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 THESECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-25135
Bank of Commerce Holdings
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California
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94-2823865 |
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(State or jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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1901 Churn Creek Road Redding, California
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96002 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (530) 722-3955
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No
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 definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act)
Yes o No
þ
Outstanding shares of Common Stock, no par value, as of March 31, 2009: 8,711,495
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index to Form 10-Q
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PAGE NUMBER |
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42 |
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2
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Index
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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Dollars in thousands |
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March 31, 2009 |
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Dec. 31, 2008 |
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March 31, 2008 |
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ASSETS |
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Cash and due from banks |
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$ |
38,965 |
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$ |
33,716 |
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$ |
12,737 |
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Federal funds sold and securities purchased under agreements to resell |
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56,655 |
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51,475 |
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25,995 |
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Cash and cash equivalents |
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95,620 |
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85,191 |
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38,732 |
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Securities available-for-sale at fair value (including pledged
collateral of $66,210 at March 31, 2009, $68,735 at December 31, 2008
and $57,274 at March 31, 2008) |
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105,538 |
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131,687 |
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62,090 |
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Securities held-to-maturity, at cost (estimated fair value of $0 at
March 31, 2009, $0 at December 31, 2008 and $10,646 at March 31,
2008) |
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10,421 |
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Loans, net of the allowance for loan losses of $7,701 at March 31,
2009, $8,429 at December 31, 2008 and $5,815 at March 31, 2008 |
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525,182 |
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518,946 |
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506,374 |
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Bank premises and equipment, net |
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10,553 |
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10,672 |
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11,370 |
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Other assets |
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28,443 |
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27,718 |
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22,248 |
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TOTAL ASSETS |
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$ |
765,336 |
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$ |
774,214 |
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$ |
651,235 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Demand noninterest bearing |
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$ |
66,351 |
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$ |
79,988 |
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$ |
71,722 |
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Demand interest bearing |
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138,231 |
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143,871 |
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140,624 |
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Savings accounts |
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72,873 |
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67,136 |
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42,946 |
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Certificates of deposit |
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270,490 |
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264,287 |
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229,006 |
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Total deposits |
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547,945 |
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555,282 |
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484,298 |
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Securities sold under agreements to repurchase |
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10,813 |
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13,853 |
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12,455 |
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Federal Home Loan Bank borrowings |
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120,000 |
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120,000 |
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85,000 |
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Other liabilities |
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7,716 |
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7,036 |
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7,633 |
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Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
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15,465 |
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15,465 |
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15,465 |
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Total Liabilities |
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701,939 |
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711,636 |
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604,851 |
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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 in
2009, and December 31, 2008, no outstanding at March 31, 2008 |
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16,573 |
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16,551 |
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Common stock , no par value, 50,000,000 shares authorized; 8,711,495
shares issued and outstanding at March 31, 2009, 8,711,495 at
December 31, 2008 and 8,707,745 at March 31, 2008 |
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9,679 |
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9,650 |
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9,550 |
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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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36,541 |
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36,009 |
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37,135 |
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Accumulated other comprehensive income (loss), net of tax |
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155 |
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(81 |
) |
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(301 |
) |
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Total stockholders equity |
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63,397 |
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62,578 |
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46,384 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
765,336 |
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$ |
774,214 |
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$ |
651,235 |
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See accompanying notes to condensed consolidated financial statements.
4
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2009, December 31, 2008 and March 31, 2008
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For the Quarter Ended: |
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March 31, |
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December 31, |
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March 31, |
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Dollars in thousands, except for per share data |
|
2009 |
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2008 |
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|
2008 |
|
Interest income: |
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Interest and fees on loans |
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$ |
8,049 |
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$ |
8,028 |
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$ |
9,131 |
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Interest on tax-exempt securities |
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|
296 |
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313 |
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274 |
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Interest on U.S. government securities |
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1,192 |
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|
873 |
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|
481 |
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Interest on federal funds sold and securities purchased
under agreements to resell |
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25 |
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39 |
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|
58 |
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Interest on other securities |
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117 |
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81 |
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22 |
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Total interest income |
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9,679 |
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9,334 |
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9,966 |
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Interest expense: |
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|
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|
|
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Interest on demand deposits |
|
|
307 |
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|
|
411 |
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|
|
750 |
|
Interest on savings deposits |
|
|
281 |
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|
383 |
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|
|
290 |
|
Interest on certificates of deposit |
|
|
1,881 |
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|
1,975 |
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|
2,376 |
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Securities sold under repurchase agreements |
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14 |
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22 |
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|
84 |
|
Interest on FHLB and other borrowings |
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|
581 |
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|
638 |
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|
731 |
|
Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust |
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|
215 |
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|
263 |
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315 |
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|
|
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|
|
|
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Total interest expense |
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|
3,279 |
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|
3,692 |
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4,546 |
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Net interest income |
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|
6,400 |
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|
5,642 |
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|
5,420 |
|
Provision for loan and lease losses |
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|
1,425 |
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|
3,620 |
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|
600 |
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|
|
|
|
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|
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|
Net interest income after provision for loan and lease losses |
|
|
4,975 |
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|
|
2,022 |
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|
4,820 |
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Noninterest income: |
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Service charges on deposit accounts |
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|
92 |
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|
108 |
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|
62 |
|
Payroll and benefit processing fees |
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|
134 |
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|
118 |
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|
129 |
|
Earnings on cash surrender value Bank owned life insurance |
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|
86 |
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|
86 |
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|
83 |
|
Net gain on sale of securities available-for-sale |
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|
404 |
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|
33 |
|
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|
242 |
|
Net loss on sale of derivative swap transaction |
|
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|
|
|
|
|
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|
(225 |
) |
Merchant credit card service income, net |
|
|
74 |
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|
85 |
|
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|
83 |
|
Mortgage brokerage fee income |
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|
4 |
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|
10 |
|
Other income |
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|
75 |
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|
|
156 |
|
|
|
181 |
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|
|
|
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|
|
|
|
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Total noninterest income |
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|
865 |
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|
590 |
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|
565 |
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Noninterest expense: |
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|
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|
|
|
|
|
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Salaries and related benefits |
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|
2,127 |
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|
2,001 |
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|
1,949 |
|
Occupancy and equipment expense |
|
|
572 |
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|
1,339 |
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|
|
644 |
|
FDIC insurance premium |
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|
273 |
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|
99 |
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|
58 |
|
Data processing fees |
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|
111 |
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|
52 |
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|
78 |
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Professional service fees |
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|
159 |
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|
270 |
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|
|
118 |
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Payroll processing fees |
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|
34 |
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|
30 |
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|
33 |
|
Deferred compensation expense |
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|
119 |
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|
120 |
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|
111 |
|
Stationery and supplies |
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|
53 |
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|
70 |
|
|
|
62 |
|
Postage |
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|
81 |
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|
|
30 |
|
|
|
34 |
|
Directors expense |
|
|
37 |
|
|
|
71 |
|
|
|
48 |
|
Other expenses |
|
|
394 |
|
|
|
425 |
|
|
|
430 |
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|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,960 |
|
|
|
4,507 |
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|
|
3,565 |
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|
|
|
|
|
|
|
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|
Income (loss) before provision (benefit) for income taxes |
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|
1,880 |
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|
|
(1,895 |
) |
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|
1,820 |
|
Provision (benefit) for income taxes |
|
|
610 |
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|
|
(1,237 |
) |
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,270 |
|
|
$ |
(658 |
) |
|
$ |
1,229 |
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|
|
|
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|
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|
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|
|
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Less preferred dividend and accretion on preferred stock |
|
$ |
(237 |
) |
|
$ |
(0 |
) |
|
$ |
(0 |
) |
Income available to common shareholders |
|
$ |
1,033 |
|
|
$ |
(658 |
) |
|
$ |
1,229 |
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|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.12 |
|
|
$ |
(0.07 |
) |
|
$ |
0.14 |
|
Weighted average shares basic |
|
|
8,711 |
|
|
|
8,755 |
|
|
|
8,719 |
|
Diluted earnings (loss) per share |
|
$ |
0.12 |
|
|
$ |
(0.07 |
) |
|
$ |
0.14 |
|
Weighted average shares diluted |
|
|
8,711 |
|
|
|
8,802 |
|
|
|
8,748 |
|
Cash dividends per share |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
See accompanying notes to condensed consolidated financial statements.
5
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
Three months ended March 31, 2009
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Accumulated |
|
|
|
|
|
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Other Comp- |
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|
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|
|
|
|
|
|
|
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|
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|
|
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Income |
|
|
|
|
|
|
Comprehensive |
|
|
Preferred |
|
|
Preferred |
|
|
|
|
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
(Loss), |
|
|
|
|
Dollars in Thousands |
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Warrant |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
net of tax |
|
|
Total |
|
Balance at December 31, 2008 |
|
|
|
|
|
|
17,000 |
|
|
$ |
16,551,268 |
|
|
$ |
448,732 |
|
|
|
8,711,495 |
|
|
$ |
9,649,672 |
|
|
$ |
36,008,866 |
|
|
$ |
(80,897 |
) |
|
$ |
62,577,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
1,270,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,270,015 |
|
|
|
|
|
|
|
1,270,015 |
|
Other Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss)
gain arising during
the period on
derivative
transactions, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net holding loss on
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on
securities, net of
reclassification
adjustment |
|
|
473,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification
adjustment for gains
included in net
income,
net of tax |
|
|
(237,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
1,506,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,089 |
|
|
|
236,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred Stock |
|
|
|
|
|
|
|
|
|
|
22,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,437 |
|
Common cash dividends
$ (0.06 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(522,690 |
) |
|
|
|
|
|
|
(522,690 |
) |
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214,861 |
) |
|
|
|
|
|
|
(214,861 |
) |
Compensation expense
associated with stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,902 |
|
|
|
|
|
|
|
|
|
|
|
28,902 |
|
Balance at March 31, 2009 |
|
|
|
|
|
|
17,000 |
|
|
$ |
16,573,705 |
|
|
$ |
448,732 |
|
|
|
8,711,495 |
|
|
$ |
9,678,574 |
|
|
$ |
36,541,330 |
|
|
$ |
155,192 |
|
|
$ |
63,397,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Dollars in thousands |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,272 |
|
|
$ |
1,229 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
1,425 |
|
|
|
600 |
|
Provision for depreciation and amortization |
|
|
260 |
|
|
|
302 |
|
Compensation expense associated with stock options |
|
|
29 |
|
|
|
28 |
|
Tax benefits from the exercise of stock options |
|
|
|
|
|
|
|
|
Gain on sale of securities available-for-sale |
|
|
(404 |
) |
|
|
(242 |
) |
Amortization of investment premiums and accretion of discounts, net |
|
|
51 |
|
|
|
7 |
|
Loss on sale of derivative swap transaction |
|
|
|
|
|
|
225 |
|
Gain on sale of fixed assets |
|
|
|
|
|
|
(6 |
) |
Deferred income taxes |
|
|
193 |
|
|
|
(698 |
) |
(Increase) in cash surrender value of bank owned life policies |
|
|
(86 |
) |
|
|
(83 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
548 |
|
|
|
(1,308 |
) |
Deferred compensation |
|
|
82 |
|
|
|
111 |
|
Deferred loan fees |
|
|
11 |
|
|
|
(53 |
) |
Other liabilities |
|
|
598 |
|
|
|
92 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
3,979 |
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from maturities of available-for-sale securities |
|
|
11,820 |
|
|
|
765 |
|
Proceeds from sales of available-for-sale securities |
|
|
20,379 |
|
|
|
16,682 |
|
Proceeds from maturities of held-to-maturity securities |
|
|
|
|
|
|
138 |
|
Purchases of available-for-sale securities |
|
|
(5,631 |
) |
|
|
(11,383 |
) |
Investment in bank owned life policies |
|
|
(1,191 |
) |
|
|
|
|
Loan origination, net of principal repayments |
|
|
(7,672 |
) |
|
|
(20,638 |
) |
Purchases of Bank premises and equipment, net |
|
|
(140 |
) |
|
|
(831 |
) |
Proceeds on sale of fixed assets |
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
Net cash from investing activities |
|
|
17,565 |
|
|
|
(15,140 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net decrease in demand and savings accounts |
|
|
(13,541 |
) |
|
|
(4,623 |
) |
Net increase in certificates of deposit |
|
|
6,204 |
|
|
|
15,290 |
|
Net decrease in securities sold under agreement to repurchase |
|
|
(3,040 |
) |
|
|
(3,058 |
) |
Proceeds from Federal Home Loan Bank advances |
|
|
210,000 |
|
|
|
80,000 |
|
Repayments of Federal Home Loan Bank advances |
|
|
(210,000 |
) |
|
|
(55,000 |
) |
Cash dividends paid on common stock |
|
|
(523 |
) |
|
|
(700 |
) |
Cash dividends paid on preferred stock |
|
|
(215 |
) |
|
|
|
|
Proceeds from stock options exercised |
|
|
|
|
|
|
29 |
|
Common Stock repurchase |
|
|
|
|
|
|
(504 |
) |
Tax benefits from the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) from financing activities |
|
|
(11,115 |
) |
|
|
31,434 |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
10,429 |
|
|
|
16,498 |
|
Cash and cash equivalents, beginning of period |
|
|
85,191 |
|
|
|
22,234 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
95,620 |
|
|
$ |
38,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
250 |
|
Interest |
|
|
3,318 |
|
|
|
4,445 |
|
See accompanying notes to condensed consolidated financial statements.
7
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Bank of Commerce
Holdings (the Holding Company) and its subsidiaries Redding Bank of Commerce, Roseville Bank of
Commerce (BOC or the Bank) and Bank of Commerce Mortgage (collectively the Company). All
significant inter-company balances and transactions have been eliminated. The condensed balance
sheet as of December 31, 2008, which has been derived from audited financial statements audited by
Moss Adams, LLP, independent public accountants, as indicated in their report not included herein,
and the unaudited condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. The financial information
contained in this report reflects all adjustments that in the opinion of management are necessary
for a fair presentation of the results of the interim periods. All such adjustments are of a normal
recurring nature. Certain reclassifications have been made to the prior period condensed
consolidated financial statements to conform to the current financial statement presentation with
no effect on previously reported equity and net income.
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and general practices within the banking industry. In
preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from
those estimates.
The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes contained in Bank of
Commerce Holdings 2008 Annual Report on Form 10-K. The results of operations and cash flows for the
2009 interim periods shown in this report are not necessarily indicative of the results for any
future interim period or the entire fiscal year. For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase
agreements. Generally, federal funds are sold for a one-day period and securities purchased under
agreements to resell are for no more than a 90-day period. Balances held in federal funds sold may
exceed FDIC insurance limits.
