
901 |
|
|
$ |
2,302 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
1,999 |
|
|
|
342 |
|
Other |
|
|
3,282 |
|
|
|
7,066 |
|
Residential: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
12,741 |
|
|
|
10,704 |
|
Home equities |
|
|
|
|
|
|
97 |
|
Consumer |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,923 |
|
|
$ |
20,511 |
|
|
The Company considers and defines a loan as impaired when, based on current information and events,
it is probable that the Company will be unable to collect all interest and principal payments due
according to the contractual terms of the loan agreement. Management assesses all loans, either
individually or in aggregate (homogenous retail credits), that meet the Companys definition of
impairment. Management classifies all troubled debt restructures (TDRs) as impaired. The Company
generally applies all cash payments received on impaired loans towards the reduction of outstanding
principal.
Pursuant to Company policy, interest income is recognized on TDRs with certain terms. When
determining whether to accrue interest on a TDR, the following criteria is applied on a
loan-by-loan basis:
|
|
|
An impairment assessment has been completed on the TDR loan, as prescribed by ASC 310,
and no impairment has been identified, |
|
|
|
|
the borrower has not been delinquent 90 or more days prior to the loan modification
date, and |
|
|
|
|
it is more likely than not that the modified payment amounts will continue into the
foreseeable future. |
Under the circumstances when a TDR is delinquent 90 or more days at the date of the modification,
it is the Companys policy to maintain the TDR on nonaccrual status. Pursuant to such status, all
cash payments received are applied to principal until such time the TDR borrower has made a minimum
of six consecutive payments in conformance with the modified contractual terms, and it is more
likely than not that the borrowers modified payment amounts will continue into the foreseeable
future.
14
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes our impaired loans by loan class as of June 30, 2011 and December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of June 30, 2011 |
|
|
|
Recorded |
|
|
Unpaid Principal |
|
|
Related |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
414 |
|
|
$ |
1,153 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
1,874 |
|
|
|
2,949 |
|
|
|
|
|
Other |
|
|
3,083 |
|
|
|
4,808 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
1,672 |
|
|
|
3,089 |
|
|
|
|
|
Home equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
7,043 |
|
|
$ |
11,999 |
|
|
$ |
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
487 |
|
|
$ |
496 |
|
|
$ |
414 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
233 |
|
|
|
395 |
|
|
|
75 |
|
Other |
|
|
17,503 |
|
|
|
17,508 |
|
|
|
712 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
17,638 |
|
|
|
18,944 |
|
|
|
2,235 |
|
Home equities |
|
|
968 |
|
|
|
968 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
36,829 |
|
|
$ |
38,311 |
|
|
$ |
3,533 |
|
Subtotal: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
901 |
|
|
$ |
1,649 |
|
|
$ |
414 |
|
Commercial real estate |
|
$ |
22,693 |
|
|
$ |
25,660 |
|
|
$ |
787 |
|
Residential |
|
$ |
20,278 |
|
|
$ |
23,001 |
|
|
$ |
2,332 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,872 |
|
|
$ |
50,310 |
|
|
$ |
3,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2010 |
|
|
|
Recorded |
|
|
Unpaid Principal |
|
|
Related |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
120 |
|
|
$ |
120 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
718 |
|
|
|
947 |
|
|
|
|
|
Other |
|
|
9,527 |
|
|
|
12,421 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
8,067 |
|
|
|
9,745 |
|
|
|
|
|
Home equities |
|
|
97 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
18,529 |
|
|
$ |
23,338 |
|
|
$ |
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,182 |
|
|
$ |
5,028 |
|
|
$ |
449 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,428 |
|
|
|
3,347 |
|
|
|
139 |
|
Other |
|
|
1,160 |
|
|
|
3,022 |
|
|
|
111 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
8,716 |
|
|
|
9,298 |
|
|
|
599 |
|
Home equities |
|
|
901 |
|
|
|
901 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
15,387 |
|
|
$ |
21,596 |
|
|
$ |
1,388 |
|
Subtotal: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,302 |
|
|
$ |
5,148 |
|
|
$ |
449 |
|
Commercial real estate |
|
$ |
13,833 |
|
|
$ |
19,737 |
|
|
$ |
250 |
|
Residential |
|
$ |
17,781 |
|
|
$ |
20,049 |
|
|
$ |
689 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,916 |
|
|
$ |
44,934 |
|
|
$ |
1,388 |
|
|
15
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes our average recorded investment and interest income recognized on
impaired loans by loan class for the three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
Three Months Ended |
|
Six Months Ended |
(Dollars in thousands) |
|
June 30, 2011 |
|
June 30, 2011 |
|
June 30, 2010 |
|
June 30, 2010 |
|
|
|
Average |
|
Interest |
|
Average |
|
Interest |
|
Average |
|
Interest |
|
Average |
|
Interest |
|
|
Recorded |
|
Income |
|
Recorded |
|
Income |
|
Recorded |
|
Income |
|
Recorded |
|
Income |
|
|
Investment |
|
Recognized |
|
Investment |
|
Recognized |
|
Investment |
|
Recognized |
|
Investment |
|
Recognized |
|
Commercial |
|
$ |
1,554 |
|
|
$ |
|
|
|
$ |
2,066 |
|
|
$ |
1 |
|
|
$ |
1,808 |
|
|
$ |
5 |
|
|
$ |
1,185 |
|
|
$ |
8 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
898 |
|
|
|
1 |
|
|
|
654 |
|
|
|
2 |
|
|
|
4,764 |
|
|
|
30 |
|
|
|
4,118 |
|
|
|
48 |
|
Other |
|
|
16,907 |
|
|
|
107 |
|
|
|
13,868 |
|
|
|
164 |
|
|
|
11,130 |
|
|
|
25 |
|
|
|
10,309 |
|
|
|
60 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
18,284 |
|
|
|
49 |
|
|
|
17,730 |
|
|
|
101 |
|
|
|
10,400 |
|
|
|
46 |
|
|
|
8,219 |
|
|
|
79 |
|
Home equities |
|
|
1,151 |
|
|
|
18 |
|
|
|
1,297 |
|
|
|
43 |
|
|
|
295 |
|
|
|
|
|
|
|
247 |
|
|
|
|
|
|
|
|
Total |
|
$ |
38,794 |
|
|
$ |
175 |
|
|
$ |
35,615 |
|
|
$ |
311 |
|
|
$ |
28,397 |
|
|
$ |
106 |
|
|
$ |
24,078 |
|
|
$ |
195 |
|
|
The foundation or primary factor in determining the appropriate credit quality indicators is
the degree of a debtors willingness and ability to perform as agreed. The Company defines a
performing loan as a loan where any installment of principal or interest is not 90 days or more
past due, and management believes the ultimate collection of principal and interest is likely. The
Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, is 90 days
past due and still accruing, or has been restructured and is not in compliance with its modified
terms.
Performing and nonperforming loans, segregated by class of loans, are as:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
Performing |
|
Nonperforming |
|
Total |
|
Commercial |
|
$ |
139,709 |
|
|
$ |
901 |
|
|
$ |
140,610 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
24,358 |
|
|
|
1,999 |
|
|
|
26,357 |
|
Other |
|
|
283,580 |
|
|
|
3,282 |
|
|
|
286,862 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
76,097 |
|
|
|
13,694 |
|
|
|
89,791 |
|
Home equities |
|
|
46,850 |
|
|
|
|
|
|
|
46,850 |
|
Consumer |
|
|
5,362 |
|
|
|
|
|
|
|
5,362 |
|
|
Total |
|
$ |
575,956 |
|
|
$ |
19,876 |
|
|
$ |
595,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2010 |
|
|
Performing |
|
Nonperforming |
|
Total |
|
Commercial |
|
$ |
128,277 |
|
|
$ |
2,302 |
|
|
$ |
130,579 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
40,985 |
|
|
|
342 |
|
|
|
41,327 |
|
Other |
|
|
276,686 |
|
|
|
7,066 |
|
|
|
283,752 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
59,881 |
|
|
|
10,704 |
|
|
|
70,585 |
|
Home equities |
|
|
67,380 |
|
|
|
97 |
|
|
|
67,477 |
|
Consumer |
|
|
7,076 |
|
|
|
|
|
|
|
7,076 |
|
|
Total |
|
$ |
580,285 |
|
|
$ |
20,511 |
|
|
$ |
600,796 |
|
|
In conjunction with evaluating the performing versus nonperforming nature of the Companys
loan portfolio, management evaluates the following credit risk and other relevant factors in
determining the appropriate credit quality indicator (grade) for each loan class:
Pass Grade Borrowers classified as Pass Grades specifically demonstrate:
|
|
|
Strong cashflows borrowers cashflows must meet or exceed the Companys minimum Debt
Service Coverage Ratio. |
|
|
|
|
Collateral margin generally, the borrower must have pledged an acceptable collateral
class with an adequate collateral margin. |
Those borrowers who qualify for unsecured loans must fully demonstrate above average cashflows and
strong secondary sources of repayment to mitigate the lack of unpledged collateral.
|
|
|
Qualitative Factors in addition to meeting the Companys minimum cashflow and
collateral requirements, a number of other quantitative and qualitative factors are also
factored into assigning a pass grade including the borrowers level of leverage (Debt to
Equity), prospects, history and experience in their industry, credit history, and any other
relevant factors including a borrowers character. |
16
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Watch Grade Generally, borrowers classified as Watch exhibit some level of deterioration
in one or more of the following:
|
|
|
Adequate Cashflows borrowers in this category demonstrate adequate cashflows and Debt
Service Coverage Ratios, but also exhibit one or more less than positive conditions such as
declining trends in the level of cashflows, increasing or sole reliance on secondary
sources of cashflows, and/or do not meet the Companys minimum Debt Service Coverage Ratio.
However, cashflow remains at acceptable levels to meet debt service requirements. |
|
|
|
|
Adequate Collateral Margin the collateral securing the debt remains adequate but also
exhibits a declining trend in value or expected volatility due to macro or industry
specific conditions. The current collateral value, less selling costs, remains adequate to
cover the outstanding debt under a liquidation scenario. |
|
|
|
|
Qualitative Factors while the borrowers cashflow and collateral margin generally
remain adequate, one or more quantitative and qualitative factors may also factor into
assigning a Watch Grade including the borrowers level of leverage (Debt to Equity),
deterioration in prospects, limited experience in their industry, newly formed company,
overall deterioration in the industry, negative trends or recent events in a borrowers
credit history, deviation from core business, and any other relevant factors. |
Special Mention Grade Generally, borrowers classified as Special Mention exhibit a
greater level of deterioration than Watch graded loans and warrant managements close attention. If
left uncorrected, the potential weaknesses could threaten repayment prospects in the future.
Special Mention loans are not adversely classified and do not expose the Company to sufficient risk
to warrant an adverse risk grade.
The following represents potential characteristics of a Special Mention Grade but do not
necessarily generate automatic reclassification into this loan grade:
|
|
|
Adequate Cashflows borrowers in this category demonstrate adequate cashflows and Debt
Service Coverage Ratios, but also reflect adverse trends in operations or continuing
financial deterioration that, if it does not stabilize and reverse in a reasonable
timeframe, retirement of the debt may be jeopardized. |
|
|
|
|
Adequate Collateral Margin the collateral securing the debt remains adequate but also
exhibits a continuing declining trend in value or volatility due to macro or industry
specific conditions. The current collateral value, less selling costs, remains adequate,
but should the negative collateral trend continue, the full recovery of the outstanding
debt under a liquidation scenario could be jeopardized. |
|
|
|
|
Qualitative Factors while the borrowers cashflow and/or collateral margin continue
to deteriorate but generally remain adequate, one or more quantitative and qualitative
factors may also be factoring into assigning a Special Mention Grade including inadequate
or incomplete loan documentation, perfection of collateral, inadequate credit structure,
borrower unable or unwilling to produce current and adequate financial information, and any
other relevant factors. |
Substandard Grade A Substandard credit is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have
a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the
debt. Substandard credits are characterized by the distinct possibility that the Company will
sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to
be recognizable in an individual credit for it to be considered a substandard credit. As such,
substandard credits may or may not be classified as impaired.
The following represents, but is not limited to, the potential characteristics of a Substandard
Grade and do not necessarily generate automatic reclassification into this loan grade:
|
|
|
Sustained or substantial deteriorating financial trends, |
|
|
|
|
Unresolved management problems, |
|
|
|
|
Collateral is insufficient to repay debt; collateral is not sufficiently supported by
independent sources, such as asset-based financial audits, appraisals, or equipment
evaluations, |
|
|
|
|
Improper perfection of lien position, which is not readily correctable, |
|
|
|
|
Unanticipated and severe decline in market values, |
|
|
|
|
High reliance on secondary source of repayment, |
|
|
|
|
Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased
the borrowers capacity to repay the debt, |
|
|
|
|
Fraud committed by the borrower, |
|
|
|
|
IRS liens that take precedence, |
|
|
|
|
Forfeiture statutes for assets involved in criminal activities, |
17
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
Protracted repayment terms outside of policy that are for longer than the same type of
credit in the Company portfolio, |
|
|
|
|
Any other relevant quantitative or qualitative factor that negatively affects the
current net worth and paying capacity of the borrower or of the collateral pledged, if any. |
Doubtful Grade A credit risk rated as Doubtful has all the weaknesses inherent in a
credit classified Substandard with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. As such, all doubtful loans are considered impaired. The possibility
of loss is extremely high, but because of certain pending factors that may work to the advantage
and strengthening of the credit, its classification as an estimated loss is deferred until its more
exact status may be determined. Pending factors may include, but are not limited to:
|
|
|
Proposed merger(s), |
|
|
|
|
Acquisition or liquidation procedures, |
|
|
|
|
Capital injection, |
|
|
|
|
Perfecting liens on additional collateral, |
|
|
|
|
Refinancing plans. |
Generally, a Doubtful grade does not remain outstanding for a period greater than six months. After
six months, the pending events should have either occurred or not occurred. The credit grade should
have improved or the principal balance charged against the ALL.