2. Recent Accounting pronouncements
On October 10, 2008, the FASB issued FAS 157-3, "Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active. FAS 157-3 is a FASB Staff Position that clarifies
the application of FASB Statement No. 157, Fair Value Measurements, for a non-active market and
provides an illustrative example of key considerations in determining the fair value of financial
assets under such conditions. The adoption of FAS 157-3 did not have a material impact on our
consolidated financial statements.
On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB No. 133 (SFAS 161). SFAS 161 requires expanded
qualitative, quantitative and credit-risk disclosures about derivatives and hedging activities and
their effects on the Companies financial position, financial performance and cash flows. SFAS 161
also clarifies that derivatives are subject to credit risk disclosures as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. SFAS 161 is effective for the Companies
financial statements for the year beginning on January 1, 2009. The adoption of SFAS No. 161 did
not have a material impact on our consolidated financial statements.
On December 4, 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations (SFAS
141R). SFAS 141R modifies the accounting for business combinations and requires, with limited
exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired,
liabilities assumed, and any non-controlling interest in the acquiree at the acquisition-date fair
value. In addition, SFAS 141R requires the expensing of acquisition-related transaction and
restructuring costs, and certain contingent assets and liabilities acquired, as well as contingent
consideration, to be recognized at fair value. SFAS 141R also modifies the accounting for certain
acquired income tax assets and liabilities. SFAS 141R is effective for new acquisitions consummated
on or after January 1, 2009 and earlier adoption is not permitted.
In April 2009, the FASB issued the following three FSPs intended to provide additional application
guidance and enhance disclosures regarding fair value measurements and impairments of securities:
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides
additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and
level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is not orderly. The
provisions of FSP FAS 157-4 are effective for the Companys interim period ending on June 30, 2009.
Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the
Companys statements of income and condition.
8
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments,
requires disclosures about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Companys interim
period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure
requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS
107-1 and APB 28-1 is not expected to affect the Companys statements of income and condition.
FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments,
amends current other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Companys interim
period ending on June 30, 2009. Management is currently evaluating the effect that the provisions
of FSP FAS 115-2 and FAS 124-2 may have on the Companys statements of income and condition.
3. Earnings per Share
Basic earnings per share excludes dilution 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 of the Company adjusted for dividend
payments and accretion associated with Preferred Stock. The following table displays the
computation of earnings per share for the three months ended March 31, 2009 and 2008.
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,270 |
|
|
$ |
1,229 |
|
Less: preferred dividend |
|
|
(215 |
) |
|
|
|
|
Less: accretion on Preferred Stock |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,033 |
|
|
$ |
1,229 |
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
8,711 |
|
|
|
8,719 |
|
Basic earnings per Share |
|
$ |
0.12 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,270 |
|
|
$ |
1,229 |
|
Less: preferred dividend |
|
|
(215 |
) |
|
|
|
|
Less: accretion on Preferred Stock |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Numerator: Earnings available to common
stockholders |
|
$ |
1,033 |
|
|
$ |
1,229 |
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
8,711 |
|
|
|
8,719 |
|
Plus incremental shares from assumed
conversions |
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
29 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,711 |
|
|
|
8,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per Share |
|
$ |
0.12 |
|
|
$ |
0.14 |
|
Anti-dilutive options not included in EPS Calculation |
|
|
615 |
|
|
|
145 |
|
Anti-dilutive warrants not included in EPS
Calculation |
|
|
405 |
|
|
|
|
|
|
Vested stock options totaling 615,305 at an average price of $7.05 were outstanding as of March 31,
2009.
9
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
4. Stock Option Plans
For the first quarter of 2009, stock option compensation expense charged against income was $28,902
compared to $28,398 at March 31, 2008. At March 31, 2009, there was $234,401 of total unrecognized
compensation costs related to non-vested share based payments which is expected to be recognized
over a period of 3.6 years. No options were granted during the first quarter of 2009 or 2008.
During the three months ended March 31, 2009 and 2008 the Company received cash of $0 and $29,393
respectively, upon exercise of stock-based compensation arrangements.
5. Securities Portfolio
The Companys available-for-sale securities consists of both debt and marketable equity securities.
The portfolio is comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed
securities, and obligations of states and political subdivisions. Securities classified as
available-for-sale are recorded at fair value. Unrealized gains and losses, after applicable income
taxes, are reported in cumulative other comprehensive income. The Company uses the most current
quotations to estimate the fair value of these securities.
The Company does not include federal funds sold as securities. These investments are included in
cash and cash equivalents. Debt securities in the securities available-for-sale portfolio provide
asset liquidity, in addition to the immediately liquid resources of cash and due from banks and
federal funds sold.
Total available-for-sale securities decreased $26.1 million or 19.9% at March 31, 2009 compared to
December 31, 2008. As of March 31, 2009, the Company has pledged a total of $66.2 million of
securities for treasury, tax and loan accounts; public funds collateral; collateralized repurchase
agreements and Federal Home Loan Bank borrowings.
The following table summarizes the amortized cost of the Companys available-for-sale securities
held on the date indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009 |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. government & agencies |
|
$ |
8,006 |
|
|
$ |
31 |
|
|
$ |
|
|
|
$ |
8,037 |
|
Obligations of state and political subdivisions |
|
|
27,003 |
|
|
|
65 |
|
|
|
(1,424 |
) |
|
|
25,644 |
|
Mortgage backed securities |
|
|
70,282 |
|
|
|
1,840 |
|
|
|
(265 |
) |
|
|
71,857 |
|
Other securities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,291 |
|
|
$ |
1,936 |
|
|
$ |
(1,689 |
) |
|
$ |
105,538 |
|
|
10
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
U.S. government & agencies |
|
$ |
16,006 |
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
16,076 |
|
Obligations of state and political subdivisions |
|
|
32,178 |
|
|
|
146 |
|
|
|
(1,303 |
) |
|
|
31,021 |
|
Mortgage backed securities |
|
|
83,657 |
|
|
|
1,278 |
|
|
|
(345 |
) |
|
|
84,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
131,841 |
|
|
$ |
1,493 |
|
|
$ |
(1,648 |
) |
|
$ |
131,687 |
|
|
An investment is impaired if the fair value of the investment is less than its cost adjusted for
accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is
impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.
Significant judgment is required in the determination of whether an OTTI has occurred for an
investment. The Company follows a consistent and systematic process for determining and recording
an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process. The
ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information. The ALCO Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which the fair value has
been less than amortized cost, (b) the financial condition and near term prospects of the issuer,
(c) the intent and ability of the Company to retain its investment for a period of time sufficient
to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and
principal payments and (e) general market conditions and industry or sector specific outlook.
Management has evaluated all securities at March 31, 2009 and has determined that no securities are
other than temporarily impaired. The following table presents the current fair value and associated
unrealized losses on investments with unrealized losses at March 31, 2009. The table represents 37
securities compared with 40 securities at December 31, 2008. The table also discloses whether these
securities have had unrealized losses for less than 12 months or for 12 months or longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. government &
agencies |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Obligations of
state and political
subdivisions |
|
$ |
20,906,886 |
|
|
$ |
(1,365,418 |
) |
|
$ |
360,654 |
|
|
$ |
(59,346 |
) |
|
$ |
21,267,540 |
|
|
$ |
(1,424,764 |
) |
Mortgage backed
securities |
|
$ |
5,251,431 |
|
|
$ |
(25,921 |
) |
|
$ |
2,130,969 |
|
|
$ |
(238,751 |
) |
|
$ |
7,382,400 |
|
|
$ |
(264,672 |
) |
Total temporarily
impaired securities |
|
$ |
26,158,317 |
|
|
$ |
(1,391,339 |
) |
|
$ |
2,491,623 |
|
|
$ |
(298,097 |
) |
|
$ |
28,649,940 |
|
|
$ |
(1,689,436 |
) |
6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust
During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory
business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued $5.0 million of
guaranteed preferred beneficial interests in Bank of Commerce Holdings junior subordinated
debentures (the trust notes) to the public and $155,000 common securities to the Company. These
debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.
The proceeds from the issuance of the trust notes were transferred from the grantor trust to the
Holding Company and from the Holding Company to the Bank as surplus capital. The trust notes accrue
and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (LIBOR) plus
3.30%. The rate at March 31, 2009 was 4.39%. The rate increase is capped at 2.75% annually and the
lifetime cap is 12.5%. The final maturity on the trust note is March 18, 2033, and the debt allows
for prepayment after five years on the quarterly payment date.
On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private placement to
an institutional investor of $10 million of fixed rate trust preferred securities (the Trust
Preferred Securities); through a newly formed Delaware trust affiliate, Bank of Commerce Holdings
Trust II (the Trust). The Trust Preferred Securities mature on September 15, 2035, and are
redeemable at the Companys option on any March 15, June 15, September 15 or December 15 on or
after September 15, 2010.
11
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
In addition, the Trust Preferred Securities require quarterly distributions by the Trust to
the holder of the Trust Preferred Securities at a rate of 6.12%, until September 10, 2010 after
which the rate will reset quarterly to equal 3-Month LIBOR plus 1.58%. The Trust simultaneously
issued $310,000 of the Trusts common securities of beneficial interest to the Company.
The proceeds from the sale of the Trust Preferred Securities were used by the Trust to purchase
from the Company the aggregate principal amount of $10,310,000 of the Companys floating rate
junior subordinate notes (the Notes). The net proceeds to the Company from the sale of the
Notes to the Trust will be used by the Company for general corporate purposes, including funding
the growth of the Companys various financial services. During September 2008, $1,200,000 in
proceeds from the issuance of the trust notes was transferred from the Holding Company to the Bank
as surplus capital.
The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture), dated July
29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association, as trustee.
Like the Trust Preferred Securities, the Notes bear interest at a floating rate, at 6.12% until
September 10, 2010, after which the rate will reset on a quarterly basis to equal 3-Month LIBOR
plus 1.58%. The interest payments by the Company will be used to pay the quarterly distributions
payable by the Trust to the holder of the Trust Preferred Securities.
However, so long as no event of default, as described below, has occurred under the Notes, the
Company may, at any time and from time to time, defer interest payments on the Notes (in which
case the Trust will be entitled to defer distributions otherwise due on the Trust Preferred
Securities) for up to twenty (20) consecutive quarters.
The Notes are subordinated to the prior payment of other indebtedness of the Company that, by its
terms, is not similarly subordinated. Although the Notes will be recorded as a long term
liability on the Companys balance sheet, for regulatory purposes, the Notes are expected to be
treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve Board, the Companys
primary federal regulatory agency.
The Notes mature on September 15, 2035, but may be redeemed at the Companys option at any time on
or after September 15, 2010, or at any time upon certain events, such as a change in the
regulatory capital treatment of the Notes, the Trust being deemed to be an investment company or
the occurrence of certain adverse tax events. In each case, the Company may redeem the Notes for
their aggregate principal amount, plus accrued interest.
7. Preferred Stock and Warrants
Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement
Standard Terms the Company issued to the United States Department of the Treasury (Treasury
Department) 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred
Stock, without par value (the Series A Preferred Stock), having a liquidation amount per share
equal to $1,000 for a total price of $17 million. The Series A Preferred Stock pays cumulative
dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per
year. The Company may not redeem the Series A Preferred Stock during the first three years except
with the proceeds from a qualified equity offering (as defined in the Certificate of
Determination described in Item 5.03). After three years, the Company may, at our option, redeem
the Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred
Stock is generally non-voting. Prior to November 14, 2011, unless the Company has redeemed the
Series A Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock to
a third party, the consent of the Treasury Department will be required for the Company to increase
our common stock dividend or repurchase our common stock or other equity or capital securities,
other than in connection with benefit plans consistent with past practice and certain other
circumstances specified in the Securities Purchase Agreement. A consequence of the Series A
Preferred Stock purchase includes certain restrictions on executive compensation that could limit
the tax deductibility of compensation we pay to executive management.
As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant
(the Warrant) to purchase 405,405 shares of the Companys common stock at an initial per share
exercise price of $6.29. The Warrant provides for the adjustment of the exercise price and the
number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other assets to holders of
our common stock, and upon certain issuances of our common stock at or below a specified price
relative to the initial exercise price. The Warrant expires ten years from the issuance date. If,
on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less
than $17 million from qualified equity offerings announced after November 14, 2008, the number of
shares of common stock issuable pursuant to the Treasury Departments exercise of the Warrant will
be reduced by one-half of the original number of shares, taking into account all adjustments,
underlying the Warrant. Pursuant to the Securities Purchase Agreement, the Treasury Department has
agreed not to exercise voting power with respect to any shares of common stock issued upon exercise
of the Warrant.
Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1
capital.
12
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the request
of the Treasury Department at any time, we have agreed to promptly enter into a deposit arrangement
pursuant to which the Series A Preferred Stock may be deposited and depositary shares (Depositary
Shares) may be issued. Neither the Series A Preferred Stock nor the Warrant will be subject to any
contractual restrictions on transfer, except that the Treasury Department may only transfer or
exercise an aggregate of one-half of the Warrant Shares prior to the earlier of the redemption of
100% of the shares of Series A Preferred Stock and December 31, 2009.
In the Securities Purchase Agreement, the Company agreed that, until such time as the Treasury
Department ceases to own any securities acquired from us pursuant to the Securities Purchase
Agreement, the Company will take all necessary action to ensure that our benefit plans with respect
to our senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization
Act of 2008 (EESA) as implemented by any guidance or regulation under Section 111(b) of EESA that
has been issued and is in effect as of the date of issuance of the Series A Preferred Stock and the
Warrant and not adopt any benefit plans with respect to, or which cover, our senior executive
officers that do not comply with EESA. The applicable executives have consented to the foregoing.
Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of
the Treasury Department will be required for us to (1) declare or pay any dividend or make any
distribution on our common stock (other than regular quarterly cash dividends of not more than
$0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Companys
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreement.
The proceeds from Treasury were allocated based on the relative fair value of the warrants as
compared with the fair value of the preferred stock. The fair value of the warrants was determined
using a valuation model which incorporates assumptions including the Companys common stock price,
dividend yield, stock price volatility and the risk-free interest rate. The fair value of the
preferred stock is determined based on assumptions regarding the discount rate (market rate) on the
preferred stock which was estimated to be approximately 9% at the date of issuance. The discount on
the preferred stock will be accreted to par value over a five-year term, which is the expected life
of the preferred stock. Capital Purchase Plan participants may opt out by repaying the capital
without raising additional capital subject to consultation with the appropriate Federal regulator.
8. Commitments and contingent liabilities
Lease Commitments The Company leases certain facilities at
which it conducts its operations. Future minimum lease commitments
under all non-cancelable operating leases as of March 31, 2009 are
below:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Operating Leases |
|
|
|
|
|
2009 |
|
$ |
389 |
|
2010 |
|
|
524 |
|
2011 |
|
|
454 |
|
2012 |
|
|
279 |
|
2013 |
|
|
155 |
|
Thereafter |
|
|
606 |
|
|
|
|
|
Total |
|
$ |
2,407 |
|
|
|
|
|
|
|
|
|
|
Minimum rental due in the future
Under non-cancelable subleases |
|
$ |
8 |
|
|
|
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.
13
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
FHLB Advances The Company has advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $120,000,000 as of March 31, 2009 and $85,000,000 as of March 31, 2008. The
FHLB advances bear fixed interest rates ranging from 0.29% to 3.97%. Interest is payable
monthly and semiannually. The following table illustrates borrowings outstanding at the end
of the period:
|
|
|
|
|
Advance Amount |
|
Interest Rate |
|
Maturity |
$70,000,000 |
|
0.29% |
|
05/26/2009 |
$15,000,000 |
|
3.41% |
|
04/29/2011 |
$35,000,000 |
|
3.97% |
|
11/23/2009 |
|
|
|
|
|
$120,000,000 |
|
|
|
|
|
|
These borrowings are secured by an investment in FHLB stock and certain real estate mortgage
loans which have been specifically pledged to the FHLB pursuant to their collateral
requirements. Based upon the level of FHLB advances, the Company was required to hold a
minimum investment in FHLB stock of $5,640,000 and to pledge $95,470,373 of its real estate
mortgage loans to the FHLB as collateral as of March 31, 2009. At March 31, 2009, the Bank
had available borrowing lines at the FHLB of $36,993,995 and additional federal fund
borrowing lines at two correspondent banks totaling $25,000,000.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company
enters various types of transactions, which involve financial instruments with off-balance
sheet risk. These instruments include commitments to extend credit and standby letter of
credits, which are not reflected in the accompanying consolidated balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk more than the
amount, if any recognized in the consolidated balance sheets. Commitments to extend credit
are agreements to lend to customers.
These commitments have specified interest rates and generally have fixed expiration dates but
may be terminated by the Company if certain conditions of the contract are violated.
Although currently subject to draw down, many of the commitments do not necessarily represent
future cash requirements. Collateral held relating to these commitments varies, but
generally includes real estate, securities and cash. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a customer to a
third party. Credit risk arises in these transactions from the possibility that a customer
may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual evaluation of each
customers creditworthiness, but may include cash and securities. Commitments to extend
credit and standby letters of credit bear similar credit risk characteristics as outstanding
loans.
The Companys commitments to extend credit are illustrated below:
|
|
|
|
|
|
|
|
|
Credit Commitments |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Unfunded loan commitments |
|
$ |
151,329,729 |
|
|
$ |
184,065,127 |
|
Standby letters of credit |
|
|
6,785,969 |
|
|
|
6,600,143 |
|
Guaranteed commitments outstanding |
|
|
1,350,399 |
|
|
|
1,375,998 |
|
|
|
|
|
|
$ |
159,466,097 |
|
|
$ |
192,041,268 |
|
|
14
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
9. Accounting for Income Tax Uncertainties (FIN 48)
In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN
48 clarifies the accounting and reporting for income taxes where interpretation of the law is
uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of income tax uncertainties with respect to
positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company adopted this Statement on January 1,
2007. As a result of the implementation of Interpretation 48, it was not necessary for the
Company to recognize any increase in the liability for unrecognized tax benefits.
Additionally, there were no unrecognized tax liabilities or benefits as of March 31, 2009.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and
California state jurisdiction
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in
income tax expense.
10. Fair Value Measurement
SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP,
and expands disclosures about fair value measurement. Effective January 1, 2008 the Company
adopted SFAS No. 157, which enhances the disclosures about financial instruments carried at
fair value.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in
active markets for identical assets or liabilities that the Company has the ability to
access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets, and inputs other than quoted prices that are observable for the asset or liability,
such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations
where there is little, if any, market activity for the asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. In such cases, the level in the fair value hierarchy within which the
fair value measurement in its entirety falls has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety.
The Companys assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or
liability. The following table presents information about the Companys assets and
liabilities measured at fair value on a recurring basis as of March 31, 2009, and indicate
the fair value hierarchy of the valuation techniques utilized by the Company to determine
such fair value.
15
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Dollars in thousands)
Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
March 31, 2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Available for sale securities |
|
$ |
105,538 |
|
|
$ |
0 |
|
|
$ |
105,538 |
|
|
$ |
0 |
|
Total assets measured at fair value |
|
$ |
105,538 |
|
|
$ |
0 |
|
|
$ |
105,538 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair
value |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
The following methods were used to estimate the fair value of each class of financial instrument
above:
Securities available-for-sale - Securities classified as available-for-sale are reported at fair
value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements
from an independent pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bonds
terms and conditions among other things.
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.
16
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Non Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets For |
|
|
Observable |
|
|
Unobservable |
|
|
Gains |
|
|
|
Fair Value |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
(Losses) |
|
Description |
|
March 31, 2009 |
|
|
Level (1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
During period |
|
|
Impaired Loans |
|
$ |
6,473 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6,473 |
|
|
$ |
(555 |
) |
|
Total assets measured at fair value |
|
$ |
6,473 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6,473 |
|
|
$ |
(555 |
) |
|
Liabilities |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
Total liabilities measured at fair
value |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
Impaired loans When available, we use observable market data, including pricing on recent closed
market transactions, to value loans. The Company does not record loans at fair value on a recurring
basis. However, from time to time, a loan is considered impaired and an allowance for loan losses
is established. Loans for which it is probable that payment of interest and principal will not be
made in accordance with the contractual terms of the loan agreement are considered impaired. Once a
loan is identified as individually impaired, management measures impairment in accordance with SFAS
114, Accounting by Creditors for Impairment of a Loan, (SFAS 114).
The fair value of impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the fair value of the
expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2009,
substantially all of the total impaired loans were evaluated based on the fair value of the
collateral.
In accordance with SFAS 157, impaired loans where an allowance is established based on the fair
value of collateral require classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value, the Company records
the impaired loan as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
The Company had outstanding balances of $19.6 and $20.2 million in impaired loans as of March 31,
2009 and December 31, 2008, respectively. During the period $555,000 in impaired loans were
written down. Impairment allowances totaled $1.1 million and $1.1 million at March 31, 2009 and
December 31, 2008, respectively.
On April 20, 2009 the Company sold $14.3 million in impaired loans and booked a recovery of
$227,000. Following the loan sale, non performing assets were 1.08% of total assets compared to
2.94% of total assets at March 31, 2009.
17
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ITEM 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
Forward Looking Statements and Risk Factors
An investment in the Company has risk. The discussion below and elsewhere in this Report and in
other documents the Company files with the SEC incorporates various risk factors that could cause
the Companys financial results and condition to vary significantly from period to period.
Information in the accompanying financial statements contains certain forward-looking statements,
which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. We caution the investor that such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those stated. These risks and
uncertainties include the Companys ability to maintain or expand its market share and net interest
margins, or to implement its marketing and growth strategies. Further, actual results may be
affected by the Companys ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; and general trends in the banking
and the regulatory environment, as they relate to the Companys cost of funds and return on assets.
The reader is advised that this list of risks is not exhaustive and should not be construed as any
prediction by the Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements.
For additional information concerning risks and uncertainties related to the Company and its
operations please refer to the Companys Annual Report on Form 10-K for the year ended December 31,
2008 under the heading Risk factors that may affect results. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of any revision to these
forward-looking statements to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
The following sections discuss significant changes and trends in the financial condition, capital
resources and liquidity of the Company from December 31, 2008 to March 31, 2009. Also discussed are
significant trends and changes in the Companys results of operations for the three months ended
March 31, 2009, compared to the same period in 2008. The consolidated financial statements and
related notes appearing elsewhere in this report are condensed and unaudited. The following
discussion and analysis is intended to provide greater detail of the Companys financial condition
and results.
Company Overview
Bank of Commerce Holdings (the Holding Company) is a corporation organized under the laws of
California and a financial holding company (FHC) registered under the Bank Holding Company Act of
1956, as amended (BHC Act). The Holding Companys principal business is to serve as a holding
company for Redding Bank of Commerce, Roseville Bank of Commerce, and Bank of Commerce
Mortgage, and for other banking or banking-related subsidiaries which the Holding Company may
establish or acquire (collectively the Company). The Holding Company also has two unconsolidated
subsidiaries, Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust II. The Company
is listed on the NASDAQ National Market under the trading symbol BOCH (Bank of Commerce Holdings).
The Bank was incorporated as a California banking corporation on November 25, 1981, and received
its certificate of authority to begin banking operations on October 22, 1982. The Bank operates
five full service facilities in three diverse markets in Northern California. Bank of Commerce is
proud of its reputation as Northern Californias premier bank for business. During 2007, the
Company re-branded Bank of Commerce| Bank of Choice reflecting a renewed commitment to making
Bank of Commerce the bank of choice for local businesses with a fresh focus on family and personal
finances.
The Mortgage subsidiary, Bank of Commerce Mortgage, an affiliate of Bank of Commerce, principal
business is mortgage brokerage services. The subsidiary has an affiliated business agreement with
BWC Mortgage Services. Under the terms of the agreement, BWC Mortgage Services underwrites or
brokers mortgage products, manages the independent contractors, supporting staff and broker
relationships with secondary market lenders. Bank of Commerce Mortgage, through this agreement,
provides office space, equipment, and marketing support for the mortgage brokerage business. All
loans are sold in the secondary market. Bank of Commerce Mortgage pays ten percent of gross
premiums earned to BWC Mortgage Services.
18
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company will provide free of charge upon request, or through links to publicly available
filings accessed through its Internet website, the Companys annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon
as reasonably practical after such reports have been filed with the Securities and Exchange
Commission. The Internet addresses of the Company are www.bankofcommerceholdings.com,
www.reddingbankofcommerce.com, www.rosevillebankofcommerce.com, and
www.bankofcommercemortgage.com. Reports may also be obtained through the Securities and
Exchange Commissions website at www.sec.gov.
The Holding Companys principal source of income is dividends from its subsidiaries. The Holding
Company conducts its corporate business operations at the administrative office of the Bank located
at 1951 Churn Creek Road, Redding, California. The Company conducts its business operations in two
geographic market areas, Redding and Roseville, California. The Company considers Upstate
California to be the major market area of the Bank.
The Bank is principally supervised and regulated by the California Department of Financial
Institutions (DFI) and the Federal Deposit Insurance Corporation (FDIC), and conducts a general
commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento,
California. Through the Bank and mortgage subsidiaries, the Company provides a wide range of
financial services and products for business and consumer banking. The services offered by the Bank
include those traditionally offered by banks of similar size and character in California. Products
such as free checking, interest-bearing checking (NOW) and savings accounts, money market deposit
accounts, sweep arrangements, commercial, construction, term loans, travelers checks, safe deposit
boxes, collection services and electronic banking activities. The Bank is an affiliate of LPL
Financial and offers wealth management services through the affiliation.
The services offered by the Mortgage Company include single and multi-family residential new
financing, refinancing and equity lines of credit. All mortgage products are brokered and are not
maintained on the Banks books. It is important to note that Redding Bank of Commerce does not
originate or hold sub-prime loans, nor do we hold collateralized debt obligations or asset backed
securities backed by sub-prime loans in our securities portfolio.
Most of the Banks customers are small to medium sized businesses, professionals and other
individuals with medium to high net worth, and most of the Banks deposits are obtained from such
customers. The primary business strategy of the Bank is to focus on its lending activities. The
Banks principal lines of lending are (i) commercial, (ii) real estate construction and (iii)
commercial real estate.
The majority of the loans of the Bank are direct loans made to individuals and small businesses in
the major market area of the Bank. The Mortgage Company provides residential real estate new
financing, refinancing and equity lines of credit, 100% sold in the secondary market. A relatively
small portion of the loan portfolio of the Bank consists of loans to individuals for personal,
family or household purposes. The Bank accepts the following as collateral for loans: real estate,
listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and
other general business assets such as accounts receivable and inventory.
The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and
intermediate term loans. The loans are generally made for working capital, asset acquisition,
business-expansion purposes, and are generally secured by a lien on the borrowers assets. The
Bank also makes unsecured loans to borrowers who meet the Banks underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its borrowers payment
performance and their respective financial condition, and makes periodic and appropriate
adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The primary
sources of repayment of the commercial loans of the Bank are the borrowers conversion of
short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor
and/or the liquidation of collateral are usually identified as a secondary source of repayment.
19
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The principal factors affecting the Banks risk of loss from commercial lending include each
borrowers ability to manage its business affairs and cash flows, local and general economic
conditions and real estate values in the Banks service area. The Bank manages risk through its
underwriting criteria, which includes strategies to match the borrowers cash flow to loan
repayment terms, and periodic evaluations of the borrowers operations. The Banks evaluations of
its borrowers are facilitated by managements knowledge of local market conditions and periodic
reviews by a consultant of the credit administration policies of the Bank.
The real estate construction loan portfolio of the Bank consists of a mix of commercial and
residential construction loans, which are principally secured by the underlying projects. The real
estate construction loans of the Bank are predominately made for projects, which are intended to be
owner occupied. The Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Banks construction loans are sale of the underlying
collateral or permanent financing provided by the Bank or another lending source. The principal
risks associated with real estate construction lending include project cost overruns that absorb
the borrowers equity in the project and deterioration of real estate values as a result of various
factors, including competitive pressures and economic downturns.
The Bank manages its credit risk associated with real estate construction lending by establishing
maximum loan-to-value ratios on projects on an as-completed basis, inspecting project status in
advance of controlled disbursements and matching maturities with expected completion dates.
Generally, the Bank requires a loan-to-value ratio of no more than 80% on single-family residential
construction loans.
The commercial and construction loan portfolio of the Bank consists of loans secured by a variety
of commercial and residential real property. The Mortgage Company makes real estate mortgage loans
for both owner-occupied properties and investor properties. The Mortgage Company brokers and sells
the residential real estate loans directly in the secondary market, servicing included. The Bank
does not provide for warehouse funding.