Credit grade definitions, including qualitative factors, for all credit grades are reviewed and
approved annually by the Companys Loan Committee. The following table summarizes our internal risk
rating by loan class as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
Pass |
|
Watch |
|
Special Mention |
|
Substandard |
|
Doubtful |
|
Total |
|
Commercial |
|
$ |
117,926 |
|
|
$ |
12,690 |
|
|
$ |
825 |
|
|
$ |
8,268 |
|
|
$ |
901 |
|
|
$ |
140,610 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
13,679 |
|
|
|
7,546 |
|
|
|
3,025 |
|
|
|
2,008 |
|
|
|
99 |
|
|
|
26,357 |
|
Other |
|
|
235,961 |
|
|
|
19,312 |
|
|
|
10,421 |
|
|
|
20,968 |
|
|
|
200 |
|
|
|
286,862 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
66,956 |
|
|
|
636 |
|
|
|
1,023 |
|
|
|
21,176 |
|
|
|
|
|
|
|
89,791 |
|
Home equities |
|
|
26,249 |
|
|
|
3,054 |
|
|
|
10,983 |
|
|
|
5,596 |
|
|
|
968 |
|
|
|
46,850 |
|
Consumer |
|
|
5,134 |
|
|
|
94 |
|
|
|
53 |
|
|
|
81 |
|
|
|
|
|
|
|
5,362 |
|
|
Total |
|
$ |
465,905 |
|
|
$ |
43,332 |
|
|
$ |
26,330 |
|
|
$ |
58,097 |
|
|
$ |
2,168 |
|
|
$ |
595,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2010 |
|
|
Pass |
|
Watch |
|
Special Mention |
|
Substandard |
|
Doubtful |
|
Total |
|
Commercial |
|
$ |
96,691 |
|
|
$ |
17,100 |
|
|
$ |
2,454 |
|
|
$ |
12,153 |
|
|
$ |
2,181 |
|
|
$ |
130,579 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
26,960 |
|
|
|
8,228 |
|
|
|
44 |
|
|
|
5,995 |
|
|
|
100 |
|
|
|
41,327 |
|
Other |
|
|
237,086 |
|
|
|
34,420 |
|
|
|
1,125 |
|
|
|
8,401 |
|
|
|
2,720 |
|
|
|
283,752 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
57,390 |
|
|
|
|
|
|
|
|
|
|
|
13,195 |
|
|
|
|
|
|
|
70,585 |
|
Home equities |
|
|
39,085 |
|
|
|
4,428 |
|
|
|
12,765 |
|
|
|
10,298 |
|
|
|
901 |
|
|
|
67,477 |
|
Consumer |
|
|
6,544 |
|
|
|
362 |
|
|
|
73 |
|
|
|
97 |
|
|
|
|
|
|
|
7,076 |
|
|
Total |
|
$ |
463,756 |
|
|
$ |
64,538 |
|
|
$ |
16,461 |
|
|
$ |
50,139 |
|
|
$ |
5,902 |
|
|
$ |
600,796 |
|
|
18
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Credit Losses and Recorded Investment in Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of June 30, 2011 |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Residential |
|
Unallocated |
|
Total |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
4,185 |
|
|
$ |
3,900 |
|
|
$ |
46 |
|
|
$ |
4,561 |
|
|
$ |
149 |
|
|
$ |
12,841 |
|
Charge offs |
|
|
(2,081 |
) |
|
|
(2,155 |
) |
|
|
(25 |
) |
|
|
(871 |
) |
|
|
|
|
|
|
(5,132 |
) |
Recoveries |
|
|
46 |
|
|
|
22 |
|
|
|
3 |
|
|
|
603 |
|
|
|
|
|
|
|
674 |
|
Provision |
|
|
1,402 |
|
|
|
1,661 |
|
|
|
7 |
|
|
|
1,602 |
|
|
|
308 |
|
|
|
4,980 |
|
|
|
|
Ending balance |
|
$ |
3,552 |
|
|
$ |
3,428 |
|
|
$ |
31 |
|
|
$ |
5,895 |
|
|
$ |
457 |
|
|
$ |
13,363 |
|
|
|
|
Ending balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for
impairment |
|
$ |
414 |
|
|
$ |
787 |
|
|
$ |
|
|
|
$ |
2,332 |
|
|
$ |
|
|
|
$ |
3,533 |
|
Ending balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for
impairment |
|
$ |
3,138 |
|
|
$ |
2,641 |
|
|
$ |
31 |
|
|
$ |
3,563 |
|
|
$ |
457 |
|
|
$ |
9,830 |
|
Financing receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
140,610 |
|
|
$ |
313,219 |
|
|
$ |
5,362 |
|
|
$ |
136,641 |
|
|
$ |
|
|
|
$ |
595,832 |
|
Ending balance individually
evaluated for impairment |
|
$ |
901 |
|
|
$ |
22,693 |
|
|
$ |
|
|
|
$ |
20,278 |
|
|
$ |
|
|
|
$ |
43,872 |
|
Ending balance collectively
evaluated for impairment |
|
$ |
139,709 |
|
|
$ |
290,526 |
|
|
$ |
5,362 |
|
|
$ |
116,363 |
|
|
$ |
|
|
|
$ |
551,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2010 |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Residential |
|
Unallocated |
|
Total |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
5,306 |
|
|
$ |
3,535 |
|
|
$ |
35 |
|
|
$ |
2,059 |
|
|
$ |
272 |
|
|
$ |
11,207 |
|
Charge offs |
|
|
(4,192 |
) |
|
|
(3,391 |
) |
|
|
|
|
|
|
(4,506 |
) |
|
|
|
|
|
|
(12,089 |
) |
Recoveries |
|
|
393 |
|
|
|
154 |
|
|
|
8 |
|
|
|
318 |
|
|
|
|
|
|
|
873 |
|
Provision |
|
|
2,678 |
|
|
|
3,602 |
|
|
|
3 |
|
|
|
6,690 |
|
|
|
(123 |
) |
|
|
12,850 |
|
|
|
|
Ending balance |
|
$ |
4,185 |
|
|
$ |
3,900 |
|
|
$ |
46 |
|
|
$ |
4,561 |
|
|
$ |
149 |
|
|
$ |
12,841 |
|
|
|
|
Ending balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for
impairment |
|
$ |
449 |
|
|
$ |
250 |
|
|
$ |
|
|
|
$ |
689 |
|
|
$ |
|
|
|
$ |
1,388 |
|
Ending balance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for
impairment |
|
$ |
3,736 |
|
|
$ |
3,650 |
|
|
$ |
46 |
|
|
$ |
3,872 |
|
|
$ |
149 |
|
|
$ |
11,453 |
|
Financing receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
130,579 |
|
|
$ |
325,079 |
|
|
$ |
7,076 |
|
|
$ |
138,062 |
|
|
$ |
|
|
|
$ |
600,796 |
|
Ending balance individually
evaluated for impairment |
|
$ |
2,302 |
|
|
$ |
13,833 |
|
|
$ |
|
|
|
$ |
17,781 |
|
|
$ |
|
|
|
$ |
33,916 |
|
Ending balance collectively
evaluated for impairment |
|
$ |
128,277 |
|
|
$ |
311,246 |
|
|
$ |
7,076 |
|
|
$ |
120,281 |
|
|
$ |
|
|
|
$ |
566,880 |
|
|
The ALL totaled $13.4 million or 2.24% of total loans at June 30, 2011 compared to $12.8
million or 2.14% at December 31, 2010. The related allowance allocation for the Individual Tax
Identification Number (ITIN) portfolio was $3.0 million and $2.9 million at June 30, 2011 and
December 31, 2010, respectively. In addition, as of June 30, 2011, the Company has $138.6 million
in commitments to extend credit, and recorded a reserve for off balance sheet commitments of $422
thousand in other liabilities.
Management employs its best judgment given available and relevant information in determining the
adequacy of the allowance; however, there are a number of factors beyond the Companys control,
including the performance of the loan portfolio, changes in interest rates, economic conditions,
and regulatory views towards loan classifications. As such, the ultimate adequacy of the allowance
may differ significantly from the Companys estimation.
The Company has lending policies and procedures in place with the objective of optimizing loan
income within an accepted risk tolerance level. Management reviews and approves these policies and
procedures annually. Monitoring and reporting systems supplement the review process with regular
frequency as related to loan production, loan quality, concentrations of credit, potential problem
loans, loan delinquencies, and nonperforming loans.
The following is a brief summary, by loan type, of managements evaluation of the general risk
characteristics and underwriting standards:
Commercial Loans Commercial loans are underwritten after evaluating the borrowers financial
ability to maintain profitability including future expansion objectives. In addition, the
borrowers qualitative qualities are evaluated, such as management skills and experience, ethical
traits, and overall business acumen.
19
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on
the underlying collateral provided by the borrower. The borrowers cash flow may deviate from
initial projections, and the value of collateral securing these loans may vary.
Most commercial loans are generally secured by the assets being financed and other business assets
such as accounts receivable or inventory. Management may also incorporate a personal guarantee;
however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans
secured by accounts receivable may be substantially dependent on the ability of the borrower to
collect amounts due from its customers.
Commercial Real Estate (CRE) Loans CRE loans are subject to similar underwriting standards and
processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and
secondarily as loans collateralized by real estate.
Generally, CRE lending involves larger principal amounts with repayment largely dependent on the
successful operation of the property securing the loan or the business conducted on the
collateralized property. CRE loans tend to be more adversely affected by conditions in the real
estate markets or by general economic conditions. The properties securing the Companys CRE
portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce
the Companys exposure to adverse economic events that affect any single industry. Management
monitors and evaluates CRE loans based on occupancy status (investor versus owner-occupied),
collateral, geography, and risk grade criteria.
Generally, CRE loans to developers and builders that are secured by non-owner occupied properties
require the borrower to have had an existing relationship with the Company and a proven record of
success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of
absorption and lease rates, and financial analysis of the developers and property owners.
Construction loans are generally based upon estimates of cost and value associated with the
complete project (as-is value). These estimates may be inaccurate. Construction loans often involve
the disbursement of substantial funds with repayment largely dependent on the success of the
ultimate project. Sources of repayment for these types of loans may be pre-committed permanent
loans from approved long term lenders, sales of developed property, or an interim loan commitment
from the Company until permanent financing is secured. These loans are closely monitored by on-site
inspections, and are considered to have higher inherent risks than other CRE loans due to their
ultimate repayment being sensitive to interest rate changes, governmental regulation of real
property, general economic conditions, and the availability of long term financing.
Consumer Loans The Companys consumer loan portfolio is generally limited to home equity loans
with nominal originations in unsecured personal loans and credit cards. The Company is highly
dependent on third party credit scoring analysis to supplement the internal underwriting process.
To monitor and manage consumer loan risk, policies and procedures are developed and modified, as
needed, jointly by management and staff personnel. This activity, coupled with relatively small
loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend
and outlook reports are reviewed by management on a regular basis. Underwriting standards for home
equity loans are heavily influenced by statutory requirements, which include, but are not limited
to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a
borrower can have at one time, and documentation requirements.
The Company maintains an independent loan review program that reviews and validates the credit risk
program on a periodic basis. Results of these reviews are presented to the Board of Directors Audit
Committee. The loan review process complements and reinforces the risk identification and
assessment decisions made by lenders and credit personnel, as well as the Companys policies and
procedures.
The Companys ALL is a reserve established through a provision for probable loan losses charged to
expense. The ALL represents managements best estimate of probable losses that have been incurred
within the existing portfolio of loans as of the financial statement date presented.
The Companys ALL methodology significantly incorporates managements current judgments, and
reflects the reserve amount that is necessary for estimated loan losses and risks inherent in the
loan portfolio in accordance with ASC Topic 450 (Contingencies) and ASC Topic 310 (Receivables).
Managements continuing evaluation of all known relevant quantitative and qualitative internal and
external risk factors provide the foundation for the three major components of the Companys ALL:
(1) historical valuation
allowances established in accordance with ASC 450 for groups of similarly situated loan pools; (2)
general valuation allowances established in accordance with ASC 450 and based on qualitative credit
risk factors; and (3) specific valuation allowances established in accordance with ASC 310 and
based on estimated probable losses on specific impaired loans. All three components are aggregated
and constitute the Companys ALL; while portions of the allowance may be allocated to specific
credits, the allowance net of specific reserves is available for the remaining credits that
management deems as loss.
20
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
It is the Companys policy to classify a credit as loss with a concurrent charge off when
management considers the credit uncollectible and of such little value that its continuance as a
bankable asset is not warranted. A loss classification does not mean that the loan has absolutely
no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the
likely credit loss of a valueless asset even though partial recovery may occur in the future.
In accordance with ASC 450, historical valuation allowances are established for loan pools with
similar risk characteristics common to each loan grouping. The Companys loan portfolio is
evaluated by general loan class including commercial, commercial real estate (which includes
construction and other real estate), residential real estate (which includes 1-4 family and home
equity loans), consumer and other loans.
These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all
relevant risk characteristics that are common to these segmented groups of loans. These
characteristics include a significant emphasis on historical losses within each loan group,
inherent risks for each, and specific loan class characteristics such as trends related to
nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other
relevant credit risk factors. Management periodically reviews and updates its historical loss
ratios based on net charge off experience for each loan class. Other credit risk factors are also
reviewed periodically and adjusted as necessary to account for any changes in potential loss
exposure.
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such
as changes in asset quality trends, concentrations of credit or changes in concentrations of
credit, changes in underwriting standards, changes in experience or depth of lending staff or
management, the effectiveness of loan grading and the internal loan review function, and any other
relevant factors. Management evaluates each qualitative component quarterly to determine the
associated risks to the quality of the Companys loan portfolio.
Valuation allowances specific to the ITIN and purchased Home Equity Portfolios
ITIN Portfolio During fiscal year 2010, management increased the general valuation allowance for
the portfolio to 4.05%, and currently as of June 30, 2011 had allocated 4.45% of the outstanding
principal balance. The following factors were considered in determining the reserve increase during
2010:
|
|
|
Increased delinquencies 20% of the portfolio was delinquent 30 days or more as of
December 31, 2010. |
|
|
|
|
Servicer modification efforts were generally extending beyond a typical timeframe. |
|
|
|
|
Mortgage insurance A small number of mortgage insurance claims have been denied and
management has not been able to identify a trend regarding any potential future denials. |
|
|
|
|
Sale of OREO An emerging trend in the lengthening disposition of ITIN OREO had
developed, including the potential for decreased recoveries and consequently increased net
charge offs. |
|
|
|
|
Lack of loss guaranty due to settlement. |
In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan
pool purchase. Subsequent to the settlement of the put reserve, the ITIN portfolio experienced
approximately $640 thousand and $316 thousand in charge offs during the remainder of 2010, and the
six months ended June 30, 2011, respectively.
Management has estimated that related recoveries will approximate 90% of amounts charged off. As of
June 30, 2011, 19.06% of the ITIN loan portfolio was delinquent 30 days or more.
Home Equity Portfolio 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. As of December 31, 2010, the Companys specific valuation allowance pertaining to this
loan pool was $758 thousand or 4.25% of the outstanding principal balance. As of June 30, 2011 the
Companys specific valuation allowance pertaining to this pool was $1.5 million or 9.48% of the
outstanding principal balance.
An accompanying $1.5 million put reserve was also part of the loan swap transaction and represents
a credit enhancement. As such, management considers this put reserve in estimating potential losses
in the home equity portfolio. The put reserve is an irrevocable first loss guarantee from the
seller that provides us the right to put back delinquent home equity loans to the seller that
become 90 days or more delinquent, up to an aggregate amount of $1.5 million. As of June 30, 2011
the Company had a put reserve balance of $221.9 thousand or 1.38% of the outstanding principal
balance of $16.1 million. This guarantee is backed by a seller cash deposit with the Company that
is restricted for this sole purpose. The sellers cash deposit is classified as a deposit
liability on the Companys consolidated balance sheet. At the end of the three year term of this
loss guarantee, on March 11, 2013, the Company will be required to return the unused portion of the
put reserve in the form of a cash deposit to the seller.
21
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 6. OTHER REAL ESTATE OWNED
OREO represents real estate which the Company has taken control of in partial or full satisfaction
of loans. At the time of foreclosure, OREO is recorded at the 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 losses.
Subsequent to 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 OREO. Revenue and expenses from
operations and subsequent adjustments to the carrying amount of the property are included in
noninterest expense in the Consolidated Statements of Income.
At June 30, 2011 and December 31, 2010, the recorded investment in OREO was $1.8 million and $2.3
million, respectively. For the six months ended June 30, 2011 the Company transferred foreclosed
property from eleven loans in the amount of $2.5 million to OREO and adjusted the balances through
charges to the allowance for loan losses in the amount of $803 thousand relating to the transferred
foreclosed property. During the six months ended June 30, 2011, the Company sold seventeen
properties with balances of $2.5 million for a net loss of $365 thousand, and recorded $557
thousand in write downs of existing OREO in other noninterest expense. The June 30, 2011 OREO
balance consists of nine properties, of which eight are secured with 1-4 family residential real
estate in the amount of $618.4 thousand. The remaining property consists of improved commercial
land in the amount of $1.2 million.