The specific underwriting standards of the Bank and methods for each of its principal lines of
lending include industry-accepted analysis and modeling, and certain proprietary techniques. The
Banks underwriting criteria is designed to comply with applicable regulatory guidelines, including
required loan-to-value ratios. The credit administration policies of the Bank contain mandatory
lien position and debt service coverage requirements, and the Bank generally requires a guarantee
from the owners of its private corporate borrowers.
The Company continuously searches for expansion possibilities, through internal growth, strategic
alliances, acquisitions or new office and product opportunities. Systematically, the Company will
reevaluate the short and long-term profitability of all lines of business, and will not hesitate to
reduce or eliminate unprofitable locations or lines of business. The Company remains a viable,
independent bank by enhancing stockholder value. This has been realized by proactive management and
commitment to staff, customers, and the markets served.
Risk Factors
Economic Conditions and Geographic Concentration
An economic slowdown could reduce demand for the Companys products and services and lead to lower
revenues and lower earnings. A change in Californias economic and business conditions may
adversely affect the ability of our borrowers to repay their loans, causing us to incur higher
credit losses. The Company earns revenue from interest and fees charged on loans and financial
services. When the economy slows, the demand for these products and services may fall, reducing our
interest and fee income, and our earnings. In addition, during periods of economic slowdown or
recession, the Bank may experience a decline in collateral values and an increase in delinquencies
and defaults due to the borrowers ability to repay their loans. Several factors could cause the
economy to slow down or even recede, including higher energy costs, higher interest rates, reduced
consumer or corporate spending, a slowdown in housing, natural disasters, terrorist activities,
military conflicts, and the normal cyclical nature of the economy.
The Companys primary lending focus has historically been commercial real estate, commercial
lending and, to a lesser extent, construction lending. At March 31, 2009, all of the Companys
real estate mortgage, real estate construction loans, and commercial real estate loans, were
secured fully or in part by deeds of trust on underlying real estate. The Companys dependence on
real estate increases the risk of loss in the loan portfolio of the Company and its holdings of
other real estate owned if economic conditions in California deteriorate in the future.
Deterioration of the real estate market in California has had an adverse effect on the Companys
business, financial condition and results of operations.
20
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Current financial and credit market conditions may persist or worsen, making it more difficult to
access capital markets on favorable terms
Over the last year financial and credit markets have experienced unprecedented disruption and
volatility. These conditions may continue or even worsen, affecting the Companys ability to access
capital markets on favorable terms. We may raise additional capital through the issuance of common
stock, which could dilute existing stockholders, or reduce or eliminate our common stock dividend
to preserve capital or in order to raise additional capital.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the fair value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of when an other-than-temporary impairment has occurred. The ALCO Committee reviews the
investment portfolio on at least a quarterly basis, with ongoing analysis as new information
becomes available. Any decline that is determined to be other-than-temporary is recorded as an
other-than-temporary impairment (OTTI) loss in the results of operations in the period in which
the determination occurred.
An investment is impaired if the fair value of the investment is less than its cost adjusted
for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment
is impaired, the impairment is evaluated to determine whether it is temporary or
other-than-temporary.
Significant judgment is required in the determination of whether an OTTI has occurred for an
investment. The Company follows a consistent and systematic process for determining and recording
an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process.
The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information. The ALCO Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which the fair value has
been less than amortized cost, (b) the financial condition and near term prospects of the issuer,
(c) the intent and ability of the Company to retain its investment for a period of time sufficient
to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and
principal payments and (e) general market conditions and industry or sector specific outlook.
For securities considered to be OTTI, the security is adjusted to fair value and the resulting
losses are recognized in Realized investment gains (losses) on the Consolidated Statements of
Income.
Changes in Interest Rates could reduce the Companys Net Interest Income and Earnings
The Companys net interest income is the interest earned on loans, debt securities and other assets
less the interest paid on deposits, long-term and short-term debt and other liabilities. Net
interest income reflects both our net interest margin the difference between the yield on
earning assets and the interest paid on deposits and other sources of funding and the amount
(volume) of earning assets we hold. As a result, changes in either the net interest margin or the
volume of earning assets could adversely affect our net interest income and earnings.
Changes in interest rates, up or down, could adversely affect the net interest margin. The yield we
earn on our deposits and our funding costs tend to move in the same direction in response to
changes in interest rates, one can rise or fall faster than the other (timing differences). A
significant portion of the Companys assets are tied to variable rate pricing and the Company is
considered to be asset sensitive. As a result, the Company is generally adversely affected by
declining interest rates. In addition, changes in monetary policy, including changes in interest
rates, influence the origination of loans, the purchase of investments and the generation of
deposits, thereby affecting the rates received on loans and securities and paid on deposits, which
could have a material adverse effect on the Companys business, financial condition and results of
operations. See Quantitative and Qualitative Disclosure about Market Risk.
Changes in the slope of the yield-curve, or the spread between short-term and long-term interest
rates could also reduce our net interest margin. Normally, the yield curve is upward sloping,
meaning that short-term rates are lower than long-term rates. Because our liabilities tend to be
shorter in duration than our assets, when the yield curve flattens or even inverts, the Company
will experience pressure on the net interest margin as the cost of funds increases relative to the
yield that can be earned on assets.
21
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company assesses interest rate risk by estimating the effect on earnings in various scenarios
that differ based on assumptions about the direction, magnitude and speed of interest rate changes
and the slope of the yield curve. The Company may hedge some interest rate risk with interest rate
derivatives. The Company does not hedge all of its interest rate risk. There is risk that changes
in interest rates could reduce our net interest income and earnings in material amounts, especially
if actual conditions turn out to be materially different that the assumptions used in the model.
One example: If interest rates rise or fall faster than assumed or the slope of the yield curve
changes, the Company may incur losses on debt securities held as investments.
To reduce the interest rate risk, the Company may choose to rebalance the investment and loan
portfolio, refinance debt outstanding or take other strategic actions. The Company may incur losses
or expenses when taking such actions.
Lending Risks Associated with Commercial Banking and Construction Activities
The business strategy of the Company is to focus on commercial, single family and multi-family real
estate loans, construction loans and commercial business loans. Loans secured by commercial real
estate are generally larger and involve a greater degree of credit and transaction risk than
residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial
and multi-family real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. Moreover, real estate
construction financing is generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the propertys value at
completion of construction or development compared to the estimated cost (including interest) of
construction. If the estimate of value proves to be inaccurate, the Company may be confronted with
a project which, when completed, has a value which is insufficient to assure full repayment of the
construction loan. Although the Company manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not materialize, in which
event the Companys financial condition, results of operations, cash flows and business prospects
could be materially adversely affected.
Adequacy of Allowance for Loan and Lease Losses (ALLL)
Higher credit losses could require the Company to increase the allowance for loan and lease losses
through a charge to earnings. When the Company loans money or commits to loan money it incurs
credit risk or the risk of losses if our borrowers do not repay their loans. The Company provides a
reserve for credit risk by establishing an allowance through a charge to earnings. The amount of
the allowance is based on an assessment of credit losses inherent in the loan portfolio (including
unfunded credit commitments). The process for determining the amount of the allowance is critical
to our financial results and condition. It requires difficult, subjective and complex judgments
about the future, including forecasts of economic or market conditions that might impair our
borrowers ability to repay their loans.
The Company might increase the allowance because of changing economic conditions or unexpected
events. The Companys allowance for loan and lease losses was approximately $7.7 million, or 1.45%
of total loans at March 31, 2009.
Potential Volatility of Deposits
The Banks depositors could choose to take their money out of the bank and put it into alternative
investments, causing an increase in funding costs and reducing net interest income. Checking,
savings and money market account balances can decrease when customers perceive that alternative
investments, such as the stock market, as providing a better risk/return tradeoff. When customers
move funds out of bank deposits into other investments, the Bank will lose a relatively low cost
source of funds, increasing funding costs.
At March 31, 2009, time certificates of deposit in excess of $100,000 represented approximately 25%
of the dollar value of the total deposits of the Company. As such, these deposits are considered
volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits
could adversely affect the liquidity of the Company, profitability, business prospects, results of
operations and cash flows. The Company monitors activity of volatile liability deposits on a
quarterly basis.
Dividends
Bank of Commerce Holdings, the parent holding company, is a separate and distinct legal entity from
its subsidiaries. The Company conducts no other significant activity than the management of its
investment in the Bank and Mortgage Company and as such, the Company is dependent on these
subsidiaries for income. The ability of the Bank and Mortgage Company to pay cash dividends in the
future depends on the profitability, growth and capital needs of the Bank and Mortgage Company.
22
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of
the Treasury Department will be required for the Company to (1) declare or pay any dividend or make
any distribution on our common stock (other than regular quarterly cash dividends of not more than
$0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Companys
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreement.
These dividends are used to pay dividends on common stock and interest and principal on debt. In
addition, the California Financial Code restricts the ability of the Bank to pay dividends. No
assurance can be given that the Company or the Bank will pay any dividends in the future or, if
paid, such dividends will not be discontinued. Dividends from the Bank to the Holding Company are
restricted under California law to the lesser of the Banks retained earnings or the Banks net
income for the latest three fiscal years, less dividends previously declared during that period,
or, with the approval of California Superintendent of Banks, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the
Bank for its current fiscal year.
Participation in the Treasury Departments Capital Purchase Program restricts our ability to raise
the common stock dividend and may result in dilution of common stockholders
The U.S. government has taken action to restore liquidity and stability to financial and credit
markets, including the enactment of the Emergency Economic Stabilization Act of 2008 (EESA) and the
Troubled Asset Relief Program (TARP). As part of TARP, the Treasury Department implemented the
Capital Purchase Program (CPP) to purchase senior preferred stock from qualifying financial
institutions including Bank of Commerce Holdings. On November 14, 2008, we issued preferred
securities and a common stock purchase warrant to the Treasury Department under the CPP. Prior to
November 14, 2011, unless the Company has redeemed the preferred securities or the Treasury
Department has transferred the securities to a third party, the Treasury Departments consent will
be required for us to increase our common stock dividend or repurchase our common stock other than
in connection with benefit plans consistent with past practice. Under the anti-dilution provisions
included in the terms of the departments CPP investment, the per share exercise price of the
warrant and the number of shares of our common stock issuable upon exercise of the warrant will be
adjusted upon certain issuances of our common stock at or below a specified price relative to the
initial exercise price. The exercise of the common stock purchase warrant could result in material
dilution to existing common stockholders. As a condition to an additional CPP investment, the
Company could be required to eliminate our common stock dividend.
As a participant in the CPP our business activities and corporate governance may be subject to
additional restrictions and requirements, including requirements for lending activities and
restrictions on compensation, some possibly with retroactive application, adopted by Congress, the
Treasury Department or government agencies.
Changes in Accounting Policies or Accounting Standards, and Changes in How Accounting Standards are
interpreted or applied, Could Materially Affect How the Company Reports its Financial Results and
Condition
The Companys accounting policies are fundamental to understanding our financial results and
condition. Some of these policies require use of estimates and assumptions that may affect the
value of our assets or liabilities and financial results. Three of our accounting policies are
critical because they require management to make difficult, subjective and complex judgments about
matters that are inherently uncertain and because it is likely that materially different amount
would be reported under different conditions or using different assumptions (refer to Critical
Accounting Policies).
From time to time the Financial Accounting Standards Board (FASB) and the SEC change the
financial accounting and reporting standards that govern the preparation of financial statements.
In addition, accounting standard setters and those who interpret the accounting standards (such as
the FASB, SEC, banking regulators and outside auditors) may change or even reverse their previous
interpretations or positions on how these standards should be applied. Changes in financial
accounting and reporting standards and changes in current interpretations may be beyond the
Companys control, can be hard to predict and could materially impact how we report our financial
results and condition. The Company could be required to apply a new or revised standard
retroactively or apply an existing standard differently, also retroactively, in each case resulting
in restating prior period financial statements.
23
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Government Regulation and Legislation
The Company and the Bank are subject to extensive state and federal regulation, supervision and
legislation, which govern almost all aspects of the operations of the Company and the Bank. The
business of the Company is particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position of other financial
institutions. Such laws are subject to change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on the business and
prospects of the Company, but it could be material and adverse.
Recent high-profile events have resulted in additional regulations. For example, Sarbanes-Oxley
limits the types of non-audit services our outside auditors may provide to the company in order to
preserve the independence of our auditors. If our auditors were found not to be independent under
SEC rules, we could be required to engage new auditors and file new financial statements and audit
reports with the SEC.
The Patriot Act which was enacted in the wake of the September 2001 terrorist attacks, requires the
Company to implement new or revised policies and procedures related to anti-money laundering,
compliance, suspicious activities, currency transaction reports and due diligence on customers. The
Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in
combating money laundering in determining whether to approve a proposed bank acquisition.
The American Recovery and Reinvestment Act of 2009 includes extensive new restrictions on the
Companys ability to pay retention awards, bonuses and other incentive compensation during the
period in which the Company has any outstanding obligation arising from financial assistance
provided to the Company under the TARP. Many of the restrictions are not limited to senior
executives and cover other employees whose contributions to revenue and performance can be
significant. The limitations may adversely affect the Companys ability to recruit and retain key
employees.
As long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and
repurchases or redemptions relating to our common stock are prohibited until all accrued and unpaid
dividends are paid on that preferred stock, subject to certain exceptions. In addition, until the
U.S. Treasury ceases to own any of our securities sold under the TARP Capital Purchase Program, the
compensation arrangements for the Companys senior executive officers must comply with the U.S.
Emergency Economic Stabilization Act of 2008 (EESA) and the rules and regulations thereunder. EESA
requires the following provisions with respect to our Chief Executive Officer: limits on
compensation to exclude incentives to take unnecessary and excessive risks; a claw-back with
respect to incentive compensation based on statements of earnings, gains or other criteria that are
later proven to be materially inaccurate; and a prohibition on golden parachute payments. EESA also
limits the deductibility of compensation earned by our senior executive officers to $500,000 per
year.
The American Recovery and Reinvestment Act of 2009 (Stimulus Act), which was signed into law on
February 17, 2009, imposes extensive new restrictions on participants in the TARP Capital Purchase
Program. The new restrictions include additional limits on executive compensation such as
prohibiting the payment or accrual of any bonus, retention award or incentive compensation to the
Companys Chief Executive Officer except for the payment of long-term restricted stock; prohibiting
any compensation plan that would encourage the manipulation of earnings; and extending the
claw-back required by EESA to the top 5 most highly compensated employees. The Stimulus Act also
requires compliance with new corporate governance standards including an annual say on pay
shareholder vote, the adoption of policies regarding excessive or luxury expenditures, and a
certification by our Chief Executive Officer and Chief Financial Officer that we have complied with
the standards in the Stimulus Act. The full impact of the Stimulus Act is not yet certain because
it calls for additional regulatory action. The Company will continue to monitor the effect of the
Stimulus Act and the anticipated regulations.
From time to time, Congress considers legislation that could significantly change our regulatory
environment, potentially increasing the cost of doing business, limiting activities or affecting
the competitive balance among banks, savings associations, credit unions and other financial
institutions.
Certain Ownership Restrictions under California and Federal Law
Federal law prohibits a person or group of persons acting in concert from acquiring control of
a bank holding company unless the FRB has been given 60 days prior written notice of such proposed
acquisition and within that time period the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days, the period during which such a disapproval may
be issued. An acquisition may be made before the expiration of the disapproval period if the FRB
issues written notice of its intent not to disapprove the action.
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Under a rebuttal presumption established by the FRB, the acquisition of more than 10% of a class of
voting stock of a bank with a class of securities registered under Section 12 of the Exchange Act
(such as the common stock), would, under the circumstances set forth in the presumption, constitute
the acquisition of control. In addition, any company would be required to obtain the approval of
the FRB under the BHCA, before acquiring 25% (5% in the case of an acquirer that is, or is deemed
to be, a bank holding company) or more of the outstanding shares of the Companys common stock, or
such lesser number of shares as constitute control. See Regulation and Supervision of Bank
Holding Companies in the Companys 2008 Annual Report on Form 10-K.
Under the California Financial Code, no person shall, directly or indirectly, acquire control of a
California licensed bank or a bank holding company unless the Commissioner has approved such
acquisition of control. A person would be deemed to have acquired control of the Company and the
Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of the Company or (ii) to direct or cause the direction of the management
and policies of the Company. For purposes of this law, a person who directly or indirectly owns or
controls 10% or more of the common stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company.
Negative Publicity could Damage our Reputation
Reputation risk, or the risk to the Companys earnings and capital from negative public opinion, is
inherent in the financial services business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse legal and regulatory consequences.
Negative public opinion could result from actual or alleged conduct in any number of activities,
including lending practices, corporate governance, acquisitions, and from actions taken by
government regulators and community organizations in response to that conduct.
Environmental Risks
The Company, in its ordinary course of business, acquires real property securing loans that are in
default, and there is a risk that hazardous substance or waste, contaminants or pollutants could
exist on such properties. The Company may be required to remove or remediate such substances from
the affected properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured by such
properties. Furthermore, the Company may not have adequate remedies against the prior owners or
other responsible parties to recover its costs. Finally, the Company may find it difficult or
impossible to sell the affected properties either before or following any such removal. In
addition, the Company may be considered liable for environmental liabilities concerning its
borrowers properties, if, among other things, it participates in the management of its borrowers
operations. The occurrence of such an event could have a material adverse effect on the Companys
business, financial condition, results of operations and cash flows.
Shares Eligible for Future Sale
As of March 31, 2009, the Company had 8,711,495 shares of Common Stock outstanding, of which
6,409,494 shares are eligible for sale in the public market without restriction and 2,302,001
shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of
1933, as amended (the Securities Act). Future sales of substantial amounts of the Companys
common stock, or the perception that such sales could occur, could have a material adverse effect
on the market price of the common stock. In addition, options to acquire 615,305 shares of the
issued and outstanding shares of common stock at exercise prices ranging from $5.42 to $11.59 have
been issued to directors and certain employees of the Company under the Companys 1998 Stock Option
Plan. No prediction can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the Companys common
stock.
Technology and Computer Systems
Advances and changes in technology can significantly affect the business and operations of the
Company. The Company faces many challenges including the increased demand for providing computer
access to bank accounts and the systems to perform banking transactions electronically. The
Companys ability to compete depends on its ability to continue to adapt its technology on a timely
and cost-effective basis to meet these requirements. In addition, the Companys business and
operations are susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to cause disruptions or
failures of the Companys data processing systems.
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Company Stock Price may be volatile due to Other Factors
The Companys stock price can fluctuate widely in response to a variety of factors, in addition to
those described above, including:
|
|
|
General business and economic conditions; |
|
|
|
|
Recommendations by securities analysts; |
|
|
|
|
New technologies introduced or services offered by our competitors; |
|
|
|
|
News reports relating to trends, concerns and other issues in the financial services industry; |
|
|
|
|
Natural disasters; and |
|
|
|
|
Geopolitical conditions, such as acts or threats of terrorism or military conflicts. |
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Executive Overview
Our Company was established to make a profitable return while serving the financial needs of the
communities of our markets. We are in the financial services business, and no line of financial
services is beyond our charter as long as it serves the needs of businesses and professionals in
our communities. The mission of our Company is to provide its stockholders with a safe, profitable
return on their investment, over the long term. Management will attempt to minimize risk to our
stockholders by making prudent business decisions, will maintain adequate levels of capital and
reserves, and will maintain effective communications with stockholders. Our Companys most valuable
asset is its customers. We will consider their needs first when we design our products and
services. The high-quality customer experience is an important mission of our Company, and how well
we accomplish this mission will have a direct influence on our profitability.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. The flexibility
provided by the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and products that can be
delivered to our customers efficiently and profitably. Producing quality returns is, as always, a
top priority.
The Companys long term success rests on the shoulders of the leadership team to effectively work
to enhance the performance of the Company. As a financial services company, we are in the business
of taking risk. Whether we are successful depends largely upon whether we take the right risks and
get paid appropriately for the risks we take. Our governance structure enables us to manage all
major aspects of the Companys business effectively through an integrated process that includes
financial, strategic, risk and leadership planning.
We define risks to include not only credit, market and liquidity risk the traditional concerns
for financial institutions but also operational risks, including risks related to systems,
processes or external events, as well as legal, regulatory and reputation risks.
Our management processes, structures and policies help to ensure compliance with laws and
regulations and provide clear lines for decision-making and accountability. Results are important,
but equally important is how we achieve those results. Our core values and commitment to high
ethical standards is material to sustaining public trust and confidence in our Company. For
additional information concerning risks and uncertainties related to the Company and its operations
please refer to the Companys Annual Report on Form 10-K for the year ended December 31, 2008,
under the heading Risk Management.
Sources of Income
The Company derives its income from two principal sources: (i) net interest income, which is the
difference between the interest income it receives on interest-earning assets and the interest
expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on
deposit services, income from SBA lending, electronic-based cash management services, mortgage
brokerage fee income and merchant credit card processing services. The income of the Bank depends
to a great extent on net interest income. These interest rate factors are highly sensitive to many
factors, which are beyond the Companys control, including general economic conditions, inflation,
recession, and the policies of various governmental and regulatory agencies, in particular, the
Federal Reserve Board. Because of the Banks predisposition to variable rate pricing and
non-interest bearing demand deposit accounts, the Bank is considered asset sensitive. As a result,
the Company is adversely affected by declining interest rates.
27
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Profitability Ratios |
|
|
|
|
|
|
|
|
Net Interest Income to Average Assets |
|
|
3.33 |
% |
|
|
3.49 |
% |
Net Income to Average Equity |
|
|
8.05 |
% |
|
|
10.54 |
% |
|
|
|
|
|
|
|
|
|
Efficiency Ratio1 |
|
|
54.48 |
% |
|
|
59.57 |
% |
|
|
|
|
|
|
|
|
|
Capital Ratios |
|
|
|
|
|
|
|
|
Leverage Ratio |
|
|
9.53 |
% |
|
|
9.15 |
% |
Risk Based Capital |
|
$ |
81,193,549 |
|
|
$ |
63,081,047 |
|
Tier 1 Capital |
|
|
11.44 |
% |
|
|
9.90 |
% |
Total Capital |
|
|
12.69 |
% |
|
|
10.98 |
% |
|
|
|
|
|
|
|
|
|
Per Common Share Data |
|
|
|
|
|
|
|
|
Dividend Payout Ratio |
|
|
41.09 |
% |
|
|
56.92 |
% |
Book Value |
|
$ |
7.28 |
|
|
$ |
5.33 |
|
Market Price |
|
$ |
5.04 |
|
|
$ |
8.00 |
|
High |
|
$ |
5.05 |
|
|
$ |
8.59 |
|
Low |
|
$ |
3.90 |
|
|
$ |
6.00 |
|
|
|
Financial Highlights Results of Operations
Balance Sheet
Our Company believes that 2009 and beyond may be redefining the financial services industry. During
2009 and 2008, the focus of the Company has been on strengthening the balance sheet, by providing
appropriate reserves, strong capital, and significant liquidity. Our strength and security continue
to compare favorably with our industry peers.
Our balance sheet decreased by $8.9 million or 1.15% over the year end 2008. As a commercial bank,
this is anticipated as customer funds are paid toward corporate taxes during the period. Loans, the
single largest asset of the Company grew by $6.2 million over year end and $18.8 million over the
same period a year ago.
Deposit balances decreased by $7.3 million over the year end 2008 for the same reasons as above.
Deposits have increased $63.6 million over the same period a year ago, and can be attributed to the
Buenaventura office opened during 2008.
Management has taken aggressive actions in provisioning for loan losses, charging down impairments
and keeping an attentive eye on expenses.
The Commercial and Industrial portfolio is performing well given the current market conditions
while real estate development properties and construction related lending remains under stress. Our
loan portfolio will likely continue to be influenced by weakness in real estate values, the effects
of higher energy prices and higher unemployment levels. Net charge offs were $2.1 million at March
31, 2009 compared to net charge offs of $3.0 million for the same period a year ago. The
charge-offs were centered in real estate development loans. One development property was taken into
other real estate owned (OREO) during 2008. OREO was $2.9 million at March 31, 2009 and zero for
the same period a year ago. We are committed to working with our customers to find potential
solutions when our customers experience financial difficulties.
Elevated provisions are associated with an aggressive reclassification of loans and managements
aggressive stance in recognizing impaired loans. Our Company has provided $1.4 million in
provisions for loan and lease losses for the three months ended March 31, 2009 compared to
$600,000 for the same period a year ago. The Companys allowance for loan losses was 1.45% of total
loans at March 31, 2009 compared to 1.14% of total loans for the same period a year ago.
Our Company continues to maintain a relatively low-risk, liquid and valuable available-for-sale
investment portfolio.
|
|
|
1 |
|
The efficiency ratio is calculated by dividing
non-interest expense by the sum of net interest income and noninterest income.
The efficiency ratio measures how the Company spends in order to generate each
dollar of net revenue. |
28
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The capital ratios of Bank of Commerce continue to be above well-capitalized guidelines established
by regulatory agencies. With our strong capital position, we find significantly more opportunities
now for acquisitions, portfolio purchases and attractive loan and asset purchases.
On October 14, 2008, the FDIC expanded deposit insurance coverage with the new Transaction Account
Guarantee Program under its Temporary Liquidity Guarantee Program. The new program provides
customers of financial institutions that choose to participate in it full FDIC insurance for all
deposit balances in noninterest-bearing transaction deposit accounts through December 31, 2009.
Bank of Commerce has opted to participate in this program to provide an additional level of
security to our customers.
Income Statement
Net income for the first quarter of 2009 totaled $1,270,000 an increase of 3.34% from the
$1,229,000 reported for the same quarterly period of 2008. On the same basis, diluted earnings per
common share for the first quarter of 2009 was $0.12, compared to $0.14 for the same period of
2008, a decrease of 14.3%. Return on average assets (ROA) and return on average equity (ROE) for
the first quarter of 2009 were 0.66% and 8.05%, respectively, compared with 0.79% and 10.54%,
respectively, for the first quarter of 2008.
Net Interest Income and Net Interest Margin
Net interest income is the primary source of the Companys income. Net interest income represents
the excess of interest and fees earned on interest-earning assets (loans, securities and Federal
Funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net interest income for the
quarter ended March 31, 2009 was $6.4 million compared with $5.4 million for the same period in
2008, an increase of 18.1%.
Average earning assets for the three-months ended March 31, 2009 increased $134.7 million or 22.9%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $20.3 million or 4.0% on average compared with the prior year period.
During the fourth quarter 2008, the Company used low cost Federal Home Loan Bank borrowings to
purchase $50.0 million in investment securities. Average securities including federal funds sold
increased $114.4 million over the same period a year ago. The yield on earning assets decreased to
5.37% for the three-month period ended March 31, 2009 compared to 6.80% for the same period a year
ago.
The decrease in average earning asset yields is primarily due to multiple interest rate drops in
the loan portfolio during the period.
Average deposits and borrowings increased by $108.0 million over the same period a year ago. The
yield on funding costs decreased to 2.13% compared with 3.58% for the same period a year ago.
Federal Home Loan Bank borrowings have seen a significant drop in costs as the Treasury continues
to provide liquidity to the financial services industries.
|
|
|
1 |
|
The efficiency ratio is noninterest expense divided by total revenue (net interest income and
noninterest income) |
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity
The objective of liquidity management is to ensure that the Company can efficiently meet the
borrowing needs of our customers, withdrawals of our depositors and other cash commitments under
both normal operating conditions and under unforeseen and unpredictable circumstances of industry
or market stress.
The Asset Liability Management Committee (ALCO) establishes and monitors liquidity guidelines
that require sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid
resources of cash and due from banks and federal funds sold, asset liquidity is supported by debt
securities in the available for sale security portfolio and wholesale lines of credit with the
Federal Home Loan Bank and borrowing lines with other financial institutions. Customer core
deposits have historically provided the Company with a source of relatively stable and low-cost
funds.
The Companys consolidated liquidity position remains adequate to meet short-term and long-term
future contingencies. At March 31, 2009, the Company had overnight investments of $95.6 million,
available lines of credit at the Federal Home Loan bank of approximately $36.9 million, and two
federal funds borrowing line with correspondent banks of $25.0 million.
Capital Management
The Company has an active program for managing stockholder capital. Capital is used to fund organic
growth, acquisitions, pay dividends and repurchase shares. The objective of effective capital
management is to produce above market long-term returns by using capital when returns are perceived
to be high and issuing capital when costs are perceived to be low.
Periodically, the Board of Directors authorizes the Company to repurchase shares. Share repurchase
announcements are published in press releases and SEC 8-K filings. Typically we do not give any
public notice before repurchasing shares. Various factors determine the amount and timing of our
share repurchases, including our capital requirements, market conditions and legal considerations.