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of June 30, 2011 are
below:
|
|
|
|
|
(Dollars in thousands) |
|
|
Amounts due in: |
|
|
|
|
|
2011 |
|
$ |
408 |
|
2012 |
|
|
623 |
|
2013 |
|
|
488 |
|
2014 |
|
|
499 |
|
2015 |
|
|
164 |
|
Thereafter |
|
|
270 |
|
|
Total |
|
$ |
2,452 |
|
|
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 FHLB totaling $91.0 million as of June 30, 2011
and $145.0 million as of June 30, 2010. The Company has a total of four fixed rate advances: one
for $50.0 million with interest payable monthly, two for $10.0 million each with interest payable
monthly, and one for $6.0 million with interest payable semiannually. In addition, the Company has
one floating rate advance for $15.0 million. The floating rate adjusts quarterly to 3 month LIBOR
plus 1 basis point, with interest payable quarterly.
The following table illustrates borrowings outstanding at the end of the period:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Advance Amount |
|
|
Interest Rate |
|
|
Maturity |
|
$ |
50,000 |
|
|
|
0.22 |
% |
|
August 17, 2011 |
|
6,000 |
|
|
|
0.33 |
% |
|
February 28, 2012 |
|
10,000 |
|
|
|
0.33 |
% |
|
June 18, 2012 |
|
15,000 |
|
|
|
0.26 |
% |
|
March 5, 2013 |
|
10,000 |
|
|
|
1.46 |
% |
|
June 16, 2015 |
|
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.
22
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Based upon the level of FHLB advances, the Company was required to hold an investment in FHLB stock
of $7.3 million. Furthermore, the Company has pledged $348.9 million of its commercial and real
estate mortgage loans, and has borrowed $85.0 million against the pledged loans.
As of June 30, 2011, the Company held $34.2 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 June 30, 2011, the Company had an available
borrowing line at the FHLB of $119.8 million.
Other Available Borrowing Lines The Company may periodically obtain secured borrowings from the
Federal Reserve Bank (FRB). FRB borrowings outstanding were $0 as of June 30, 2011 and $0 as of
June 30, 2010. The FRBs discount window credit facility is limited to overnight borrowings. The
Company has pledged $64.9 million in commercial loans as collateral as of June 30, 2011, and had
available borrowing lines at the FRB of $53.7 million. In additions, at June 30, 2011, the Company
had a federal funds borrowing line at two correspondent banks totaling $15.0 million.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters
into various types of transactions, which involve financial instruments with off-balance sheet
risk.
These instruments include commitments to extend credit and standby letters of credit, which are not
reflected in the accompanying consolidated balance sheets. These transactions may involve, to
varying degrees, credit and interest rate risk more than the amount, if any recognized, in the
consolidated balance sheets.
Commitments to extend credit are agreements to lend to customers. These commitments have specified
interest rates and have fixed expiration dates but may be terminated by the Company if certain
conditions of the contract are violated. Although currently subject to draw down, many of the
commitments do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but includes real estate, securities, and
cash. Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Credit risk arises in these transactions from the
possibility that a customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual evaluation of each
customers creditworthiness, but may include cash and securities. Commitments to extend credit and
standby letters of credit bear similar credit risk characteristics as outstanding loans.
The Companys commitments to extend credit are illustrated below:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
Off-balance sheet commitments: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
138,551 |
|
|
$ |
146,915 |
|
Standby letters of credit |
|
|
3,067 |
|
|
|
3,509 |
|
Guaranteed commitments outstanding |
|
|
1,274 |
|
|
|
1,299 |
|
|
Total commitments |
|
$ |
142,892 |
|
|
$ |
151,723 |
|
|
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 (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. As of June 30, 2011, the Company has recorded
$357 thousand in other liabilities for estimated buy backs for early payment defaults,
representations and warranties. The mortgage loan repurchase agreements are consistent with the
standard representations and warranties of the loan sales agreements, and the Company considers the
impact to the consolidated financial statements to be immaterial.
The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of
mortgage loans. Under the agreement, the Company was committed to deliver $264 million in loan
volume over the period from March 1, 2010 through February 28, 2011. Upon failure to deliver
minimum loan volume quarterly, the Company was responsible to pay a non-delivery fee to the
purchaser. As of February 28, 2011, the Company met the volume commitments. As of June 30, 2011
there are no mandatory forward loan volume commitment agreements.
23
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 8. ACCOUNTING FOR INCOME TAX AND UNCERTAINTIES
The Companys effective income tax rate was 17.12% for the six months ended June 30, 2011, compared
with 33.78% for the six months ended June 30, 2010. The decrease in the effective tax rate was
primarily driven by reductions of accrued provision for income tax of approximately $393,000,
recognized by our mortgage subsidiary and immaterial true-up adjustments.
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 from investing in tax-exempt securities and preferential state tax treatment for
qualified enterprise zone loans.
The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Noncontrolling interests are presented in the income statement such that the consolidated income
statement includes income and income tax expense from both the Company and noncontrolling
interests. The effective tax rate is calculated by dividing income tax expense by income before tax
expense for the consolidated entity.
NOTE 9. FAIR VALUE MEASUREMENT
The following table presents estimated fair values of the Companys financial instruments as of
June 30, 2011 and December 31, 2010, excluding financial instruments recorded at fair value on a
recurring basis (summarized in a separate table), whether or not recognized or recorded at fair
value in the consolidated balance sheets.
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, are excluded from the
table. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
December 31, 2010 |
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
(Dollars in thousands) |
|
Amounts |
|
Fair Value |
|
Amounts |
|
Fair Value |
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
48,316 |
|
|
$ |
48,316 |
|
|
$ |
63,256 |
|
|
$ |
63,256 |
|
Portfolio loans, net |
|
|
582,418 |
|
|
|
589,960 |
|
|
|
587,865 |
|
|
|
595,442 |
|
Mortgages loans held for sale |
|
|
26,067 |
|
|
|
26,067 |
|
|
|
42,995 |
|
|
|
42,995 |
|
Interest receivable |
|
|
3,555 |
|
|
|
3,555 |
|
|
|
3,845 |
|
|
|
3,845 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
625,431 |
|
|
|
623,131 |
|
|
|
648,702 |
|
|
|
650,200 |
|
Securities sold under agreements to repurchase |
|
|
15,353 |
|
|
|
14,233 |
|
|
|
13,548 |
|
|
|
12,425 |
|
Federal Home Loan Bank advances |
|
|
91,000 |
|
|
|
90,951 |
|
|
|
141,000 |
|
|
|
140,963 |
|
Subordinated debenture |
|
|
15,465 |
|
|
|
6,762 |
|
|
|
15,465 |
|
|
|
6,633 |
|
Interest payable |
|
|
451 |
|
|
|
451 |
|
|
|
458 |
|
|
|
458 |
|
|
|
|
Contract |
|
|
|
|
|
Contract |
|
|
|
|
Off balance sheet financial instruments: |
|
Amount |
|
|
|
|
|
Amount |
|
|
|
|
Commitments to extend credit |
|
$ |
138,551 |
|
|
|
|
|
|
$ |
146,915 |
|
|
|
|
|
Standby letters of credit |
|
$ |
3,067 |
|
|
|
|
|
|
$ |
3,509 |
|
|
|
|
|
Guaranteed commitments outstanding |
|
$ |
1,274 |
|
|
|
|
|
|
$ |
1,299 |
|
|
|
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practical to estimate that value:
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.
24
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Portfolio loans, net For variable-rate loans that re-price frequently and with no significant
change in credit risk, fair values are based on carrying values. For fixed rate loans projected
cash flows are discounted back to their present value based on specific risk adjusted spreads to
the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The
ALL is considered to be a reasonable estimate of loan discount for credit quality concerns.
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.
Interest receivable and payable The carrying amount of interest receivable and payable
approximates its fair value.
Deposits The fair value of deposits was derived by discounting the expected cash flows back to
their present values based on the FHLB yield curve. The OTS decay rate assumptions for the timing
of cash flows were used as a conservative proxy for non-maturity deposits.
Securities sold under agreements to repurchase The fair value of securities sold under
agreements to repurchase is estimated by discounting the contractual cash flows under outstanding
borrowings at rates equal to the Companys current offering rate, which approximate general market
rates.
FHLB advances The fair value of the FHLB advances is derived by discounting the cash flows of
the fixed rate borrowings by the current FHLB offering rates of borrowings of similar terms, as of
June 30, 2011. For variable rate FHLB borrowings, the carrying value approximates fair value.
Subordinated debentures The fair value of the subordinated debenture is estimated by discounting
the future cash flows using market rates at June 30, 2011, of which similar debentures would be
issued with similar credit ratings as ours and similar remaining maturities. Future cash flows were
discounted at 6.71%.
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.
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. Available-for-sale securities, derivatives,
and the earn out payable 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
collateral dependent impaired loans and certain other assets including OREO and goodwill. These
nonrecurring fair value adjustments involve the application of lower of cost or fair value
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.
25
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 June 30, 2011 and December 31, 2010, respectively, and
indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at June 30, 2011 |
|
Recurring basis |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
$ |
57,881 |
|
|
$ |
|
|
|
$ |
57,881 |
|
|
$ |
|
|
Corporate securities |
|
$ |
23,432 |
|
|
|
|
|
|
$ |
23,432 |
|
|
|
|
|
Other investment securities (1) |
|
$ |
80,871 |
|
|
|
|
|
|
$ |
80,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
162,184 |
|
|
$ |
|
|
|
$ |
162,184 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn out payable |
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
596 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage backed securities
issued or guaranteed by governmental agencies. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2010 |
|
Recurring basis |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
$ |
64,151 |
|
|
$ |
|
|
|
$ |
64,151 |
|
|
$ |
|
|
Corporate securities |
|
|
28,957 |
|
|
|
|
|
|
|
28,957 |
|
|
|
|
|
Other investment securities (1) |
|
|
96,127 |
|
|
|
|
|
|
|
96,127 |
|
|
|
|
|
Derivatives |
|
|
2,341 |
|
|
|
|
|
|
|
2,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
191,576 |
|
|
$ |
|
|
|
$ |
191,576 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn out payable |
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
986 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage backed securities
issued or guaranteed by governmental agencies. |
The following table provides a reconciliation of assets and liabilities measured at fair value
using significant unobservable inputs (Level 3) on a recurring basis for the three months and six
months ended June 30, 2011, and 2010. The amount included in the Transfer into Level 3 column
represents the beginning balance of an item in the period (interim quarter) for which it was
designated as a Level 3 fair value measure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Beginning balance Earn out payable |
|
$ |
596 |
|
|
$ |
965 |
|
|
$ |
986 |
|
|
$ |
965 |
|
Transfers into Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net liabilities) |
|
|
|
|
|
|
11 |
|
|
|
(390 |
) |
|
|
11 |
|
Included in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales, and settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance Earn out payable |
|
$ |
596 |
|
|
$ |
976 |
|
|
$ |
596 |
|
|
$ |
976 |
|
|
The available-for-sale securities amount above represents securities that have been adjusted to
their fair value. 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.
26
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The derivative amount disclosed in the December 31, 2010 recurring fair value table above represent
the fair value of the Companys interest rate swaps, prior to termination. The valuation of the
Companys interest rate swaps was obtained from a third party pricing service. The fair values were
determined by using a discounted cash flow analysis on the expected cash flows of each derivative.
The pricing analysis was 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.
The earn out payable amount above represents the fair value of the Companys earn out incentive
agreement with the non controlling interest of the Bank of Commerce Mortgage subsidiary. The non
controlling interest of the mortgage subsidiary will earn certain cash payments from the Company,
based on targeted results. The fair value of the earn out payable is estimated by using a
discounted cash flow model whereby discounting the contractual cash flows expected to be paid out,
under the assumption the mortgage subsidiary meets the target results. The expected contractual
cash flows are discounted using the six month and two year treasury rates coinciding with their
expected payment dates. As such, the Company has determined that the fair values fall with Level 3
of the fair value hierarchy.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a
nonrecurring 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 nonrecurring basis are included in the table below. No
liabilities were measured at fair value on a nonrecurring basis at June 30, 2011 or December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at June 30, 2011 |
Nonrecurring basis |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Impaired loans |
|
$ |
4,918 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,918 |
|
Other real estate owned |
|
|
1,470 |
|
|
|
|
|
|
|
|
|
|
|
1,470 |
|
|
Total assets measured at fair value |
|
$ |
6,388 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2010 |
Nonrecurring basis |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Impaired loans |
|
$ |
12,982 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,982 |
|
Other real estate owned |
|
|
1,994 |
|
|
|
|
|
|
|
|
|
|
|
1,994 |
|
Goodwill |
|
|
3,695 |
|
|
|
|
|
|
|
|
|
|
|
3,695 |
|
|
Total assets measured at fair value |
|
$ |
18,671 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,671 |
|
|
The following table presents the losses resulting from nonrecurring fair value adjustments for the
three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Impaired loans |
|
$ |
2,243 |
|
|
$ |
332 |
|
|
$ |
3,145 |
|
|
$ |
1,415 |
|
Other real estate owned |
|
|
370 |
|
|
|
1,064 |
|
|
|
557 |
|
|
|
1,245 |
|
Goodwill |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
Total assets measured at fair value |
|
$ |
2,613 |
|
|
$ |
1,428 |
|
|
$ |
3,702 |
|
|
$ |
2,692 |
|
|
For the six months ended June 30, 2011:
|
|
|
Collateral dependent impaired loans with a carrying amount of $8.0 million were written
down to their fair value of $4.9 million resulting in a $3.1 million adjustment to the ALL. |
|
|
|
|
OREO with a carrying amount of $2.0 million was written down to fair value of $1.5
million resulting in a loss of $557 thousand which was included in earnings for the period. |
27
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The loan amounts above represent impaired, collateral dependent loans that have been adjusted to
fair value. When we identify a collateral dependent loan as impaired, we measure the impairment
using the current fair value of the collateral, less selling costs. Depending on the
characteristics of a loan, the fair value of collateral is generally estimated by obtaining
external appraisals. If we determine that the value of the impaired loan is less than the recorded
investment in the loan, we recognize this impairment and adjust the carrying value of the loan to
fair value through the ALL.
The loss represents charge offs or impairments on collateral dependent loans for fair value
adjustments based on the fair value of collateral. The carrying value of loans fully charged off is
zero. When the fair value of the collateral is based on a current appraised value, or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
The OREO amount above represents impaired real estate that has been adjusted to fair value. OREO
represents real estate which the Bank has taken control of in partial or full satisfaction of
loans. At the time of foreclosure, OREO is recorded at the 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 ALL. 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. Fair value adjustments on OREO are recognized within net loss on real
estate owned. The loss represents impairments on OREO for fair value adjustments based on the fair
value of the real estate. The Company records OREO as a nonrecurring Level 3.
The fair value of goodwill in the December 31, 2010 nonrecurring fair value table above represents
goodwill that has been adjusted to fair value. The fair value of the mortgage subsidiary is
estimated using a market and income approach, and is provided to the Company by a third party
independent valuation consultant. Based on the fair value of the mortgage subsidiary, the Company
makes a determination of goodwill impairment. An impairment review was performed during the three
months ended June 30, 2011, and no fair value adjustment was deemed necessary. See Note 8 in the
Companys December 31, 2010 financial statements, incorporated in the annual December 31, 2010 10-K
filing for further disclosure pertaining to the goodwill impairment analysis. The Company records
goodwill as a nonrecurring Level 3 when impairment is recorded.