These factors can change at any time and there can be no assurance as to the number of shares
repurchased or the timing of the repurchases.
Our policy has been to repurchase shares under the safe harbor conditions of Rule 10b-18 of the
Exchange Act including a limitation on the daily volume of repurchases. The Companys potential
sources of capital include retained earnings, common and preferred stock issuance and issuance of
subordinated debt and trust notes.
The Company and bank are subject to various regulatory capital adequacy requirements as prescribed
by the Federal Reserve Bank. Risk-based capital guidelines establish a risk-adjusted ratio relating
capital to difference categories of assets and off-balance sheet exposures.
As of March 31, 2009, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the following table. There are no conditions or events since that
notification that management believes have changed the Banks category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
March 31, 2009 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
73,242,341 |
|
|
|
9.50 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
73,242,341 |
|
|
|
11.45 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Total Risk-Based |
|
|
81,238,930 |
|
|
|
12.70 |
% |
|
|
n/a |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
73,196,960 |
|
|
|
9.53 |
% |
|
|
5.0 |
% |
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
73,196,960 |
|
|
|
11.44 |
% |
|
|
6.0 |
% |
|
|
4.0 |
% |
Total Risk-Based |
|
|
81,193,549 |
|
|
|
12.69 |
% |
|
|
10.00 |
% |
|
|
8.0 |
% |
|
|
30
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Short and Long Term Borrowings
The Company actively uses Federal Home Loan Bank (FHLB) advances as a source of wholesale funding
to support growth strategies as well as to provide liquidity. At March 31, 2009, the Companys FHLB
advances were of fixed term borrowings without call or put option features.
At March 31, 2009, the Bank had $120 million in FHLB term advances outstanding at an average rate
of 1.92% compared to $80.5 million at an average rate of 3.60% at March 31, 2008.
Provision for Loan and Lease Losses
The Allowance for Loan and Lease Losses, which consists of the allowance for loan losses, is
managements estimate of credit losses inherent in the loan portfolio at the balance sheet date.
The Company has established a process using several analytical tools and benchmarks, to calculate a
range of probable outcomes and determine the adequacy of the allowance. No single statistic or
measurement determines the adequacy of the allowance. Loan recoveries and the provision for credit
losses increase the allowance, while loan charge-offs decrease the allowance.
The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer,
Sacramento and Tehama counties, in California, and the location of the four full service offices of
the Bank. Although the Company has a diversified loan portfolio, a significant portion of its
customers ability to repay the loans is dependent upon the professional services and investor
commercial real estate sectors. Generally, the loans are secured by real estate or other assets
and are expected to be repaid from cash flows of the borrowers business or cash flows from real
estate investments.
The Companys exposure to credit loss, if any, is the difference between the fair value of the
collateral, and the outstanding balance of the loan. At March 31, 2009 and December 31, 2008, the
Company had pledged $95,470,373 and $96,721,113, respectively, in loans as available collateral for
Federal Home Loan Bank borrowings. In the ordinary course of business, the Company enters various
types of transactions, which involve financial instruments with off-balance sheet risk. These
instruments include commitments to extend credit and stand-by letters of credit, which are not
reflected in the consolidated balance sheets. These transactions may involve, to varying degrees,
credit and interest rate risk more than the amount, if any recognized in the consolidated balance
sheets. Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans. An allowance for unfunded loan commitments and letters of
credit is determined using estimates of the probability of funding. This reserve is carried as a
liability on the consolidated balance sheet.
The allowance for loan and lease losses is the Companys most significant management accounting
estimate. The Company follows a methodology for calculating the appropriate level for the
allowance for loan and lease losses as discussed under Asset Quality and Allowance for Loan and
Lease Losses (ALLL) in this document. The entire allowance is used to absorb credit losses
inherent in the loan portfolio. The allowance includes an amount for imprecision or uncertainty to
incorporate a range of probable outcomes inherent in estimates used for the allowance, which may
change from period to period. This portion of the total allowance is the results of the Companys
judgment of risks inherent in the portfolio, economic uncertainties, historical loss experience and
other subjective factors, including industry trends. The methodology used is refined to calculate a
portion of the allowance for each portfolio type to reflect our view of the risk in these
portfolios.
Changes in the estimate of the allowance for loan and lease losses and the related provision
expense can materially affect net income. Determining the allowance for loan and lease losses
requires management to make forecasts of losses that are highly uncertain and require a high degree
of judgment.
Provision for loan and lease losses of $1,425,000 were provided for the three-months ended March
31, 2009 compared with $3,620,000 for the three-months ended December 31, 2008 and $600,000 for the
three-months ended March 31, 2008. The Companys allowance for loan and lease losses was 1.45% of
total loans at March 31, 2009, 1.60% at December 31, 2008 and 1.14% at March 31, 2008, while its
ratio of non-performing assets to total assets was 2.94% at March 31, 2009, 2.98% at December 31,
2008, and 2.45% at March 31, 2008. Two commercial credits totaling $1.6 million were charged off
during the first quarter 2009.
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Factors that may affect future results
As a financial services company, our earnings are significantly affected by general business and
economic conditions. These conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, and the strength of the
United States economy and local economies in which we operate. For example, an economic downturn,
increase in unemployment, or other events that negatively impact household and/or corporate incomes
could decrease the demand for the Companys loan and non-loan products and services and increase
the number of customers who fail to pay interest or principal on their loans. Geopolitical
conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United
States or other governments in response to acts or threats of terrorism and our military conflicts
including the aftermath of the war with Iraq, could impact business conditions in the United
States.
The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part our cost of funds for lending and investing
and the return we earn on those loans and investments, both of which impact our net interest
margin, and can materially affect the value of financial instruments we hold. Its policies can also
affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in
Federal Reserve Board policies are beyond our control and hard to predict or anticipate.
We operate in a highly competitive industry that could become even more competitive because of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can now merge creating a financial holding company that can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and some have lower cost structures.
The holding company, subsidiary bank and non-bank subsidiary are heavily regulated at the federal
and state levels. This regulation is to protect depositors, federal deposit insurance funds and the
banking system as a whole, not investors. Congress and state legislatures and federal and state
regulatory agencies continually review banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies including changes in interpretation and
implementation could affect us in substantial and unpredictable ways including limiting the types
of financial services and products we may offer. Our failure to comply with the laws, regulations
or policies could result in sanctions by regulatory agencies and damage our reputation. For more
information, refer to the Supervision and Regulation section in the Companys 2008 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 2008 Annual Report on Form 10-K.
Critical Accounting Policies
The Securities and Exchange Commission (SEC) issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require application of
managements most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in future
periods.
Our accounting policies are integral to understanding the results reported. Accounting policies are
described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Companys
2008 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2
to the Consolidated Financial Statements contained in the Companys 2008 Annual Report on Form 10-K
require management to make difficult, subjective or complex judgments or estimates.
32
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Preparation of financial statements
The preparation of these financial statements requires management to make estimates and judgments
that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis,
management evaluates the estimates used. Estimates are based upon historical experience, current
economic conditions and other factors that management considers reasonable under the circumstances.
Use of estimates
These estimates result in judgments regarding the carrying values of assets and liabilities when
these values are not readily available from other sources, as well as assessing and identifying the
accounting treatments of contingencies and commitments. Actual results may differ from these
estimates under different assumptions or conditions.
Accounting Principles Generally Accepted in the United States of America
The Companys financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The Companys significant accounting policies
are presented in Note 2 to the Consolidated Financial Statements contained in the Companys 2008
Annual Report on Form 10-K.
The Company follows accounting policies typical to the commercial banking industry and in
compliance with various regulations and guidelines as established by the Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA) and the
Banks primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). The following
is a brief description of the Companys current accounting policies involving significant
management judgments.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the fair value of these assets, it is possible that changes in risks in the near term
could have an adverse material impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of when an other-than-temporary impairment has occurred. The ALCO Committee reviews the
investment portfolio on at least a quarterly basis, with ongoing analysis as new information
becomes available. Any decline that is determined to be other-than-temporary is recorded as an
other-than-temporary impairment (OTTI) loss in the results of operations in the period in which
the determination occurred.
An investment is impaired if the fair value of the investment is less than its cost adjusted
for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment
is impaired, the impairment is evaluated to determine whether it is temporary or
other-than-temporary.
Significant judgment is required in the determination of whether an OTTI has occurred for an
investment. The Company follows a consistent and systematic process for determining and recording
an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process.
The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information. The ALCO Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which the fair value has
been less than amortized cost, (b) the financial condition and near term prospects of the issuer,
(c) the intent and ability of the Company to retain its investment for a period of time sufficient
to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and
principal payments and (e) general market conditions and industry or sector specific outlook.
For securities considered to be OTTI, the security is adjusted to fair value and the resulting
losses are recognized in Realized investment gains (losses) on the Consolidated Statement of
Income.
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is the Companys most significant management accounting
estimate. The allowance for loan and lease losses is managements best estimate of the probable
losses that may be sustained in our loan portfolio. The allowance is based on two basic principles
of accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of
occurring and estimable and (2) SFAS No. 114, which requires that losses on impaired loans be
accrued based on the differences between that value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan balance.
The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to Statement of Financial Accounting Standards
(SFAS) Statement No. 5, Accounting for Contingencies or SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Managements estimate of each SFAS No. 5 component is based on certain
observable data that management believes is the most reflective of the underlying credit losses
being estimated. Changes in the amount of each component of the allowance for loan losses are
directionally consistent with changes in the observable data, taking into account the interaction
of the SFAS No. 5 components over time.
An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys credit risk evaluation process, which includes credit risk grading individual,
commercial, construction, commercial real estate, and consumer loans. Loans are assigned credit
risk grades based on the Companys assessment of conditions that affect the borrowers ability to
meet its contractual obligations under the loan agreement.
That process includes reviewing borrowers current financial information, historical payment
experience, credit documentation, public information, and other information specific to each
individual borrower. Loans are reviewed on an annual or rotational basis and/or as management
become aware of information affecting the borrowers ability to fulfill its obligations. Credit
risk grades carry a dollar weighted risk percentage.
For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to
measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, we measure
impairment based on the present value of expected future principal and interest cash flows
discounted at the loans effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loans observable market price or the fair value of collateral,
if the loan is collateral dependent. When developing the estimate of future cash flows for a loan,
we consider all available information reflecting past events and current conditions, including the
effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan
commitments and letters of credit is determined using estimates of the probability of funding. This
reserve is carried as a liability on the consolidated balance sheet.
Revenue recognition
The Companys primary source of revenue is interest income. Interest income is recorded on an
accrual basis. Note 2 to the Consolidated Financial Statements contained in the Companys 2008
Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of
interest income is discontinued on an impaired loan.
Income Taxes
The Company files a consolidated federal and state income tax return. The Company accounts for
income taxes under the asset and liability method. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using currently
enacted tax rates applied to such taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. If
future income should prove non-existent or less than the amount of deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and our net income will be
reduced. The Companys deferred tax assets are described further in Note 13 of the Notes to
Consolidated Financial Statements in the Companys 2008 Annual Report on Form 10-K.
34
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table presents the Companys daily average balance sheet information together with
interest income and yields earned on average interest-bearing assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily balances.
Table 1.
Average Balances, Interest Income/Expense and Yields/Rates Paid
(Unaudited, Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
|
|
|
|
March 31, 2009 |
|
|
|
|
March 31, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans2 |
|
$ |
524,367 |
|
|
$ |
8,049 |
|
|
|
6.14 |
% |
|
$ |
504,091 |
|
|
$ |
9,131 |
|
|
|
7.25 |
% |
Tax-exempt Securities3 |
|
|
29,304 |
|
|
|
296 |
|
|
|
4.04 |
% |
|
|
27,901 |
|
|
|
274 |
|
|
|
3.93 |
% |
US Government Securities |
|
|
11,316 |
|
|
|
127 |
|
|
|
4.49 |
% |
|
|
15,272 |
|
|
|
142 |
|
|
|
3.72 |
% |
Mortgage backed Securities |
|
|
80,263 |
|
|
|
1,065 |
|
|
|
5.31 |
% |
|
|
29,055 |
|
|
|
339 |
|
|
|
4.67 |
% |
Federal Funds Sold |
|
|
38,222 |
|
|
|
25 |
|
|
|
0.26 |
% |
|
|
8,014 |
|
|
|
58 |
|
|
|
2.89 |
% |
Other Securities |
|
|
37,557 |
|
|
|
117 |
|
|
|
1.25 |
% |
|
|
2,000 |
|
|
|
22 |
|
|
|
4.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
$ |
721,029 |
|
|
$ |
9,679 |
|
|
|
5.37 |
% |
|
$ |
586,333 |
|
|
$ |
9,966 |
|
|
|
6.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & Due From Banks |
|
$ |
17,614 |
|
|
|
|
|
|
|
|
|
|
$ |
12,708 |
|
|
|
|
|
|
|
|
|
Bank Premises |
|
|
10,623 |
|
|
|
|
|
|
|
|
|
|
|
11,303 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
( 8,402 |
) |
|
|
|
|
|
|
|
|
|
|
(8,441 |
) |
|
|
|
|
|
|
|
|
Other Assets |
|
|
27,814 |
|
|
|
|
|
|
|
|
|
|
|
20,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
768,678 |
|
|
|
|
|
|
|
|
|
|
$ |
622,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Interest Bearing |
|
$ |
137,608 |
|
|
$ |
307 |
|
|
|
0.89 |
% |
|
$ |
141,709 |
|
|
$ |
750 |
|
|
|
2.12 |
% |
Savings Deposits |
|
|
65,803 |
|
|
|
281 |
|
|
|
1.71 |
% |
|
|
41,195 |
|
|
|
290 |
|
|
|
2.82 |
% |
Certificates of Deposit |
|
|
265,296 |
|
|
|
1,881 |
|
|
|
2.84 |
% |
|
|
216,051 |
|
|
|
2,376 |
|
|
|
4.40 |
% |
Repurchase Agreements |
|
|
11,940 |
|
|
|
14 |
|
|
|
0.47 |
% |
|
|
13,052 |
|
|
|
84 |
|
|
|
2.57 |
% |
FHLB Borrowings |
|
|
120,000 |
|
|
|
581 |
|
|
|
1.94 |
% |
|
|
80,569 |
|
|
|
731 |
|
|
|
3.63 |
% |
Trust Preferred Borrowings |
|
|
15,000 |
|
|
|
215 |
|
|
|
5.73 |
% |
|
|
15,000 |
|
|
|
315 |
|
|
|
8.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615,647 |
|
|
$ |
3,279 |
|
|
|
2.13 |
% |
|
|
507,576 |
|
|
$ |
4,546 |
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand |
|
|
74,637 |
|
|
|
|
|
|
|
|
|
|
|
66,825 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
5,219 |
|
|
|
|
|
|
|
|
|
|
|
995 |
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
73,175 |
|
|
|
|
|
|
|
|
|
|
|
46,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and Stockholders Equity |
|
$ |
768,678 |
|
|
|
|
|
|
|
|
|
|
$ |
622,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net Interest Margin |
|
|
|
|
|
$ |
6,400 |
|
|
|
3.55 |
% |
|
|
|
|
|
$ |
5,420 |
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes FASB No. 91 fee expense of approximately $62,000 and FASB
No. 91 fee income of approximately $36,000 for the period ended March 31, 2009 and 2008,
respectively.
|
|
|
2 |
|
Average non-performing loans of $19.8 million are
included |
|
3 |
|
The yield on tax-exempt securities has not been
adjusted to a tax-equivalent yield basis. |
35
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following tables set forth changes in interest income and expense for each major category of
earning assets and interest-bearing liabilities, and the amount of change attributable to volume
and rate changes for the periods indicated. Changes attributable to rate/volume have been
allocated to volume changes.