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.
NOTE 10. TRANSFER OF FINANCIAL ASSETS
On March 12, 2010, the Company transferred certain nonperforming loans, without recourse, and $14.8
million in exchange for the acquisition of a pool of performing residential mortgage home equity
loans.
The acquired residential mortgage home equity loan portfolio was initially recorded at an estimated
fair value of $21.8 million. The initial fair value of the residential home equity loan portfolio
was measured based on the fair value of the assets transferred and derecognized. No gain on loss
was recorded resulting from this transaction.
At the settlement date the mortgage home equity loan pool consisted of 562 loans with an average
principal balance of approximately $39 thousand, a weighted average credit score of 744, a weighted
average loan to value of 86%, 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 throughout the United States.
28
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11. SEGMENT REPORTING
The Company has two reportable segments: Commercial Banking and Mortgage Brokerage Services. The
Company conducts 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 fifteen offices in two different
states. Furthermore, the subsidiary is licensed in California, Oregon, Washington, 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 and six months ended June 30, 2011,
and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2011 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
8,566 |
|
|
$ |
(3 |
) |
|
$ |
(46 |
) |
|
$ |
|
|
|
$ |
8,517 |
|
Provision for loan losses |
|
|
2,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,580 |
|
Total noninterest income |
|
|
1,128 |
|
|
|
2,550 |
|
|
|
5 |
|
|
|
(58 |
) |
|
|
3,625 |
|
Total noninterest expense |
|
|
5,056 |
|
|
|
2,665 |
|
|
|
191 |
|
|
|
(58 |
) |
|
|
7,854 |
|
|
|
|
Income before provision for income taxes |
|
|
2,058 |
|
|
|
(118 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
1,708 |
|
Provision for income taxes |
|
|
346 |
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
216 |
|
|
|
|
Net income |
|
|
1,712 |
|
|
|
12 |
|
|
|
(232 |
) |
|
|
|
|
|
|
1,492 |
|
Less: net income attributable to noncontrolling interest |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
1,712 |
|
|
$ |
6 |
|
|
$ |
(232 |
) |
|
$ |
|
|
|
$ |
1,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2010 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
8,329 |
|
|
$ |
(7 |
) |
|
$ |
(141 |
) |
|
$ |
|
|
|
$ |
8,181 |
|
Provision for loan losses |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,600 |
|
Total noninterest income |
|
|
654 |
|
|
|
2,777 |
|
|
|
|
|
|
|
(104 |
) |
|
|
3,327 |
|
Total noninterest expense |
|
|
4,894 |
|
|
|
2,369 |
|
|
|
350 |
|
|
|
(104 |
) |
|
|
7,509 |
|
|
|
|
Income before provision for income taxes |
|
|
2,489 |
|
|
|
401 |
|
|
|
(491 |
) |
|
|
|
|
|
|
2,399 |
|
Provision for income taxes |
|
|
626 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
750 |
|
|
|
|
Net income |
|
|
1,863 |
|
|
|
277 |
|
|
|
(491 |
) |
|
|
|
|
|
|
1,649 |
|
Less: net income attributable to noncontrolling interest |
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
1,863 |
|
|
$ |
133 |
|
|
$ |
(491 |
) |
|
$ |
|
|
|
$ |
1,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2011 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
17,324 |
|
|
$ |
(42 |
) |
|
$ |
(100 |
) |
|
$ |
|
|
|
$ |
17,182 |
|
Provision for loan losses |
|
|
4,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,980 |
|
Total noninterest income |
|
|
2,135 |
|
|
|
5,083 |
|
|
|
5 |
|
|
|
(146 |
) |
|
|
7,077 |
|
Total noninterest expense |
|
|
9,832 |
|
|
|
5,465 |
|
|
|
349 |
|
|
|
(146 |
) |
|
|
15,500 |
|
|
|
|
Income before provision for income taxes |
|
|
4,647 |
|
|
|
(424 |
) |
|
|
(444 |
) |
|
|
|
|
|
|
3,779 |
|
Provision for income taxes |
|
|
1,034 |
|
|
|
(387 |
) |
|
|
|
|
|
|
|
|
|
|
647 |
|
|
|
|
Net income |
|
|
3,613 |
|
|
|
(37 |
) |
|
|
(444 |
) |
|
|
|
|
|
|
3,132 |
|
Less: net income attributable to noncontrolling interest |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
3,613 |
|
|
$ |
(19 |
) |
|
$ |
(444 |
) |
|
$ |
|
|
|
$ |
3,150 |
|
|
29
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
16,066 |
|
|
$ |
(42 |
) |
|
$ |
(296 |
) |
|
$ |
|
|
|
$ |
15,728 |
|
Provision for loan losses |
|
|
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,850 |
|
Total noninterest income |
|
|
2,139 |
|
|
|
5,317 |
|
|
|
|
|
|
|
(215 |
) |
|
|
7,241 |
|
Total noninterest expense |
|
|
9,303 |
|
|
|
5,119 |
|
|
|
489 |
|
|
|
(215 |
) |
|
|
14,696 |
|
|
|
|
Income before provision for income taxes |
|
|
5,052 |
|
|
|
156 |
|
|
|
(785 |
) |
|
|
|
|
|
|
4,423 |
|
Provision for income taxes |
|
|
1,370 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
1,494 |
|
|
|
|
Net income |
|
|
3,682 |
|
|
|
32 |
|
|
|
(785 |
) |
|
|
|
|
|
|
2,929 |
|
Less: net income attributable to noncontrolling interest |
|
|
|
|
|
|
(111 |
) |
|
|
|
|
|
|
|
|
|
|
(111 |
) |
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
3,682 |
|
|
$ |
143 |
|
|
$ |
(785 |
) |
|
$ |
|
|
|
$ |
3,040 |
|
|
The following table represents financial information about the Companys reportable segments
at June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
|
Total assets |
|
$ |
855,235 |
|
|
$ |
14,528 |
|
|
$ |
122,276 |
|
|
$ |
(123,517 |
) |
|
$ |
868,522 |
|
Total portfolio loans, gross |
|
$ |
596,077 |
|
|
$ |
|
|
|
$ |
2,194 |
|
|
$ |
(2,439 |
) |
|
$ |
595,832 |
|
Total deposits |
|
$ |
629,396 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,965 |
) |
|
$ |
625,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
(Dollars in thousands) |
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
|
Total assets |
|
$ |
923,832 |
|
|
$ |
23,912 |
|
|
$ |
118,173 |
|
|
$ |
(126,784 |
) |
|
$ |
939,133 |
|
Total portfolio loans, gross |
|
$ |
606,646 |
|
|
$ |
|
|
|
$ |
2,289 |
|
|
$ |
(8,139 |
) |
|
$ |
600,796 |
|
Total deposits |
|
$ |
655,802 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,100 |
) |
|
$ |
648,702 |
|
|
NOTE 12. DERIVATIVES
As part of the Companys risk management strategy, the Company enters into interest rate swap
agreements or other derivatives to mitigate the interest rate risk inherent in certain assets and
liabilities. Presently, the Company does not use derivatives for trading or speculative purposes.
The primary underlying risk exposure of the derivative instruments is the timing and level of
changes in interest rates counter to managements expectations. Furthermore, interest rate swap
agreements involve the risk of dealing with institutional 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 Management Committee (ALCO) of the Companys Board of
Directors.
The following table summarizes the notional amount, effective dates and maturity dates of the
forward starting interest rate contracts the Company had outstanding with counterparties as of
December 31, 2010. The Company did not carry any derivatives as of June 30, 2011. The total of
$75.0 million represents interest rate swaps designated as cash flow hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
|
Pursuant to the interest rate swap agreements, the Company pledged collateral to counterparties in
the form of securities totaling $4.0 million with an amortized cost of $4.0 million and a fair
value of $3.9 million as of December 31, 2010. No collateral was posted from counterparties to the
Company as of December 31, 2010.
30
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the type of derivative and their location on the consolidated
balance sheet and the fair values of such derivatives as of December 31, 2010. See Note 9 in these
consolidated financial statements for further detail on the valuation of the Companys interest
rate swaps.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
Underlying |
|
|
|
|
|
Balance Sheet |
|
|
|
|
Risk Exposure |
|
Description |
|
Location |
|
Fair Value |
|
Maturity |
|
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
(22 |
) |
|
September 1, 2012 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
198 |
|
|
September 1, 2013 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
443 |
|
|
September 1, 2014 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
611 |
|
|
September 1, 2015 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
1,111 |
|
|
March 1, 2017 |
|
|
|
|
|
|
|
Total |
|
$ |
2,341 |
|
|
|
|
|
|
On February 4, 2011, ALCO terminated the Companys forward starting swap positions and realized
$3.0 million in cash from the counterparty, equal to the carrying amount of the derivative at the
date of termination. Concurrent with the termination of the hedge contract, management removed the
cash flow hedge designation.
ALCO terminated the forward starting swaps due to continuing uncertainty regarding future economic
conditions including the corresponding uncertainty on the timing and extent of future changes in
the three month Libor rate index. The $3.0 million in cash received from the counterparty related
to the cash flow hedge reflects gains to be reclassified into earnings. Although the hedge
designation was removed, management believes the forecasted transaction to be probable.
Accordingly, the net gains will be reclassified from other comprehensive income to earnings as a
credit to interest expense in the same periods during which the hedged forecasted transaction will
affect earnings.
As of June 30, 2011, the Company estimates that $118 thousand of existing net gains reported in
accumulated other comprehensive income will be reclassified into earnings within the next twelve
months.
31
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,
2010 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, 2010 to June 30, 2011. Also discussed are
significant trends and changes in the Companys results of operations for the three and six months
ended June 30, 2011, compared to the same period in 2010. 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, a division of Redding Bank of Commerce) 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 offers wealth
management services through a third party investment broker.
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 fifteen offices in two different states and
licenses in California, Oregon, Washington, 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.
32
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 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 Information Technology Steering Committee establishes technological strategies,
makes technology investment decisions, and manages the implementation process. ALCO 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 June 30, 2011, we had $21.7 million in
nonperforming assets, or 2.49% of total assets. We also seek to maintain a prudent ALL, which at
June 30, 2011 was $13.4 million, representing 2.24% of our loan portfolio.
33
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 FHLB 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. |
|
|
|
|
Nonperforming assets take significant time to resolve and adversely affect our
results of operations and financial condition. |
|
|
|
|
We have a concentration risk in real estate related loans. |
|
|
|
|
Monitoring and servicing our IITIN residential mortgage loans could prove more costly
and time consuming than previously modeled. |
|
|
|
|
Future loan losses may exceed the allowance for loan losses. |
|
|
|
|
Defaults may negatively impact us. |
|
|
|
|
Interest rate fluctuations, which are out of our control, could harm
profitability. |
|
|
|
|
Changes in the fair value of our securities may reduce our stockholders equity and net
income. |
|
|
|
|
Conditions in the financial markets may limit our access to additional funding to meet
our liquidity needs. |
|
|
|
|
The condition of other financial institutions could negatively affect us. |
|
|
|
|
Changes in laws, government regulation and monetary policy may have a material effect on
our results of operations. |
|
|
|
|
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. |
|
|
|
|
Our Series A Preferred Stock diminishes the net income available to our common
shareholders and earnings per common share. |
|
|
|
|
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. |
|
|
|
|
We rely heavily on our management team and the loss of key officers may adversely affect
operations. |
|
|
|
|
Internal control systems could fail to detect certain events. |
|
|
|
|
Our operations could be interrupted if third party service providers experience
difficulty, terminate their services or fail to comply with banking regulations. |
|
|
|
|
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. |
|
|
|
|
Potential acquisitions may disrupt our business and dilute shareholder value. |
|
|
|
|
We are subject to extensive regulation which could adversely affect our business. |
|
|
|
|
Higher FDIC deposit insurance premiums and assessments could adversely affect our
financial condition. |
|
|
|
|
Shares eligible for future sale could have a dilutive effect. |
|
|
|
|
Changes in accounting standards may impact how we report our financial condition and
results of operations. |
|
|
|
|
A natural disaster or recurring energy shortage, especially in California, could harm
our business. |
|
|
|
|
The price of our common stock may fluctuate significantly, and this may make it
difficult to resell shares of common stock at desirable prices. |
|
|
|
|
Our profitability measures could be adversely affected if we are unable to effectively
deploy the capital raised in our latest offering. |
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
|
|
|
Only a limited trading market exists for our common stock, which could lead to
significant price volatility |
|
|
|
|
Anti-takeover provisions in our articles of incorporation could make a third party
acquisition of us difficult |
|
|
|
|
There may be future sales or other dilutions of our equity which may adversely affect
the market price of our common stock. |
|
|
|
|
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. |
|
|
|
|
Our future ability to pay dividends and repurchase stock is subject to restrictions. |
|
|
|
|
Potential volatility of deposits. |
|
|
|
|
Negative publicity could damage our reputation. |
|
|
|
|
Mortgage banking interest rate and market risk. |
|
|
|
|
Mortgage banking revenue can be volatile quarter to quarter. |
|
|
|
|
The impact of financial reform legislation is yet to be determined. |
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,
2010, under the heading Risk Management.
Sources of Income
We derive our income from two principal sources: (1) 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 (2) 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.
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
Profitability |
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.68 |
% |
|
|
0.73 |
% |
Return on average equity |
|
|
5.93 |
% |
|
|
7.14 |
% |
Average earning assets to total average assets |
|
|
96.47 |
% |
|
|
94.69 |
% |
Interest Margin |
|
|
|
|
|
|
|
|
Net interest margin |
|
|
3.96 |
% |
|
|
4.06 |
% |
Asset Quality |
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
|
|
2.24 |
% |
|
|
2.08 |
% |
Nonperforming assets to total assets |
|
|
2.49 |
% |
|
|
2.74 |
% |
Net charge offs to average loans |
|
|
0.73 |
% |
|
|
0.38 |
% |
Liquidity |
|
|
|
|
|
|
|
|
Loans to deposits |
|
|
93.12 |
% |
|
|
93.44 |
% |
Liquidity ratio |
|
|
45.98 |
% |
|
|
32.84 |
% |
Capital |
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital Bank |
|
|
15.76 |
% |
|
|
14.21 |
% |
Total Risk-Based Capital Bank |
|
|
17.02 |
% |
|
|
15.47 |
% |
Tier 1 Risk-Based Capital Company |
|
|
15.75 |
% |
|
|
15.03 |
% |
Total Risk-Based Capital Company |
|
|
17.00 |
% |
|
|
16.29 |
% |
Efficiency |
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
62.30 |
% |
|
|
63.98 |
% |
|
Financial Highlights Results of Operations
Balance Sheet
As of June 30, 2011, the Company had total consolidated assets of $868.5 million, total net
portfolio loans of $582.4 million, an ALL of $13.4 million, deposits outstanding of $625.4 million,
and stockholders equity of $108.2 million.
The Company continued to maintain a strong liquidity position during the reporting period. As of
June 30, 2011, the Company maintained cash positions at the Federal Reserve Bank (FRB) and
correspondent banks in the amount of $19.1 million. The Company also held certificates of deposits
with other financial institutions in the amount of $29.2 million, which the Company considers
highly liquid.