Table 2
Analysis of Changes in Net Interest Income and Interest
Expense (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
Over |
|
|
March 31, 2008 |
|
(Dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
Increase(Decrease) In Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Loans |
|
$ |
311 |
|
|
$ |
(1,393 |
) |
|
|
(1,082 |
) |
Tax-exempt Securities |
|
|
14 |
|
|
|
8 |
|
|
|
22 |
|
US Government Securities |
|
|
(44 |
) |
|
|
29 |
|
|
|
(15 |
) |
Mortgage Back Securities |
|
|
679 |
|
|
|
47 |
|
|
|
726 |
|
Federal Funds Sold |
|
|
20 |
|
|
|
(53 |
) |
|
|
(33 |
) |
Other Securities |
|
|
111 |
|
|
|
(16 |
) |
|
|
95 |
|
|
|
|
Total Increase (Decrease) |
|
$ |
1,091 |
|
|
$ |
(1,378 |
) |
|
$ |
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase(Decrease) In Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Demand |
|
$ |
(9 |
) |
|
$ |
(434 |
) |
|
$ |
(443 |
) |
Savings Deposits |
|
|
105 |
|
|
|
(114 |
) |
|
|
(9 |
) |
Certificates of Deposit |
|
|
349 |
|
|
|
(844 |
) |
|
|
(495 |
) |
Repurchase Agreements |
|
|
(1 |
) |
|
|
(69 |
) |
|
|
(70 |
) |
FHLB Borrowings |
|
|
191 |
|
|
|
(341 |
) |
|
|
(150 |
) |
Trust Preferred Borrowings |
|
|
0 |
|
|
|
(100 |
) |
|
|
(100 |
) |
|
|
|
Total Increase (Decrease) |
|
$ |
635 |
|
|
$ |
(1902 |
) |
|
$ |
( 1,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase |
|
$ |
456 |
|
|
$ |
524 |
|
|
$ |
980 |
|
|
|
|
Average earning assets for the three-months ended March 31, 2009 increased $134.7 million or 22.9%
compared with the same period in the prior year. Average loans, the largest component of average
earning assets, increased $20.3 million or 4.0% on average compared with the prior year period.
During the fourth quarter 2008, the Company used low cost Federal Home Loan Bank borrowings to
purchase $50.0 million in investment securities. Average securities including federal funds sold
increased $114.4 million over the same period a year ago. The yield on earning assets decreased to
5.37% for the three-month period ended March 31, 2009 compared to 6.80% for the same period a year
ago.
The decrease in average earning asset yields is primarily due to multiple interest rate drops in
the loan portfolio during the period.
Average deposits and borrowings increased by $108.0 million over the same period a year ago. The
yield on funding costs decreased to 2.13% compared with 3.58% for the same period a year ago.
Federal Home Loan Bank borrowings have seen a significant drop in costs as the Treasury continues
to provide liquidity to the financial services industries.
36
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Companys non-interest income consists of service charges on deposit accounts, other fee
income, processing fees for credit card payments and gains or losses on security sales. The
following table sets forth a summary of noninterest income for the periods indicated.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(Dollars in thousands) |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
Noninterest income |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
92 |
|
|
$ |
62 |
|
Payroll and benefit processing fees |
|
|
134 |
|
|
|
129 |
|
Earnings on cash surrender value Bank owned
life insurance |
|
|
86 |
|
|
|
83 |
|
Net gain on sale of securities available-for-sale |
|
|
404 |
|
|
|
242 |
|
Net loss on sale of derivative swap |
|
|
|
|
|
|
(225 |
) |
Merchant credit card service income, net |
|
|
74 |
|
|
|
83 |
|
Mortgage brokerage fee income |
|
|
|
|
|
|
10 |
|
Other income |
|
|
75 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
865 |
|
|
$ |
565 |
|
|
|
Noninterest income increased $300,000 or 53.1% for the quarter ended March 31, 2009 over March 31,
2008. The increase is primarily related to gains on available-for-sale investment securities that
were sold during the period. All other items compare favorably to the prior period.
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(Dollars in thousands) |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
$ |
2,127 |
|
|
$ |
1,949 |
|
Occupancy and equipment expense |
|
|
572 |
|
|
|
644 |
|
FDIC insurance premium |
|
|
273 |
|
|
|
58 |
|
Data processing fees |
|
|
111 |
|
|
|
78 |
|
Professional service fees |
|
|
159 |
|
|
|
118 |
|
Payroll processing fees |
|
|
34 |
|
|
|
33 |
|
Deferred compensation expense |
|
|
119 |
|
|
|
111 |
|
Stationery and supplies |
|
|
53 |
|
|
|
62 |
|
Postage |
|
|
81 |
|
|
|
34 |
|
Directors expense |
|
|
37 |
|
|
|
48 |
|
Other expenses |
|
|
394 |
|
|
|
430 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
3,960 |
|
|
$ |
3,565 |
|
|
|
Noninterest expense for the quarter ended March 31, 2009 was $3.9 million, an increase of $395,000
or 11.08% over the same period a year ago. The increase is primarily related to the increase in
FDIC insurance premium in anticipation of a 20 basis point special assessment during 2009. Salaries
and benefits have increased $178,000 or 9.13% related to increased costs to employee insurance
benefits during the period.
37
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates applied to such taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Companys effective tax rate varies with changes in the relative amounts of its non-taxable
income and non-deductible expenses. The decrease in the Companys tax provision is attributable to
increases in non-taxable income related to increases in the municipal security portfolio,
classification of enterprise zone qualified credits and California Affordable Housing project which
affords federal and state tax credits. The principal difference between statutory tax rates and the
Companys effective tax rate is the benefit derived from key life proceeds, investing in tax-exempt
securities and preferential state tax treatment for qualified enterprise zone loans.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Income Taxes |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
Tax provision |
|
$ |
610 |
|
|
$ |
591 |
|
Effective tax rate |
|
|
32.41 |
% |
|
|
32.5 |
% |
|
The Companys provision for income taxes includes both federal and state income taxes and reflects
the application of federal and state statutory rates to the Companys net income before
taxes. Increases and decreases in the provision for taxes reflect changes in the Companys net
income before tax, and takes into consideration strategies to increase tax exempt income and tax
credits.
The Company had a net deferred tax asset of $4.7 million at March 31, 2009. The Company does not
reasonably estimate that the deferred tax asset will change significantly within the next twelve
months. Deferred tax assets are recognized subject to management judgment that realization is more
likely than not. The Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income tax expense.
The Company files a consolidated federal and state income tax return. The Company determines
deferred income tax assets and liabilities using the balance sheet method. Under this method, the
net deferred tax asset or liability is based on the tax effects of the differences between book and
tax basis of assets and liabilities, and recognizes enacted changes in tax rates and laws.
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at March 31, 2009 consist of the following:
|
|
|
|
|
|
|
|
|
Deferred Tax Assets |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
State Franchise taxes |
|
$ |
(72,047 |
) |
|
$ |
186,193 |
|
Deferred compensation |
|
|
2,174,628 |
|
|
|
1,962,157 |
|
Loan loss reserves |
|
|
3,848,649 |
|
|
|
3,585,204 |
|
Other Comprehensive Income |
|
|
(108,560 |
) |
|
|
124,016 |
|
Other |
|
|
24,768 |
|
|
|
398,793 |
|
|
|
|
Total Deferred Tax Assets |
|
$ |
5,867,438 |
|
|
$ |
6,256,363 |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(1,128,350 |
) |
|
|
(180,882 |
) |
Deferred loan origination costs |
|
|
|
|
|
|
(452,281 |
) |
Deferred state taxes |
|
|
|
|
|
|
(413,227 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Liabilities |
|
|
(1,128,350 |
) |
|
|
(1,046,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Deferred Tax Asset |
|
$ |
4,739,088 |
|
|
$ |
5,209,973 |
|
|
38
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Asset Quality
The Company concentrates its lending activities primarily within El Dorado, Placer, Sacramento,
Shasta, and Tehama counties, California, and the location of the
Banks four full services
branches, specifically identified as Upstate California. The Company manages its credit risk
through diversification of its loan portfolio and the application of underwriting policies and
procedures and credit monitoring practices. Although the Company has a diversified loan portfolio,
a significant portion of its borrowers ability to repay the loans is dependent upon the
professional services, commercial real estate market and the residential real estate development
industry sectors. Generally, the loans are secured by real estate or other assets located in
California and are expected to be repaid from cash flows of the borrower or proceeds from the sale
of collateral. The Companys dependence on real estate increases the risk of loss in the loan
portfolio of the Company and its holdings of other real estate owned as economic conditions in
California continue to deteriorate in the future. Deterioration of the real estate market in
California has had an adverse effect on the Companys business, financial condition and results of
operations. The recent slowdown in residential development and construction markets has led to an
increase in nonperforming loans which has made it prudent to strengthen our reserve position at
this time. Management has taken cautious steps to ensure the proper funding of loan reserves.
Credit quality, expense control and the bottom line remain top focus. A number of larger
institutions have announced significant losses. These losses stemmed from securities collateralized
with sub-prime mortgages and other troubled assets. It is important to note that Redding Bank of
Commerce does not originate or hold sub-prime loans, nor do we hold collateralized debt obligations
or asset backed securities backed by sub-prime loans in our securities portfolio. However, as a
lending institution, we are not immune to the residential real estate slowdown.
The following table sets forth the amounts of loans outstanding by category as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Portfolio Loans |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Commercial and financial loans |
|
$ |
167,162 |
|
|
$ |
164,083 |
|
Real estate-construction loans |
|
|
73,155 |
|
|
|
84,218 |
|
Real estate-commercial |
|
|
229,361 |
|
|
|
217,914 |
|
Real estate-mortgage |
|
|
20,929 |
|
|
|
20,285 |
|
Real estate-other |
|
|
41,363 |
|
|
|
39,915 |
|
Installment |
|
|
155 |
|
|
|
145 |
|
Other loans |
|
|
856 |
|
|
|
902 |
|
Less: |
|
|
|
|
|
|
|
|
Net deferred loan costs (fees) |
|
|
(98 |
) |
|
|
(87 |
) |
Allowance for loan losses |
|
|
(7,701 |
) |
|
|
(8,429 |
) |
|
|
|
Total net loans |
|
$ |
525,182 |
|
|
$ |
518,946 |
|
|
The Companys practice is to place an asset on nonaccrual status when one of the following events
occur: (i) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well secured and in the process of collection). (ii) Management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past due and still accruing or
have been restructured. The portfolio mix reflects increases in commercial real estate and the
other real estate category. Construction and development loans have declined since December 31,
2008; and now represent 13.9% of total loans compared to 16.2% at December 31, 2008.
Non accrual and impaired loans are loans for which it is probable that the Bank will not be able to
collect all amounts due and payable. The Bank had outstanding balances of $19.6 and $20.2 in
impaired loans that had impairment allowances of $1,100,000 and $1,100,000 as of March 31, 2009 and
December 31, 2008, respectively.
Subsequent to March 31, 2009, the Company received a new appraisal related to two credits totaling
$3.5 million that are currently in nonaccrual status and considered impaired at March 31, 2009. The
two credits relate to loan participations wherein the Company is not the lead lender. The lead
lender ordered an updated appraisal for the collateral securing the two credits and forwarded it to
the Company in April 2009. As part of the Companys normal processes and controls related to the
review and evaluation of appraisals from non-bank approved appraisers, the Company will evaluate
the assumptions and other components used in the appraisal during the 2nd quarter of
2009. The results of this evaluation will be incorporated into the Companys FAS 114 analysis for
these credits during the 2nd quarter of 2009. The specific reserve for these credits is
$500,000 at March 31, 2009. This reserve was determined based on discounted cash flow analysis.
Management believes the $500,000 specific reserve for these credits is adequate and appropriate.
However, managements evaluation of the aforementioned appraisal and the related incorporation of
the appraisal into managements FAS 114 analysis could result in additional reserves being required
for these credits and additional provisions to the Allowance for Loan and Lease Losses during the
2nd quarter of 2009. On April 20, 2009 the Company sold $14.3 million in impaired loans
and booked a recovery of $227,000. Following the loan sale non performing assets were 1.08% of
total assets compared to 2.94% of total assets at March 31, 2009.
39
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Non performing assets |
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
Nonaccrual loans |
|
$ |
19,599 |
|
|
$ |
20,154 |
|
90 days past due and still accruing interest |
|
|
0 |
|
|
|
0 |
|
|
|
|
Total nonaccrual loans |
|
|
19,599 |
|
|
|
20,154 |
|
Other Real Estate Owned |
|
|
2,934 |
|
|
|
2,934 |
|
|
|
|
Total non performing assets |
|
$ |
22,533 |
|
|
$ |
23,088 |
|
|
The OREO is a single parcel of land located in the Companys Sacramento, California market. Prior
to foreclosure, the project was in the entitlement phase of development; the Company in
coordination with the other participating banks will continue the entitlement processes in
conjunction with establishing a marketing plan to ultimately dispose of the project. A recent
valuation of the property fully supports any additional improvement costs until such time the
property is sold. The Companys foreclosed assets are carried at the lower of cost or fair value,
less estimated costs to dispose of the properties.