The 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. Investment securities totaled $162.2 million at June 30, 2011,
compared with $189.2 million at December 31, 2010. The $27.1 million, or 14.3% decrease primarily
reflected net sales activity relating to municipal bonds, residential mortgage backed securities,
and corporate securities. During the period the Company sold securities to generate liquidity to
payoff maturing FHLB borrowings, and to a lesser extent, reposition the portfolio to shorten
duration. As a direct result of the investment portfolio liquidation, for the six months ended June
30, 2011, the Company recorded approximately $913 thousand in realized gains on sales of
securities.
At June 30, 2011, the Companys net unrealized gain on available-for-sale securities was $809
thousand, compared with $3.2 million net unrealized loss at December 31, 2010. The favorable change
in net unrealized losses was primarily due to increases in the fair values of the Companys
municipal bond portfolio.
Overall, the net portfolio loan balance did not change significantly for the period ended June 30,
2011. The Companys net loan portfolio was $582.4 million at June 30, 2011, compared with $587.9
million at December 31, 2010, a decrease of $5.4 million, or 0.92%. The Company continued to
conservatively monitor credit quality during the period, and adjust the ALL accordingly. As such,
the Company provided $5.0 million in provisions for loan losses for the six months ended June 30,
2011 compared with $3.9 million for the same period a year ago. The Companys ALL as a percentage
of total portfolio loans were 2.24% and 2.08% for the six months ended June 30, 2011, and June 30,
2010, respectively.
Net charge offs were $4.5 million for the six months ended June 30, 2011 compared with net charge
offs of $2.3 million for the same period a year ago. The charge offs were centered in commercial
loans and construction loans, where ongoing credit quality issues continue to surface. The
weaknesses in the commercial loan portfolio are specifically centered on loans where the borrowers
business is tied to real estate. For the foreseeable future, the commercial loan portfolio, as well
as the commercial real estate loan portfolio will continue to be influenced by weakness in real
estate values, the effects of high unemployment levels, and general overall weakness in economic
conditions.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Loans held for sale, consisting of residential mortgages to be sold in the secondary market, were
$26.1 million at June 30, 2011, compared with $43.0 million at December 31, 2010. The decrease in
loans held for sale was principally due to a decrease in mortgage loan origination and refinancing
activity, primarily driven by an increase in interest rates during the during the first six months
of 2011.
The Companys OREO decreased from $2.3 million to $1.8 million for the six months ended June 30,
2011. The net decrease was driven primarily by the sale of a $1.6 million commercial building and
the associated property. See Note 7 in the Condensed Consolidated Financial Statements incorporated
in this report, for further details relating to the Companys OREO portfolio. The Company remains
committed to working with customers who are experiencing financial difficulties to find potential
solutions. However, the Company expects to realize further transfer and sale activity in the OREO
portfolio for the foreseeable future.
Income Statement
Due to conservative loan underwriting, active servicing of problem credits, and maintenance of a
healthy net interest margin, the Company has remained profitable during the economic downturn.
Accordingly, the Company continues to be well positioned to take advantage of growth opportunities
in the coming years. Net income attributable to Bank of Commerce Holdings was $1.5 million and
$3.2 million for the three months and six months ended June 30, 2011, compared with $1.5 million
and $3.0 million for the same periods in 2010, respectively. Net income available to common
stockholders was $1.3 million and $2.7 million for the three and six months ended June 30, 2011,
compared with $1.3 million and $2.6 million for the same periods in 2010, respectively. Diluted
earnings per share was $0.07 and $0.16 for the three months and six months ended June 30, 2011,
compared with $0.08 and $0.20 for the same periods in 2010, respectively.
The decrease in the six months ended diluted earnings per share was primarily driven by the
disproportional increase in common shares outstanding for the six months ended June 30, 2011. The
increase in common shares outstanding is directly related to the Companys successful Offering in
March 2010. See the subsequent discussion on Capital Management and Adequacy in this document for
further information pertaining to the Offering.
The Company continued to pay dividends on common stock during the three months ended June 30, 2011.
The dollar amount per share decreased from $0.06 per quarter during 2010 to $0.03 per quarter in
2011. The decrease in the dividend rate was executed to preserve capital, while ensuring that
dividend payout ratios remain consistent to periods prior to the Offering.
Return on average assets (ROA) and return on average equity (ROE) for the three months ended June
30, 2011 was 0.65% and 5.53% respectively, compared with 0.70% and 6.02% respectively, for the
three months ended June 30, 2010. ROA and ROE for the six months ended June 30, 2011 was 0.68% and
5.93% respectively, compared with 0.73% and 7.14% respectively, for the six months ended June 30,
2010. The modest decrease in return on assets was driven by lower yields in the loan portfolio
associated with the pay off of higher yielding loans, downward rate adjustments of variable rate
loans, and the transfer of existing loans to nonaccrual status. Decreased yield in the
available-for-sale investment portfolio had a negative impact on ROA as well. The decline in the
investment portfolio yields was primarily driven by sales of securities with relatively higher
yields. The transaction activity pertaining to the investment portfolio was in accordance to the
Companys objective of liquidating the portfolio to pay down FHLB borrowings, while also shortening
duration.
The decrease in ROE for the three and six months ended June 30, 2011, compared with the same period
a year ago, was primarily driven by the lower ROA and the deleveraging of the balance sheet. In
addition, the disproportional increase in average common equity relative to changes in earning
assets and interest bearing liabilities combined as well to decrease ROE.
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.
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, asset
liquidity is supported by debt securities in the available-for-sale portfolio and the ability to
sell loans in the secondary market. Furthermore, the Company pledges various loans as collateral,
enabling access to secured borrowing lines of credit with the FHLB, FRB, 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 FHLB borrowings and
the Companys junior subordinated debentures.
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Companys consolidated liquidity position remains adequate to meet short term and long term
future contingencies. At June 30, 2011, the Company had available lines of credit at the FHLB and
FRB of approximately $119.8 million and $53.7 million, respectively. The Company also has fed funds
borrowing lines with two correspondent banks totaling $15.0 million.
Capital Management and Adequacy
We use capital to fund organic growth, pay dividends and repurchase our 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. Our
potential sources of capital include retained earnings, common and preferred stock issuance, and
issuance of subordinated debt and trust preferred securities.
Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board
of Directors on a monthly basis. The regulators of the Bank measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines.
Under the risk-based capital standard, assets reported on our balance sheet and certain off-balance
sheet items are assigned to risk categories, each of which is assigned a risk weight.
This standard characterizes an institutions capital as being Tier 1 capital (defined as
principally comprising shareholders equity) and Tier 2 capital (defined as principally
comprising the qualifying portion of the ALL). The minimum ratio of total risk-based capital to
risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of
the total risk-based capital is to be comprised of common equity; the remaining balance may consist
of debt securities and a limited portion of the ALL.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average
assets. Management believes that the Company and the Bank met all capital adequacy requirements to
which they are subject to, as of June 30, 2011.
As of June 30, 2011, the most recent notification from the Federal Deposit Insurance Corporation
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 the notification that management believes have changed the Banks
category. The Company and the Banks capital amounts and ratios as of June 30, 2011 are presented
in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Minimum Capital |
|
(Dollars in thousands) |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Holding Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
117,246 |
|
|
|
12.87 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
117,246 |
|
|
|
15.75 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Total Risk-Based |
|
|
126,608 |
|
|
|
17.00 |
% |
|
|
n/a |
|
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
110,365 |
|
|
|
12.16 |
% |
|
|
5.00 |
% |
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
110,365 |
|
|
|
15.76 |
% |
|
|
6.00 |
% |
|
|
4.00 |
% |
Total Risk-Based |
|
|
119,181 |
|
|
|
17.02 |
% |
|
|
10.00 |
% |
|
|
8.00 |
% |
|
The United States Department of Treasury (Treasury) introduced the Capital Purchase Program on
October 14, 2008, under which the Treasury was authorized to make up to $250 billion in equity
capital available to qualifying healthy financial institutions. Bank of Commerce Holdings qualified
for this highly selective program and received capital investment in November of 2008.
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.
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 underwriters exercised
their overallotment option adding additional net proceeds of approximately $4.2 million to the
Companys equity, for a total of $33.0 million in net proceeds received through the Offering.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement. With our strong capital position, we are
constantly seeking new opportunities to increase franchise value through loan growth, investment
portfolio purchases, and core deposits.
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.
Short and Long Term Borrowings
The Company actively uses FHLB advances as a source of wholesale funding to support growth
strategies as well as to provide liquidity. At June 30, 2011, the Companys FHLB advances were of
fixed term and variable term borrowings without call or put option features. At June 30, 2011, the
Company had $91.0 million in FHLB advances outstanding at an average rate of 0.38% compared to
$145.0 million at an average rate of 0.13% at June 30, 2010.
Allowance for Loan Losses
The ALL, 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.
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. Loans within the Companys loan portfolio are generally 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.
Provisions for loan losses for the three months ended June 30, 2011, and 2010 were $2.6 million and
$1.6 million, respectively. Provisions for loan losses for the six months ended June 30, 2011, and
2010 were $5.0 million and $3.9 million, respectively. The Companys ALL was 2.24% of total loans
at June 30, 2011, compared with 2.08% at June 30, 2010.
The increased level of the Companys ALL relative to the gross loan portfolio is primarily driven
by the declining credit quality, as well as managements conservative approach to managing through
the credit quality issues. This approach has inherently resulted in an increasing number of
impairment reviews, and consequently identified impairment. Refer to the nonperforming assets
caption in this document for further detail on impaired loans and nonperforming assets.
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.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 2010 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 2010 Annual Report on Form 10-K.
Critical Accounting Policies
Critical accounting policies are those that are both most important to the portrayal of our
financial condition and results of operations and require 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.
Management has determined the following five accounting policies to be critical: Valuation of
Investments and Impairment of Securities, Allowance for loan losses, Accounting for Income Taxes,
Accounting for Derivative Financial Instruments and Hedging Activities, and Accounting for Fair
Value Measurements.
41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Valuation of Investments and Impairment of Securities
At the time of purchase, the Company designates the security as held-to-maturity or
available-for-sale, based on its investment objectives, operational needs and intent to hold. The
Company does not engage in trading activity. Securities designated as held-to-maturity are carried
at cost adjusted for the accretion of discounts and amortization of premiums. The Company has the
ability and intent to hold these securities to maturity. Securities designated as
available-for-sale may be sold to implement the Companys asset/liability management strategies and
in response to changes in interest rates, prepayment rates and similar factors. Securities
designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of
income taxes, are reported as part of accumulated other comprehensive income (loss), a separate
component of shareholders equity. Gains or losses on sale of securities are based on the specific
identification method. The market value and underlying rating of the security is monitored for
quality. Securities may be adjusted to reflect changes in valuation as a result of
other-than-temporary declines in value. Investments with fair values that are less than amortized
cost are considered impaired. Impairment may result from either a decline in the financial
condition of the issuing entity or, in the case of fixed rate investments, from changes in interest
rates. At each financial statement date, management assesses each investment to determine if
impaired investments are temporarily impaired or if the impairment is other-than-temporary based
upon the positive and negative evidence available. Evidence evaluated includes, but is not limited
to, industry analyst reports, credit market conditions, and interest rate trends.
When an investment is other-than-temporarily impaired, the Company assesses whether it intends to
sell the security, or it is more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis less any current-period credit losses. If the
Company intends to sell the security or if it more likely than not that the Company will be
required to sell security before recovery of the amortized cost basis, the entire amount of
other-than-temporary impairment is recognized in earnings.
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
other-than-temporary impairment has occurred for an investment. The Company follows a consistent
and systematic process for determining and recording other-than-temporary impairment loss. The
Company has designated the ALCO Committee responsible for the other-than-temporary evaluation
process.
The ALCO Committees assessment of whether other-than-temporary impairment loss should be
recognized incorporates both quantitative and qualitative information including, but not limited
to: (1) the length of time and the extent of which the fair value has been less than amortized
cost, (2) the financial condition and near term prospects of the issuer, (3) 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, (4) whether the debtor is current on interest and principal payments, and (5)
general market conditions and industry or sector specific outlook.
Allowance for Loan Losses
ALL is based upon estimates of loan losses and is maintained at a level considered adequate to
provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased
by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the
adequacy of the allowance balance, management considers our past loan loss experience by type of
credit, known and inherent risks in the portfolio, adverse situations that may affect the
borrowers ability to repay, the estimated value of any underlying collateral, current economic
conditions and other factors. We formally assess the adequacy of the ALL on a monthly basis. These
assessments include the periodic re-grading of classified loans based on changes in their
individual credit characteristics including delinquency, seasoning, recent financial performance of
the borrower, economic factors, changes in the interest rate environment and other factors as
warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when
there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk
of default. Confirmation of the quality of our grading process is obtained by independent reviews
conducted by outside consultants specifically hired for this purpose and by periodic examination by
various bank regulatory agencies. Management monitors delinquent loans continuously and identifies
problem loans to be evaluated individually for impairment testing. For loans that are determined
impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
Our method for assessing the appropriateness of the allowance includes specific allowances for
identified problem loans, an allowance factor for categories of credits and allowances for changing
environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors).
Allowances for identified problem loans are based on specific analysis of individual credits. Loss
estimation factors for loan categories are based on analysis of local economic factors applicable
to each loan category. Allowances for changing environmental factors are managements best estimate
of the probable impact these changes have had on the loan portfolio as a whole.
42
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Income Taxes
Income taxes reported in the financial statements are computed based on an asset and liability
approach. We recognize the amount of taxes payable or refundable for the current year, and deferred
tax assets and liabilities for the expected future tax consequences that have been recognized in
the financial statements. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. We
record net deferred tax assets to the extent it is more likely than not that they will be realized.
In evaluating our ability to recover the deferred tax assets, management considers all available
positive and negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and recent financial operations. In
projecting future taxable income, management develops assumptions including the amount of future
state and federal pretax operating income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are consistent with the plans
and estimates being used to manage the underlying business. The Company files consolidated federal
and combined state income tax returns.
We recognize the financial statement effect of a tax position when it is more likely than not,
based on the technical merits, that the position will be sustained upon examination. For tax
positions that meet the more likely than not threshold, we may recognize only the largest amount of
tax benefit that is greater than fifty percent likely to be realized upon ultimate settlement with
the taxing authority. Management believes that all of our tax positions taken meet the more likely
than not recognition threshold. To the extent tax authorities disagree with these tax positions,
our effective tax rates could be materially affected in the period of settlement with the taxing
authorities.
Derivative Financial Instruments and Hedging Activities
|
|
|
Derivative Loan Commitments The Company, through its majority owned subsidiary, Bank
of Commerce Mortgage, enters 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 forward delivery contracts with investors associated with mortgage loans
receivable held for sale. |
|
|
|
|
These 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. At June 30, 2011 the Company did not
maintain any open positions or any other outstanding derivative loan commitments. |
|
|
|
|
Interest Rate Swap Agreements As part of the Companys risk management strategy, the
Company enters into interest rate swap agreements or other derivatives to mitigate the
interest rate risk inherent in certain assets and liabilities. These derivative instruments
are accounted for as cash flow hedges, with the changes in fair value reflected in other
comprehensive income and subsequently reclassified to earnings when gains or losses are
realized on the hedged item. At June 30, 2011, the Company did not maintain any interest
rate swap agreements. |
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities,
and to determine fair value disclosures. We base our fair values on the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Securities available-for-sale, derivatives, and loans held
for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time,
we may be required to record certain assets at fair value on a nonrecurring basis, such as certain
impaired loans held for investment, securities held-to-maturity that are other-than-temporarily
impaired, and goodwill. These nonrecurring fair value adjustments typically involve write-downs of
individual assets due to application of lower of cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value
measurements. Whenever there is no readily available market data, management uses its best estimate
and assumptions in determining fair value, but these estimates involve inherent uncertainties and
the application of managements judgment. As a result, if other assumptions had been used, our
recorded earnings or disclosures could have been materially different from those reflected in these
financial statements. For detailed information on our use of fair value measurements and our
related valuation methodologies, see Note 9 to the Condensed Consolidated Financial Statements in
this document.
43
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net Interest Income and Net Interest Margin
Net interest income is the largest source of our operating income. Net interest income for the
three months ended June 30, 2011 was $8.5 million, an increase of $336 thousand or 4.1% compared to
the same period in 2010. Net interest income for the three months ended June 30, 2011 was
positively impacted by a lower volume of FHLB borrowings, lower funding costs relating to the
Companys certificate of deposits, and floating rate junior subordinated debentures. Net interest
income for the six months ended June 30, 2011 was $17.2 million, an increase of $1.5 million or
9.24% compared to the same period in 2010. The results for the three and six months ended June 30,
2011, as compared to the same period in 2010 are attributable to growth in outstanding average
interest earning assets, primarily investment securities, partially offset by growth in interest
bearing liabilities, primarily FHLB borrowings.
The net interest margin (net interest income as a percentage of average interest earning assets) on
a fully tax-equivalent basis was 3.97% for the three months ended June 30, 2011, a decrease of 15
basis points as compared to the same period in 2010. The net interest margin on a fully taxable
basis was 3.96% for the six months ended June 30, 2011, a decrease of 10 basis points as compared
to the same period in 2010. The decrease in net interest margin primarily resulted from decreased
yield on the loan portfolio as a result of payoffs, downward rate adjustments on variable rate
loans, and transfers to nonaccrual status, partially offset by a decrease in interest expense to
earning assets of 34 basis points due to declining costs of interest bearing deposits, and junior
subordinated debentures.
44
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Our net interest income is affected by changes in the amount and mix of interest earning assets and
interest bearing liabilities, as well as changes in the yields earned on interest earning assets
and rates paid on deposits and borrowed funds. The following tables present condensed average
balance sheet information, together with interest income and yields on average interest earning
assets, and interest expense and rates paid on average interest bearing liabilities for the six
months ended June 30, 2011 and 2010:
Average Balances, Interest Income/Expense and Yields/Rates Paid
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Six months ended |
|
|
June 30, 2011 |
|
June 30, 2010 |
|
|
Average Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Average Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Interest Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans1 |
|
$ |
626,685 |
|
|
$ |
17,991 |
|
|
|
5.74 |
% |
|
$ |
622,525 |
|
|
$ |
18,689 |
|
|
|
6.00 |
% |
Tax-exempt securities |
|
|
50,899 |
|
|
|
1,485 |
|
|
|
5.84 |
% |
|
|
34,288 |
|
|
|
1,034 |
|
|
|
6.03 |
% |
US government securities |
|
|
29,480 |
|
|
|
316 |
|
|
|
2.14 |
% |
|
|
21,329 |
|
|
|
292 |
|
|
|
2.74 |
% |
Mortgage backed securities |
|
|
73,500 |
|
|
|
995 |
|
|
|
2.71 |
% |
|
|
32,076 |
|
|
|
653 |
|
|
|
4.07 |
% |
Other securities |
|
|
42,256 |
|
|
|
802 |
|
|
|
3.80 |
% |
|
|
9,043 |
|
|
|
193 |
|
|
|
4.27 |
% |
Interest bearing due from banks |
|
|
69,205 |
|
|
|
426 |
|
|
|
1.23 |
% |
|
|
71,793 |
|
|
|
422 |
|
|
|
1.18 |
% |
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
0.00 |
% |
|
|
990 |
|
|
|
1 |
|
|
|
0.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest earning assets |
|
|
892,025 |
|
|
|
22,015 |
|
|
|
4.94 |
% |
|
|
792,044 |
|
|
|
21,284 |
|
|
|
5.37 |
% |
Cash & due from banks |
|
|
1,985 |
|
|
|
|
|
|
|
|
|
|
|
1,829 |
|
|
|
|
|
|
|
|
|
Bank premises |
|
|
9,576 |
|
|
|
|
|
|
|
|
|
|
|
9,911 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
21,114 |
|
|
|
|
|
|
|
|
|
|
|
32,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
924,700 |
|
|
|
|
|
|
|
|
|
|
$ |
836,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
$ |
148,473 |
|
|
$ |
430 |
|
|
|
0.58 |
% |
|
$ |
143,813 |
|
|
$ |
456 |
|
|
|
0.63 |
% |
Savings deposits |
|
|
90,714 |
|
|
|
475 |
|
|
|
1.05 |
% |
|
|
71,789 |
|
|
|
440 |
|
|
|
1.23 |
% |
Certificates of deposit |
|
|
307,094 |
|
|
|
2,585 |
|
|
|
1.68 |
% |
|
|
333,239 |
|
|
|
3,315 |
|
|
|
1.99 |
% |
Repurchase agreements |
|
|
14,224 |
|
|
|
27 |
|
|
|
0.38 |
% |
|
|
11,215 |
|
|
|
27 |
|
|
|
0.48 |
% |
Other borrowings |
|
|
156,756 |
|
|
|
840 |
|
|
|
1.07 |
% |
|
|
89,692 |
|
|
|
986 |
|
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest liabilities |
|
|
717,261 |
|
|
|
4,357 |
|
|
|
1.21 |
% |
|
|
649,748 |
|
|
|
5,224 |
|
|
|
1.61 |
% |
Noninterest bearing demand |
|
|
95,641 |
|
|
|
|
|
|
|
|
|
|
|
74,713 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
5,617 |
|
|
|
|
|
|
|
|
|
|
|
26,893 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
106,181 |
|
|
|
|
|
|
|
|
|
|
|
85,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and shareholders equity |
|
$ |
924,700 |
|
|
|
|
|
|
|
|
|
|
$ |
836,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net Interest Margin2 |
|
|
|
|
|
$ |
17,658 |
|
|
|
3.96 |
% |
|
|
|
|
|
$ |
16,060 |
|
|
|
4.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes fee (expense) income of approximately $(95) thousand
and $85 thousand for the period ended June 30, 2011, and 2010, respectively.
|
|
|
1 |
|
Average nonaccrual loans and average
loans held for sale of $18.8 and $19.5 million are included, respectively |
|
2 |
|
Tax-exempt income has been adjusted to a
tax equivalent basis at a 32% tax rate. The amount of such adjustments was an
addition to recorded income of approximately $476 thousand and $332 thousand
for the six months ended June 30, 2011 and 2010, respectively. |
45
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table sets forth changes in tax equivalent net interest income due to changes in
average asset and liability balances (volume) and changes in average rates (rate) for the six
months ended June 30, 2011 as compared to the same period in 2010. Changes in tax equivalent
interest income and expense, which are not attributable specifically to either volume or rate, are
allocated proportionally between both variances.
Table 2 Analysis of Changes in Net Interest Income and Interest Expense (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 over June 30, 2010 |
|
|
Variance Due to |
|
|
Variance Due to |
|
|
|
|
|
|
Average Volume |
|
|
Average Rate |
|
|
Total |
|
|
Increase (decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans |
|
$ |
119 |
|
|
$ |
(817 |
) |
|
$ |
(698 |
) |
Tax-exempt securities |
|
|
485 |
|
|
|
(35 |
) |
|
|
450 |
|
US government securities |
|
|
87 |
|
|
|
(63 |
) |
|
|
24 |
|
Mortgage backed securities |
|
|
561 |
|
|
|
(219 |
) |
|
|
342 |
|
Federal funds sold |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
Other securities |
|
|
630 |
|
|
|
(21 |
) |
|
|
609 |
|
Interest bearing due from banks |
|
|
(16 |
) |
|
|
20 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) |
|
|
1,866 |
|
|
|
(1,136 |
) |
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
|
13 |
|
|
|
(39 |
) |
|
|
(26 |
) |
Savings deposits |
|
|
99 |
|
|
|
(64 |
) |
|
|
35 |
|
Certificates of deposit |
|
|
(220 |
) |
|
|
(510 |
) |
|
|
(730 |
) |
Repurchase agreements |
|
|
6 |
|
|
|
(6 |
) |
|
|
|
|
Other borrowings |
|
|
359 |
|
|
|
(506 |
) |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) |
|
|
257 |
|
|
|
(1,125 |
) |
|
|
(868 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) |
|
$ |
1,609 |
|
|
$ |
(11 |
) |
|
$ |
1,598 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings
on key life investments, gains on the sale of securities investments, and mortgage brokerage fee
income.
Noninterest income for the three months ended June 30, 2011 was $3.6 million or 25.4% of total
gross revenues compared to $3.3 million or 23.65% of total gross revenues during the same period in
2010. Noninterest income for the six months ended June 30, 2011 was $7.1 million or 24.73% of
total gross revenues compared to $7.2 million or 25.68% of total gross revenues during the same
period a year ago. The following table presents the key components of noninterest income for the
three and six months ended June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
52 |
|
|
$ |
62 |
|
|
$ |
102 |
|
|
$ |
144 |
|
Payroll and benefit processing fees |
|
|
102 |
|
|
|
100 |
|
|
|
230 |
|
|
|
228 |
|
Earnings on cash surrender value Bank owned life insurance |
|
|
119 |
|
|
|
107 |
|
|
|
230 |
|
|
|
215 |
|
Net gain on sale of securities available-for-sale |
|
|
655 |
|
|
|
133 |
|
|
|
913 |
|
|
|
1,064 |
|
Merchant credit card service income, net |
|
|
33 |
|
|
|
64 |
|
|
|
303 |
|
|
|
117 |
|
Mortgage banking revenue, net |
|
|
2,550 |
|
|
|
2,776 |
|
|
|
5,083 |
|
|
|
5,336 |
|
Other income |
|
|
114 |
|
|
|
85 |
|
|
|
216 |
|
|
|
137 |
|
|
Total noninterest income |
|
$ |
3,625 |
|
|
$ |
3,327 |
|
|
$ |
7,077 |
|
|
$ |
7,241 |
|
|
For the three and six months ended June 30, 2011, we recorded service charges on deposit accounts
of $52 thousand and $102 thousand, respectively, as compared to $62 thousand and $144 thousand,
respectively, for the same periods a year ago. The decrease in service charges was primarily
attributable to the discontinuance of the Overdraft Privilege product, and decreased analysis fees
charged to our customers.
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
For the three and six months ended June 30, 2011, we recorded earnings on cash surrender value Bank
owned life insurance of $119 thousand and $107 thousand, respectively, as compared to $107 thousand
and $215 thousand, respectively, for the same periods a year ago. The increased income was primarily
attributable to one time accrual adjustments, and the purchase of an additional policy.
For the three and six months ended June 30, 2011, we recorded securities gains of $655 thousand and
$913 thousand, respectively, as compared to securities gains of $133 thousand and $1.1 million,
respectively, for the three and six months ended June 30, 2010. The increased gains during the
three months ended June 30, 2011 compared to the same period a year ago, resulted from increased
sales activity pursuant to the liquidation and repositioning of the available-for-sale investment
portfolio.
For the three and six months ended June 30, 2011, we recorded merchant credit card income of $33
thousand and $303 thousand, respectively, as compared to merchant credit card income of $64
thousand and $117 thousand, respectively for the same periods a year ago. During the first quarter
of 2011, approximately 50% of the merchant credit card portfolio was sold to an independent third
party, resulting in additional revenues of $225 thousand. Accordingly, merchant credit card income
for the three months ended June 30, 2011 is down 48% compared to the same period a year ago.
Mortgage banking revenue for the three and six months ended June 30, 2011 decreased by 8.14% and
4.98% respectively, as compared to the same period a year ago, primarily driven by decreased
origination and financing activity due to higher market interest rates. Closed mortgage volume for
the six months ended June 30, 2011 was $355.9 million, representing an 18.43% decrease compared to
the same period a year ago.
Noninterest Expense
Noninterest expense includes salaries and benefits, occupancy, write down of OREO, FDIC insurance
assessments, director fees, and other expenses. Other expenses include overhead items such as
utilities, telephone, insurance and licensing fees, and business travel.
Noninterest expense for the three months ended June 30, 2011 was $7.9 million compared to $7.5
million during the same period in 2010. Noninterest expense for the six months ended June 30, 2011
was $15.5 million compared to $14.7 million during the same period a year ago. The following table
presents the key components of noninterest expense for the three and six months ended June 30, 2011
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & related benefits |
|
$ |
4,068 |
|
|
$ |
3,365 |
|
|
$ |
8,321 |
|
|
$ |
7,076 |
|
Occupancy & equipment expense |
|
|
800 |
|
|
|
924 |
|
|
|
1,528 |
|
|
|
1,853 |
|
Write down of other real estate owned |
|
|
370 |
|
|
|
1,064 |
|
|
|
557 |
|
|
|
1,245 |
|
FDIC insurance premium |
|
|
363 |
|
|
|
254 |
|
|
|
735 |
|
|
|
505 |
|
Data processing fees |
|
|
91 |
|
|
|
64 |
|
|
|
190 |
|
|
|
153 |
|
Professional service fees |
|
|
595 |
|
|
|
543 |
|
|
|
1,169 |
|
|
|
943 |
|
Directors deferred fee compensation plan |
|
|
131 |
|
|
|
122 |
|
|
|
258 |
|
|
|
240 |
|
Stationery & supplies |
|
|
88 |
|
|
|
96 |
|
|
|
139 |
|
|
|
176 |
|
Postage |
|
|
44 |
|
|
|
45 |
|
|
|
90 |
|
|
|
87 |
|
Directors expenses |
|
|
67 |
|
|
|
68 |
|
|
|
141 |
|
|
|
152 |
|
Goodwill impairment |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
Other expenses |
|
|
1,237 |
|
|
|
932 |
|
|
|
2,372 |
|
|
|
2,234 |
|
|
Total noninterest expense |
|
$ |
7,854 |
|
|
$ |
7,509 |
|
|
$ |
15,500 |
|
|
$ |
14,696 |
|
|
Salaries and related benefits for the three months ended June 30, 2011 increased by $703 thousand
or 20.89%, compared to the same period a year ago. Salaries and related benefits for the six months
ended June 30, 2011 increased by $1.2 million or 17.59%, compared to the same period a year ago.
During the last six months of fiscal year 2010, Mortgage Services transitioned existing independent
contractors to full time equivalents, and increased staff due to growth in general operations,
resulting in an increase in salaries and related benefits compared to the same periods a year ago.
47
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Occupancy and equipment expense for the three months ended June 30, 2011 decreased by $124 thousand
or 13.42%, compared to the same period a year ago. Occupancy and equipment expense for the six
months ended June 30, 2011 decreased by $325 thousand, or 17.54%, compared to the same period a
year ago. The decrease is primarily driven by decreased rent expense, and decreased equipment
repairs, both pertaining to the mortgage subsidiary.
Write down of the Companys other real estate owned decreased by $694 thousand and $688 thousand
for the three and six months ended June 30, 2011, respectively, compared to the same period a year
ago. During the three months ended June 30, 2010, management determined that further impairment on
a specific commercial lot was necessary, resulting in a substantial write down of the propertys
carrying value.
FDIC insurance premium expense for the three months ended June 30, 2011 increased by $109 thousand
or 42.91%, compared to the same period a year ago. FDIC insurance premium expense for the six
months ended June 30, 2011 increased by $230 thousand, or 45.54%, compared to the same period a
year ago. The increase is primarily due to the FDICs revisions in deposit insurance assessments
methodology for determining premiums, and prepayment true up adjustments.
Data processing expense for the three months ended June 30, 2011 increased by $27 thousand or
42.19%, compared to the same period a year ago. Data processing expense for the six months ended
June 30, 2011 increased by $37 thousand, or 24.18%, compared to the same period a year ago. The
increase is primarily attributable to new software additions and their associated licensing.
Professional service fees encompass audit, legal and consulting fees. The Company continues to
experience increased expense in this area due to ongoing credit quality issues within the loan
portfolio, and increased regulatory and financial reporting burdens.
Other expenses for the three months ended June 30, 2011 increased by $275 thousand or 28.59%,
compared to the same period in the prior year, attributable primarily to increased losses on sale
of other real estate owned, and increased regulatory compliance expense.
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.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Income tax provision (benefit) |
|
$ |
216 |
|
|
$ |
750 |
|
|
$ |
647 |
|
|
$ |
1,494 |
|
Effective tax rate |
|
|
12.65 |
% |
|
|
31.26 |
% |
|
|
17.12 |
% |
|
|
33.78 |
% |
|
Noncontrolling interests are presented in the income statement such that the consolidated income
statement includes income and income tax expense from both the Company and noncontrolling
interests. The effective tax rate is calculated by dividing income tax expense by income before tax
expense for the consolidated entity.
Income tax provisions (benefit) for the three months ended June 30, 2011 decreased by $534 thousand
or 71.20%, compared to the same period a year ago. Income tax provisions (benefit) for the six
months ended June 30, 2011 decreased by $847 thousand, or 56.69%, compared to the same period a
year ago. The decrease is primarily driven by income tax benefits realized from the mortgage
subsidiary. During the first six months of the year, the Mortgage Company subsidiary recognized a
reduction in provision for income tax previously accrued of approximately $393 thousand. During
2010, the Company did not consider the benefit of the state tax deduction when deriving the federal
tax provision. As such, this benefit was recognized during the first quarter of 2011.
The Company had a net deferred tax asset of $6.5 million at June 30, 2011. 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.
48
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company files a consolidated federal and state income tax return. The Company determines
deferred income tax assets and liabilities using the balance sheet method. Under this method, the
net deferred tax asset or liability is based on the tax effects of the differences between book and
tax basis of assets and liabilities, and recognizes enacted changes in tax rates and laws.
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at June 30, 2011 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
State franchise taxes |
|
$ |
101 |
|
|
$ |
162 |
|
Deferred compensation |
|
|
2,658 |
|
|
|
2,446 |
|
Loan loss reserves |
|
|
6,282 |
|
|
|
5,830 |
|
Unrealized gains on available-for-sale investment securities |
|
|
(1,575 |
) |
|
|
|
|
Other |
|
|
823 |
|
|
|
271 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
8,289 |
|
|
$ |
8,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
State franchise taxes |
|
$ |
(712 |
) |
|
$ |
|
|
Unrealized gains on available-for-sale investment securities |
|
|
|
|
|
|
(284 |
) |
Depreciation |
|
|
(78 |
) |
|
|
(242 |
) |
Deferred loan origination costs |
|
|
(460 |
) |
|
|
(412 |
) |
Deferred state taxes |
|
|
|
|
|
|
(644 |
) |
Other |
|
|
(495 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
(1,745 |
) |
|
$ |
(1,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
6,544 |
|
|
$ |
6,971 |
|
|
Asset Quality and Portfolio Concentration
We concentrate our portfolio 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.
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 primarily located in California and are expected to be repaid from cash flows of the
borrower or proceeds from the sale of collateral. As such, the Companys dependence on real estate
increases the risk of loss in the loan portfolio of the Company. Furthermore, declining real estate
values negatively impact holdings of OREO as well.
The recent deterioration of the real estate market in California has had an adverse effect on the
Companys business, financial condition and results of operations. The slowdown in residential
development and construction markets has led to an increase in nonperforming loans which has
resulted in additional provisions to our ALL. Management has taken cautious yet decisive steps to
ensure the proper funding of loan reserves. Given our current business environment, managements
top focus is on credit quality, expense control, and bottom line net income. All of these are
affected either directly or indirectly by the Companys management of its asset quality.
The Companys practice is to place an asset on nonaccrual status when one of the following events
occurs: (1) 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), (2) management
determines the ultimate collection of principal or interest to be unlikely, or (3) the terms of the
loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been
restructured and are not performing to their modified terms. 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.
49
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)
One exception to the 90 days past due policy for nonaccruals is the Companys pool of home equity
loans and lines purchased from a private equity firm. The purchase of this pool of loans included
a put option allowing the bank to sell a portion of the loan pool back to the private equity firm
in the event of default by the borrower [each home equity loan that becomes ninety days past due
will be sold back to the private equity firm for the outstanding principal balance, unless a
workout plan has been put in place with the borrower]. Once this put reserve is exhausted, the
bank will charge off any loans that go more than 90 days past due. As such, management does not
expect to classify any of the loans from this pool as nonaccrual. Management believes that charging
the entire loan balance off at the time it becomes impaired would be more conservative than placing
it in nonaccrual status.
Total portfolio loans outstanding at June 30, 2011 were $582.4 million, a decrease of
$5.4 million when compared to the same period a year ago. This decrease was primarily driven by
$6.1 million in payoffs, and $1 million in charge offs relating to real estate construction loans.
The following table presents the concentration distribution of the Companys loan portfolio at June
30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2011 |
|
|
% |
|
|
December 31, 2010 |
|
|
% |
|
|
Commercial |
|
$ |
140,610 |
|
|
|
23.60 |
% |
|
$ |
130,579 |
|
|
|
21.73 |
% |
Real estate construction loans |
|
|
26,357 |
|
|
|
4.42 |
% |
|
|
41,327 |
|
|
|
6.88 |
% |
Real estate commercial (investor) |
|
|
218,535 |
|
|
|
36.68 |
% |
|
|
215,697 |
|
|
|
35.90 |
% |
Real estate commercial (owner occupied) |
|
|
68,327 |
|
|
|
11.47 |
% |
|
|
68,055 |
|
|
|
11.33 |
% |
Real estate ITIN loans |
|
|
67,675 |
|
|
|
11.36 |
% |
|
|
70,585 |
|
|
|
11.75 |
% |
Real estate mortgage |
|
|
22,116 |
|
|
|
3.71 |
% |
|
|
19,299 |
|
|
|
3.21 |
% |
Real estate equity lines |
|
|
46,850 |
|
|
|
7.86 |
% |
|
|
48,178 |
|
|
|
8.02 |
% |
Consumer |
|
|
5,271 |
|
|
|
0.88 |
% |
|
|
6,775 |
|
|
|
1.13 |
% |
Other |
|
|
91 |
|
|
|
0.02 |
% |
|
|
301 |
|
|
|
0.05 |
% |
|
Gross portfolio loans |
|
$ |
595,832 |
|
|
|
100.00 |
% |
|
$ |
600,796 |
|
|
|
100.00 |
% |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees, net |
|
|
51 |
|
|
|
|
|
|
|
90 |
|
|
|
|
|
Allowance for loan losses |
|
|
13,363 |
|
|
|
|
|
|
|
12,841 |
|
|
|
|
|
|
Net portfolio loans |
|
$ |
582,418 |
|
|
|
|
|
|
$ |
587,865 |
|
|
|
|
|
|
The following table provides a breakdown of the Companys real estate construction portfolio as of
June 30, 2011:
Dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of gross |
|
Loan Type |
|
Balance |
|
|
portfolio loans |
|
|
Commercial lots and entitled commercial land |
|
$ |
8,363 |
|
|
|
1.40 |
% |
Commercial real estate construction |
|
|
14,380 |
|
|
|
2.41 |
% |
1-4 family subdivision loans |
|
|
1,900 |
|
|
|
0.32 |
% |
1-4 family individual residential lots |
|
|
1,714 |
|
|
|
0.29 |
% |
|
Total real estate construction |
|
$ |
26,357 |
|
|
|
4.42 |
% |
|
Mortgages held for sale
Mortgages held for sale are not included in total net portfolio loans in the table above. Mortgages
held for sale are generated through two pipelines: (1) Bank of Commerce Mortgage and (2) the Banks
purchase program with Bank of Commerce Mortgage. In both cases our majority owned subsidiary Bank
of Commerce Mortgage originates residential mortgage loans within Bank of Commerces geographic
market, as well as on a nationwide basis. In scenario (1) above, the loans are funded through a
warehouse line of credit with the Bank or other financial institutions, and are accounted for as
loans held for sale at the Mortgage Subsidiary. Under scenario (2) above, the Bank purchases the
mortgages at origination from the Mortgage Subsidiary, and are classified as held for sale at the
Bank.
All mortgage loans originated through either pipeline 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 (FNMA), Freddie Mac (FHLMC), and
Ginnie Mae (GNMA)) and to third party investors including the servicing rights. Mortgages 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. 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. As of June 30, 2011, the Company
had $26.1 million in mortgages that were held for sale. These loans are not included in net
portfolio loans listed in the table above.
50
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Nonperforming Assets
The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Nonperforming assets |
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
901 |
|
|
$ |
2,302 |
|
Real estate construction |
|
|
|
|
|
|
|
|
Commercial real estate construction |
|
|
1,973 |
|
|
|
100 |
|
Residential real estate construction |
|
|
26 |
|
|
|
242 |
|
|
|
|
Total real estate construction |
|
|
1,999 |
|
|
|
342 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
1-4 family, closed end 1st lien |
|
|
3,002 |
|
|
|
1,166 |
|
1-4 family revolving |
|
|
|
|
|
|
97 |
|
ITIN 1-4 family loan pool |
|
|
9,739 |
|
|
|
9,538 |
|
Home equity loan pool |
|
|
|
|
|
|
|
|
|
|
|
Total real estate mortgage |
|
|
12,741 |
|
|
|
10,801 |
|
Commercial real estate |
|
|
3,282 |
|
|
|
7,066 |
|
|
|
|
Total nonaccrual loans |
|
|
18,923 |
|
|
|
20,511 |
|
90 days past due and still accruing |
|
|
953 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
19,876 |
|
|
|
20,511 |
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
1,793 |
|
|
|
2,288 |
|
|
|
|
Total nonperforming assets |
|
$ |
21,669 |
|
|
$ |
22,799 |
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
3.34 |
% |
|
|
3.41 |
% |
Nonperforming assets to total assets |
|
|
2.49 |
% |
|
|
2.43 |
% |
Nonperforming assets adversely affect our net income in various ways. Until macroeconomic and local
market conditions improve, we may expect to continue to incur losses relating to nonperforming
assets. We generally do not record interest income on nonperforming loans or OREO, thereby
adversely affecting our income, and increasing our loan administration costs. When we take
collateral in foreclosures and similar proceedings, we mark the respective assets to their fair
market value which may result in the recognition of 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.
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. As of June 30,
2011, the Company had allocated $1.5 million towards this pool or 9.48% of the outstanding
principal balance. An accompanying $1.5 million put reserve was also part of the loan swap
transaction and represented a credit enhancement. As such, management considered the put reserve in
estimating probable losses in the home equity portfolio.
At June 30, 2011, the remaining put reserve totaled $222 thousand or 1.38% of the outstanding
principal balance. The put reserve is considered an irrevocable first loss guarantee from the
seller that provides the Company the right to put back delinquent home equity loans to the seller
that are 90 days or more delinquent up to an aggregate amount of $1.5 million. The guarantee is
backed by a seller cash deposit with the Company that is restricted for this sole purpose. The
sellers cash deposit is classified as a deposit liability in the Companys balance sheet. At the
end of the term of the loss guarantee, on March 11, 2013, the Company is required to return the
unused cash deposit to the seller.
51
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The ITIN loan pool represents residential mortgage loans made to legal United States residents
without a social security number and are geographically dispersed throughout the United States. The
ITIN loan portfolio 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 original ITIN loan transaction, we obtained an irrevocable first loss guarantee from
the seller that provided us the right to put back delinquent ITIN loans to the seller that were 90
days or more delinquent up to an aggregate amount of $3.5 million. This guarantee was backed by a
seller cash deposit with the Company that was restricted for this sole purpose. The sellers cash
deposit was classified as a deposit liability in the Companys balance sheet. At the end of the
term of this loss guarantee, the Company was required to return the cash deposit to the seller to
the extent not used to fund losses in the ITIN portfolio.
The Company accounted for the loans returned to the seller under the loss guarantee by
derecognizing the loan, debiting cash and relieving the deposit liability. During the period from
March 2010 to September 2010, thirteen ITIN loans with an aggregate principal amount of $1.4
million were returned to the seller under the loss guarantee, reducing the deposit liability to
approximately $2.1 million prior to reaching a settlement with the seller to eliminate the loss
guarantee arrangement. At the date of settlement, the Company received $1.8 million in cash and
returned $300 thousand in cash to the seller from the deposit account. Accordingly, the Company
recognized a gain upon settlement. As such, no portion of the remaining outstanding principal
balance of the ITIN loan portfolio has an accompanying loss guarantee.
In conjunction with settlement of the loss guarantee, $1.8 million was expensed in provisions for
loan losses, and specifically allocated in the ALL against the ITIN portfolio. The gain on
settlement and the increase in loan loss provisions were two separate and distinct events.
However, the two events are linked because upon eliminating the irrevocable loss guarantee from the
seller, an increase in our ALL related to the ITIN loans was necessary; the following factors were
considered in determining the specific ALL allocation to the ITIN Portfolio:
|
|
|
Increasing delinquencies 20% of the portfolio was delinquent 30 days or more as of
December 31, 2010, |
|
|
|
|
Servicer modification efforts were generally extending beyond a typical timeframe, |
|
|
|
|
Mortgage insurance A small number of mortgage insurance claims have been denied and
management has not been able to identify a trend regarding any potential future denials, |
|
|
|
|
Sale of OREO An emerging trend in the lengthening disposition of ITIN OREO had
developed including the potential for decreased recoveries and consequently increased net
charge offs, |
|
|
|
|
Lack of loss guaranty due to settlement. |
As of March 31, 2011 and December 31, 2010, the specific ITIN ALL allocation represented
approximately 4.45% and 4.05% of the total outstanding principal, respectively.
A loan is considered impaired when based on current information and events, we determine that we
will probably not be able to collect all amounts due according to the loan contract, including
scheduled interest payments. When we identify a loan as impaired, we measure the loan for potential
impairment using discounted cash flows, except when the sole remaining source of the repayment for
the loan is the liquidation of the collateral. In these cases, we use the current fair value of
collateral, less selling costs. The starting point for determining the fair value of collateral is
through obtaining external appraisals. Generally, external appraisals are updated every six to
twelve months. We obtain appraisals from a pre-approved list of independent, third party, local
appraisal firms. Approval and addition to the list is based on experience, reputation, character,
consistency and knowledge of the respective real estate market. At a minimum, it is ascertained
that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is
experienced in the appraisal of properties similar to the property being appraised, (3) is actively
engaged in the appraisal work, (4) has knowledge of current real estate market conditions and
financing trends, (5) is reputable, and (6) is not on Freddie Macs nor the Banks Exclusionary
List of appraisers and brokers.
Upon receipt and review, an external appraisal is utilized to measure a loan for potential
impairment. Our impairment analysis documents the date of the appraisal used in the analysis,
whether the officer preparing the report deems it current, and, if not, allows for internal
valuation adjustments with justification. Typical justified adjustments might include discounts for
continued market deterioration subsequent to appraisal date, adjustments for the release of
collateral contemplated in the appraisal, or the value of other collateral or consideration not
contemplated in the appraisal. An appraisal over one year old in most cases will be considered
stale dated and an updated or new appraisal will be required. Any adjustments from appraised value
to net realizable value are detailed and justified in the impairment analysis, which is reviewed
and approved by senior credit quality officers.
52
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Although an external appraisal is the primary source to value collateral dependent loans, we may
also utilize values obtained through purchase and sale agreements, negotiated short sales, broker
price opinions, or the sales price of the note. These alternative sources of value are used only if
deemed to be more representative of value based on updated information regarding collateral
resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near
the end of each reporting period. Based on these processes, we do not believe there are significant
time lapses for the recognition of additional loan loss provisions or charge offs from the date
they become known.
As of June 30, 2011, impaired loans totaled $43.9 million, of which $18.9 million were in
nonaccrual status. Of the total impaired loans $13.3 million, or one hundred and forty-seven were
ITIN loans with an average balance of approximately $90 thousand. The remaining nonaccrual loans
consist of two commercial loans, three construction loans, four commercial real estate loans, and
seven residential mortgages.
Loans are reported as TDRs when the Bank grants a concession(s) to a borrower experiencing
financial difficulties that it would not otherwise consider. Examples of such concessions include a
reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity
date(s) significantly, or providing a lower interest rate than would be normally available for a
transaction of similar risk. As a result of these concessions, restructured loans are impaired as
the Bank will not collect all amounts due, both principal and interest, in accordance with the
terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured
loans are measured by comparing the present value of expected future cash flows on the restructured
loans discounted at the interest rate of the original loan agreement to the loans carrying value.
These impairment reserves are recognized as a specific component to be provided for in the
allowance for loan losses.
TDRs are considered impaired loans, but are not necessarily placed 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 June 30, 2011, there were $7.6 million of ITINs which were
classified as TDRs, of which $4.1 million were on nonaccrual status.
As of June 30, 2011 the Company had $32.4 million in TDRs compared to $24.6 million as of December
31, 2010. As of June 30, 2011, the Company had one hundred and nine restructured loans that
qualified as TDRs, of which fifty-eight were performing according to their restructured terms. TDRs
represented 5.43% of gross portfolio loans as of June 30, 2011 compared with 4.10% at December 31,
2010.
The following table sets forth a summary of the Companys restructured loans that qualify as TDRs:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
Troubled debt restructurings |
|
2011 |
|
|
2010 |
|
|
Nonaccrual |
|
$ |
7,959 |
|
|
$ |
11,977 |
|
Accruing |
|
|
24,410 |
|
|
|
12,668 |
|
|
Total troubled debt restructurings |
|
$ |
32,369 |
|
|
$ |
24,645 |
|
|
53
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table summarizes the activity in the ALL reserves for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
Beginning balance |
|
$ |
12,841 |
|
|
$ |
11,207 |
|
|
$ |
12,197 |
|
Provision for loan loss charged to expense |
|
|
4,980 |
|
|
|
12,850 |
|
|
|
1,600 |
|
Loans charged off |
|
|
(5,132 |
) |
|
|
(12,089 |
) |
|
|
(1,194 |
) |
Loan loss recoveries |
|
|
674 |
|
|
|
873 |
|
|
|
164 |
|
|
|
|
Ending balance |
|
$ |
13,363 |
|
|
$ |
12,841 |
|
|
$ |
12,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross portfolio loans outstanding at period end |
|
$ |
595,832 |
|
|
$ |
600,796 |
|
|
$ |
613,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans |
|
|
2.24 |
% |
|
|
2.14 |
% |
|
|
2.08 |
% |
Nonaccrual loans at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
901 |
|
|
$ |
2,302 |
|
|
$ |
3,404 |
|
Construction |
|
|
1,999 |
|
|
|
342 |
|
|
|
2,415 |
|
Commercial real estate |
|
|
3,282 |
|
|
|
7,066 |
|
|
|
9,601 |
|
Residential real estate |
|
|
12,741 |
|
|
|
10,704 |
|
|
|
6,910 |
|
Home equity |
|
|
|
|
|
|
97 |
|
|
|
499 |
|
|
|
|
Total nonaccrual loans |
|
$ |
18,923 |
|
|
$ |
20,511 |
|
|
$ |
22,829 |
|
Accruing troubled debt restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
|
|
|
$ |
|
|
|
$ |
484 |
|
Construction |
|
|
108 |
|
|
|
2,804 |
|
|
|
2,320 |
|
Commercial real estate |
|
|
17,304 |
|
|
|
3,621 |
|
|
|
1,164 |
|
Residential real estate |
|
|
6,569 |
|
|
|
6,243 |
|
|
|
5,120 |
|
Home equity |
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing restructured loans |
|
$ |
24,410 |
|
|
$ |
12,668 |
|
|
$ |
9,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other accruing impaired loans |
|
|
539 |
|
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
43,872 |
|
|
$ |
33,916 |
|
|
$ |
31,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonaccrual loans at period end |
|
|
70.62 |
% |
|
|
62.61 |
% |
|
|
55.92 |
% |
Nonaccrual loans to total loans |
|
|
3.18 |
% |
|
|
3.41 |
% |
|
|
3.72 |
% |
|
54
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
(Amounts in thousands) |
|
2011 |
|
|
2011 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
8,958 |
|
|
$ |
9,033 |
|
|
$ |
9,635 |
|
|
$ |
9,710 |
|
|
$ |
9,511 |
|
Interest on tax-exempt securities |
|
|
478 |
|
|
|
532 |
|
|
|
524 |
|
|
|
465 |
|
|
|
381 |
|
Interest on U.S. government securities |
|
|
633 |
|
|
|
678 |
|
|
|
505 |
|
|
|
633 |
|
|
|
507 |
|
Interest on federal funds sold and securities
purchased under agreement to resell |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Interest on other securities |
|
|
577 |
|
|
|
651 |
|
|
|
529 |
|
|
|
471 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
10,646 |
|
|
|
10,894 |
|
|
|
11,193 |
|
|
|
11,280 |
|
|
|
10,741 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
204 |
|
|
|
226 |
|
|
|
261 |
|
|
|
251 |
|
|
|
226 |
|
Interest on savings deposits |
|
|
229 |
|
|
|
246 |
|
|
|
244 |
|
|
|
237 |
|
|
|
221 |
|
Interest on certificates of deposit |
|
|
1,272 |
|
|
|
1,313 |
|
|
|
1,383 |
|
|
|
1,453 |
|
|
|
1,554 |
|
Securities sold under agreements to
repurchase |
|
|
13 |
|
|
|
14 |
|
|
|
12 |
|
|
|
13 |
|
|
|
15 |
|
Interest on FHLB borrowings |
|
|
148 |
|
|
|
164 |
|
|
|
181 |
|
|
|
178 |
|
|
|
138 |
|
Interest on other borrowings |
|
|
263 |
|
|
|
266 |
|
|
|
495 |
|
|
|
470 |
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,129 |
|
|
|
2,229 |
|
|
|
2,576 |
|
|
|
2,602 |
|
|
|
2,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,517 |
|
|
|
8,665 |
|
|
|
8,617 |
|
|
|
8,678 |
|
|
|
8,181 |
|
Provision for loan and lease losses |
|
|
2,580 |
|
|
|
2,400 |
|
|
|
4,550 |
|
|
|
4,450 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses |
|
|
5,937 |
|
|
|
6,265 |
|
|
|
4,067 |
|
|
|
4,228 |
|
|
|
6,581 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
52 |
|
|
|
50 |
|
|
|
53 |
|
|
|
63 |
|
|
|
62 |
|
Payroll and benefit processing fees |
|
|
102 |
|
|
|
128 |
|
|
|
113 |
|
|
|
107 |
|
|
|
100 |
|
Earnings on cash surrender value Bank
owned life insurance |
|
|
119 |
|
|
|
111 |
|
|
|
111 |
|
|
|
112 |
|
|
|
107 |
|
Net gain on sale of securities
available-for-sale |
|
|
655 |
|
|
|
258 |
|
|
|
738 |
|
|
|
179 |
|
|
|
133 |
|
Gain on settlement of put reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750 |
|
|
|
|
|
Merchant credit card service income, net |
|
|
33 |
|
|
|
270 |
|
|
|
53 |
|
|
|
65 |
|
|
|
64 |
|
Mortgage brokerage fee income |
|
|
2,550 |
|
|
|
2,533 |
|
|
|
5,711 |
|
|
|
3,281 |
|
|
|
2,776 |
|
Other income |
|
|
114 |
|
|
|
102 |
|
|
|
123 |
|
|
|
91 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
3,625 |
|
|
|
3,452 |
|
|
|
6,902 |
|
|
|
5,648 |
|
|
|
3,327 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
4,068 |
|
|
|
4,253 |
|
|
|
4,665 |
|
|
|
4,162 |
|
|
|
3,365 |
|
Occupancy and equipment expense |
|
|
800 |
|
|
|
728 |
|
|
|
855 |
|
|
|
952 |
|
|
|
924 |
|
Write down of other real estate owned |
|
|
370 |
|
|
|
187 |
|
|
|
196 |
|
|
|
129 |
|
|
|
1,064 |
|
FDIC insurance premium |
|
|
363 |
|
|
|
372 |
|
|
|
261 |
|
|
|
250 |
|
|
|
254 |
|
Data processing fees |
|
|
91 |
|
|
|
99 |
|
|
|
65 |
|
|
|
52 |
|
|
|
64 |
|
Professional service fees |
|
|
595 |
|
|
|
574 |
|
|
|
567 |
|
|
|
216 |
|
|
|
543 |
|
Deferred compensation expense |
|
|
131 |
|
|
|
127 |
|
|
|
127 |
|
|
|
126 |
|
|
|
122 |
|
Stationery and supplies |
|
|
88 |
|
|
|
51 |
|
|
|
47 |
|
|
|
35 |
|
|
|
96 |
|
Postage |
|
|
44 |
|
|
|
46 |
|
|
|
53 |
|
|
|
58 |
|
|
|
45 |
|
Directors expense |
|
|
67 |
|
|
|
74 |
|
|
|
58 |
|
|
|
56 |
|
|
|
68 |
|
Other expenses |
|
|
1,237 |
|
|
|
1,135 |
|
|
|
1,445 |
|
|
|
1,260 |
|
|
|
964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
7,854 |
|
|
|
7,646 |
|
|
|
8,339 |
|
|
|
7,296 |
|
|
|
7,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
1,708 |
|
|
|
2,071 |
|
|
|
2,630 |
|
|
|
2,580 |
|
|
|
2,399 |
|
Provision for income taxes |
|
|
216 |
|
|
|
431 |
|
|
|
749 |
|
|
|
916 |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,492 |
|
|
|
1,640 |
|
|
|
1,881 |
|
|
|
1,664 |
|
|
|
1,649 |
|
Less: Net income (loss) attributable to non-
controlling interest |
|
|
6 |
|
|
|
(24 |
) |
|
|
260 |
|
|
|
105 |
|
|
|
144 |
|
Net income attributable to Bank of Commerce
Holdings |
|
$ |
1,486 |
|
|
$ |
1,664 |
|
|
$ |
1,621 |
|
|
$ |
1,559 |
|
|
$ |
1,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend and accretion on
preferred stock |
|
$ |
235 |
|
|
$ |
235 |
|
|
$ |
235 |
|
|
$ |
235 |
|
|
$ |
236 |
|
Income available to common stockholders |
|
$ |
1,251 |
|
|
$ |
1,429 |
|
|
$ |
1,386 |
|
|
$ |
1,324 |
|
|
$ |
1,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Weighted average shares basic |
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,837 |
|
Diluted earnings per share |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Weighted average shares diluted |
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,991 |
|
|
|
16,837 |
|
Cash dividends declared |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
55
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.
ALCO 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: (1) repricing opportunities for earning assets and interest bearing
liabilities, and (2) changes in net interest income for declining interest rate shocks of 100 to
400 basis points.
Because of our predisposition to variable rate pricing and noninterest bearing demand deposit
accounts, we are normally considered asset sensitive. However, with the current historically low
interest rate environment, the market rates on many of our variable-rate loans are below their
respective floors. Consequently, we would not immediately benefit in a rising rate environment.
Based on the most recent model run, we are considered liability sensitive in the 100 basis point to
400 basis point upward rate shock. As a result, management anticipates that, in a rising interest
rate environment, our net interest income and margin would generally be expected to decline, as
well as in a declining interest rate environment. However, given that the model assumes a static
balance sheet, no assurance can be given that under such circumstances we would experience the
described relationships to declining or increasing interest 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. Given
the historically low interest rates we are currently experiencing, we are currently only running
the model for 100 and 200 basis points in a down rate scenario. The most recent model results
indicate the estimated annualized reduction in net interest income attributable to 100 and 200
basis point declines in the federal funds rate was $784,030 and $1,744,069, 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 100, 200, and 300 basis point
increases in the federal funds rate was $355,478, $401,310, and $162,047, respectively. When
shocked 400 basis points, the model shows a net interest income increase of $163,469.
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.
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
Management believes that the short duration of its rate-sensitive assets and liabilities
contributes to its ability to re-price 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.
Our approach to managing interest rate risk may include the use of derivatives, including interest
rate swaps, caps and floors. This helps to minimize significant, unplanned fluctuations in
earnings, fair values of assets and liabilities and cash flows caused by interest rate volatility.
This approach involves an off-balance sheet instrument with the same characteristics of certain
assets and liabilities so that changes in interest rates do not have a significant adverse effect
on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged
assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect
of this unrealized gain or loss will generally be offset by income or loss on the derivatives
linked to the hedged assets and liabilities. For a cash flow hedge, the change in the fair value of
the derivative to the extent that it is effective is recorded through other comprehensive income.
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.
57
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including its President and
Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).
Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer
concluded that these disclosure controls and procedures were effective.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only
reasonable assurance of achieving an entitys disclosure objectives. The likelihood of achieving
such objectives is affected by limitations inherent in disclosure controls and procedures. These
include the fact that human judgment in decision-making can be faulty and that breakdowns in
internal controls can occur because of human failures such as simple errors, mistakes or
intentional circumvention of the established processes.
Report on 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.
On a quarterly basis, we carry out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Principal Financial Officer (whom is
also our Principal Accounting Officer) of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934. As of June 30, 2011, our management, including our Chief Executive Officer and Principal
Financial Officer, concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us that is required to be included in our
periodic SEC filings.
Although we change and improve our internal controls over financial reporting on an ongoing basis,
we do not believe that any such changes occurred in the second quarter of 2011 that materially
affected, or are reasonably likely to materially affect our internal control over financial
reporting.
58
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 have been no significant changes in the risk factors previously disclosed in the Companys
Form 10-K for the period ended December 31, 2010, filed with the SEC on March 4, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not have any unregistered sales of our equity securities within the past three years ended
June 30, 2011.
Item 3. Defaults Upon Senior Securities
N/A.
Item 4. (Removed and Reserved)
N/A
Item 5. Other Information
N/A
Item 6. Exhibits
(31.1) |
|
Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 |
|
(31.2) |
|
Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 |
|
(32.0) |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Sarbanes-Oxley Act of 2002 |
59
SIGNATURES
Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
BANK OF COMMERCE HOLDINGS
(Registrant)
|
|
Date: August 5, 2011 |
/s/ Samuel D. Jimenez
|
|
|
Samuel D. Jimenez |
|
|
Executive Vice President and
Chief Financial Officer |
|
|
60