Material future additions to the allowance for loan losses may be necessary if material adverse
economic conditions persist and the performance of the loan portfolio of the Company deteriorates.
Future additions to the Companys allowance for loan and lease losses may also be required to
reflect market changes and other factors affecting the Companys real estate and real estate
related portfolios. Moreover, the FDIC and the DFI, as an integral part of their examination
process, review the Companys allowance for loan and lease losses and the carrying value of its
assets. The Bank was most recently examined by the FDIC in this regard during the second quarter
of 2008. No adjustments were made to managements estimates for the allowance for loan and lease
losses during the examination.
Non-performing assets were 2.94% of total assets as of March 31, 2009 compared to 2.98% at December
31, 2008. On April 20, 2009 the Company sold $14.3 million in impaired loans and booked a recovery
of $227,000. Following the loan sale non-performing assets were 1.08% of total assets compared to
2.94% of total assets at March 31, 2009.
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is managements estimate of the amount of probable loan
losses in the loan portfolio. The Company determines the allowance for loan losses based on an
ongoing evaluation. The evaluation is inherently subjective because it requires material estimates,
including the amounts and timing of cash flows expected to be received on impaired loans. Those
estimates may be susceptible to significant change. The Company makes provisions to the ALLL on a
regular basis through charges to operations that are reflected in the Companys statements of
income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against
the allowance. Any recoveries of previously charged-off loans are credited back to the
allowance. There is no precise method of predicting specific losses or amounts that ultimately may
be charged-off on particular categories of the loan portfolio.
Material future additions to the allowance for loan losses might be necessary if material adverse
changes in economic conditions occur and the performance of the loan portfolio of the Company
deteriorates. Future additions to the Companys allowance for loan and lease losses may also be
required in order to reflect changes in the markets for real estate in which the Companys real
estate related portfolios are located and other factors which may result in adjustments which are
necessary to ensure that the Companys foreclosed assets are carried at the lower of cost or fair
value, less estimated costs to dispose of the properties.
Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically
review the Companys allowance for loan and lease losses and the carrying value of its assets. The
Bank was most recently examined by the FDIC in this regard during the second quarter of 2008. No
adjustments were made to managements estimates for the allowance for loan and lease losses during
the examination.
The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to SFAS No. 5, Accounting for Contingencies or
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Managements estimate of each SFAS
No. 5 Accounting for Contingencies component is based on certain observable data that management
believes is the most reflective of the underlying loan losses being estimated. Changes in the
amount of each component of the allowance for loan losses are directionally consistent with changes
in the observable data, taking into account the interaction of the SFAS No. 5 components over time.
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys loan risk evaluation process, which includes loan risk grading individual commercial,
construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades
based on the Companys assessment of conditions that affect the borrowers ability to meet its
contractual obligations under the loan agreement. That process includes reviewing borrowers
current financial information, historical payment experience, loan documentation, public
information, and other information specific to each individual borrower. Loans are reviewed on an
annual or rotational basis or as management become aware of information affecting the borrowers
ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage.
The ALLL is a general reserve available against the total loan portfolio. It is maintained without
any inter-allocation to the categories of the loan portfolio, and the entire allowance is available
to cover loan losses. While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of the examination process, periodically
review the Companys ALLL. Such agencies may require the Company to provide additions to the
allowance based on their judgment of information available to them at the time of their
examination. Accordingly, it is not possible to predict the effect future economic trends may have
on the level of the provision for loan losses in future periods. In addition to the ALLL, an
allowance for unfunded loan commitments and letters of credit is determined using estimates of the
probability of funding. This reserve is carried as a liability on the condensed consolidated
balance sheet.
The ALLL should not be interpreted as an indication that charge-offs in future periods will occur
in the stated amounts or proportions.
The following table summarizes the activity in the ALLL reserves for the periods indicated.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Allowance for Loan and Lease |
|
|
|
|
|
|
Losses |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
Beginning balance for Loan Losses |
|
$ |
8,429 |
|
|
$ |
8,233 |
|
Provision for Loan Losses |
|
|
1,425 |
|
|
|
600 |
|
Charge offs: |
|
|
|
|
|
|
|
|
Commercial |
|
|
(1,658 |
) |
|
|
(0 |
) |
Real Estate |
|
|
(497 |
) |
|
|
(3,020 |
) |
Other |
|
|
(0 |
) |
|
|
(0 |
) |
|
|
|
Total Charge offs |
|
|
(2,155 |
) |
|
|
(3,020 |
) |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Commercial |
|
|
1 |
|
|
|
0 |
|
Real Estate |
|
|
0 |
|
|
|
0 |
|
Other |
|
|
1 |
|
|
|
2 |
|
|
|
|
Total Recoveries |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
7,701 |
|
|
$ |
5,815 |
|
ALLL to total loans |
|
|
1.45 |
% |
|
|
1.14 |
% |
Net Charge offs to average loans |
|
|
0.04 |
% |
|
|
0.60 |
% |
|
The allowance for loan and lease losses totaled $7.7 million at March 31, 2009 compared to $8.4
million at December 31, 2008 and $5.8 million at March 31, 2008. The Companys allowance for loan
losses was 1.45% of total loans at March 31, 2009, 1.60% at December 31, 2008 and 1.14% at March
31, 2008. Provisions for loan losses for the quarter ended March 31, 2009 were $1,425,000 compared
to $600,000 for the same quarter in 2008.
The Company continues to be aggressive in identifying non-performing assets. Elevated provisions
are associated with a reclassification of loans, following completion of a total portfolio review,
and managements aggressive stance in recognizing impaired loans. Two commercial credits totaling
$1.6 million which were fully reserved were charged off during the first quarter 2009.
The Companys ratio of non-performing assets to total assets was 2.94% at March 31, 2009, compared
to 2.98% at December 31, 2008. The Companys OREO consists of one commercial development property
at $2.9 million.
41
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Dollars in thousands, except for per share data |
|
2009 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
8,049 |
|
|
$ |
8,028 |
|
|
$ |
8,252 |
|
|
$ |
8,171 |
|
|
$ |
9,131 |
|
Interest on tax-exempt securities |
|
|
296 |
|
|
|
313 |
|
|
|
308 |
|
|
|
302 |
|
|
|
274 |
|
Interest on U.S. government securities |
|
|
1,192 |
|
|
|
873 |
|
|
|
582 |
|
|
|
533 |
|
|
|
481 |
|
Interest on federal funds sold and
securities purchased under agreements to
resell |
|
|
25 |
|
|
|
39 |
|
|
|
116 |
|
|
|
90 |
|
|
|
58 |
|
Interest on other securities |
|
|
117 |
|
|
|
81 |
|
|
|
13 |
|
|
|
23 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
9,679 |
|
|
|
9,334 |
|
|
|
9,271 |
|
|
|
9,119 |
|
|
|
9,966 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
307 |
|
|
|
411 |
|
|
|
514 |
|
|
|
498 |
|
|
|
750 |
|
Interest on savings deposits |
|
|
281 |
|
|
|
383 |
|
|
|
543 |
|
|
|
360 |
|
|
|
290 |
|
Interest on certificates of deposit |
|
|
1,881 |
|
|
|
1,975 |
|
|
|
1,963 |
|
|
|
2,238 |
|
|
|
2,376 |
|
Securities sold under repurchase agreements |
|
|
14 |
|
|
|
22 |
|
|
|
32 |
|
|
|
35 |
|
|
|
84 |
|
Interest on FHLB and other borrowings |
|
|
581 |
|
|
|
638 |
|
|
|
662 |
|
|
|
781 |
|
|
|
731 |
|
Interest on junior subordinated debt
payable to unconsolidated subsidiary
grantor trust |
|
|
215 |
|
|
|
263 |
|
|
|
317 |
|
|
|
161 |
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
3,279 |
|
|
|
3,692 |
|
|
|
4,031 |
|
|
|
4,073 |
|
|
|
4,546 |
|
Net interest income |
|
|
6,400 |
|
|
|
5,642 |
|
|
|
5,240 |
|
|
|
5,046 |
|
|
|
5,420 |
|
Provision for loan and lease losses |
|
|
1,425 |
|
|
|
3,620 |
|
|
|
1,300 |
|
|
|
1,000 |
|
|
|
600 |
|
Net interest income after provision for
loan and lease losses |
|
|
4,975 |
|
|
|
2,022 |
|
|
|
3,940 |
|
|
|
4,046 |
|
|
|
4,820 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
92 |
|
|
|
108 |
|
|
|
91 |
|
|
|
50 |
|
|
|
62 |
|
Payroll and benefit processing fees |
|
|
134 |
|
|
|
118 |
|
|
|
107 |
|
|
|
99 |
|
|
|
129 |
|
Earnings on cash surrender value bank
owned life insurance |
|
|
86 |
|
|
|
86 |
|
|
|
86 |
|
|
|
85 |
|
|
|
83 |
|
Net gain on sale of securities
available-for-sale |
|
|
404 |
|
|
|
33 |
|
|
|
159 |
|
|
|
194 |
|
|
|
242 |
|
Net loss on sale of derivative swap
transaction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225 |
) |
Merchant credit card service income, net |
|
|
74 |
|
|
|
85 |
|
|
|
99 |
|
|
|
97 |
|
|
|
83 |
|
Mortgage brokerage fee income |
|
|
|
|
|
|
4 |
|
|
|
2 |
|
|
|
5 |
|
|
|
10 |
|
Other income |
|
|
75 |
|
|
|
156 |
|
|
|
207 |
|
|
|
187 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
865 |
|
|
|
590 |
|
|
|
751 |
|
|
|
717 |
|
|
|
565 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
2,127 |
|
|
|
2,001 |
|
|
|
1,909 |
|
|
|
1,892 |
|
|
|
1,949 |
|
Occupancy and equipment expense |
|
|
572 |
|
|
|
1,339 |
|
|
|
613 |
|
|
|
640 |
|
|
|
644 |
|
FDIC insurance premium |
|
|
273 |
|
|
|
99 |
|
|
|
113 |
|
|
|
113 |
|
|
|
58 |
|
Data processing fees |
|
|
111 |
|
|
|
52 |
|
|
|
81 |
|
|
|
65 |
|
|
|
78 |
|
Professional service fees |
|
|
159 |
|
|
|
270 |
|
|
|
146 |
|
|
|
133 |
|
|
|
118 |
|
Payroll processing fees |
|
|
34 |
|
|
|
30 |
|
|
|
26 |
|
|
|
27 |
|
|
|
33 |
|
Deferred compensation expense |
|
|
119 |
|
|
|
120 |
|
|
|
118 |
|
|
|
113 |
|
|
|
111 |
|
Stationery and supplies |
|
|
53 |
|
|
|
70 |
|
|
|
50 |
|
|
|
80 |
|
|
|
62 |
|
Postage |
|
|
81 |
|
|
|
30 |
|
|
|
32 |
|
|
|
38 |
|
|
|
34 |
|
Directors expense |
|
|
37 |
|
|
|
71 |
|
|
|
81 |
|
|
|
94 |
|
|
|
48 |
|
Other expenses |
|
|
394 |
|
|
|
425 |
|
|
|
443 |
|
|
|
418 |
|
|
|
430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
3,960 |
|
|
|
4,507 |
|
|
|
3,612 |
|
|
|
3,613 |
|
|
|
3,565 |
|
Income (loss) before provision for income taxes |
|
|
1,882 |
|
|
|
(1,895 |
) |
|
|
1,079 |
|
|
|
1,150 |
|
|
|
1,820 |
|
Provision (benefit) for income taxes |
|
|
610 |
|
|
|
(1,237 |
) |
|
|
362 |
|
|
|
244 |
|
|
|
591 |
|
Net income (loss) |
|
$ |
1,270 |
|
|
$ |
(658 |
) |
|
$ |
717 |
|
|
$ |
906 |
|
|
$ |
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less preferred dividend and accretion on
preferred stock |
|
$ |
(237 |
) |
|
$ |
(0 |
) |
|
$ |
(0 |
) |
|
$ |
(0 |
) |
|
$ |
(0 |
) |
Income available to common shareholders |
|
$ |
1,033 |
|
|
$ |
(658 |
) |
|
$ |
717 |
|
|
$ |
906 |
|
|
$ |
1,229 |
|
Basic earnings (loss) per share |
|
$ |
0.12 |
|
|
$ |
(0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.14 |
|
Weighted average shares basic |
|
|
8,711 |
|
|
|
8,755 |
|
|
|
8,711 |
|
|
|
8,748 |
|
|
|
8,719 |
|
Diluted earnings (loss) per share |
|
$ |
0.12 |
|
|
$ |
(0.07 |
) |
|
$ |
0.08 |
|
|
$ |
0.10 |
|
|
$ |
0.14 |
|
Weighted average shares diluted |
|
|
8,711 |
|
|
|
8,802 |
|
|
|
8,713 |
|
|
|
8,751 |
|
|
|
8,748 |
|
Cash dividends per share |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk that values of assets and liabilities or revenues will be adversely
affected by changes in market conditions such as market movements. The risk is inherent in the
financial instruments associated with our operations and activities including loans, deposits,
securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and
liabilities are generated through loans and deposits associated with our banking business, our
Asset Liability Management (ALM) process, and credit risk mitigation activities. Traditional loan
and deposit products are reported at amortized cost for assets or the amount owed for liabilities.
These positions are subject to changes in economic value based on varying market conditions.
Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as
our other interest rate sensitive instruments and is reflected in the levels of future income and
expense produced by these positions versus levels that would be generated by current levels of
interest rates. We seek to mitigate interest rate risk as part of the ALM process.
Interest rate risk, which potentially can have a significant earnings impact, is an integral part
of financial services. The Company is subject to interest rate risk for the following reasons:
|
|
|
Assets and liabilities may mature or reprice at different times (for example,
if assets reprice faster than liabilities and interest rates fall, earnings will initially
decline); |
|
|
|
|
Assets and liabilities may reprice at the same time but by different amounts
(for example, the level of interest rates in the market is falling and the Company may
reduce rates paid on checking and savings deposit accounts by an amount that is less than
the general decline in market rates); |
|
|
|
|
Short-term and long-term market interest rates may change by different amounts
(for example, the shape of the yield curve may affect new loan yields and funding costs
differently); or |
|
|
|
|
The remaining maturities of various assets and liabilities may shorten or
lengthen as interest rates change (for example, if long-term mortgage rates decline
sharply, mortgage-backed securities held in the securities available-for-sale may prepay
significantly earlier than anticipated, which could reduce portfolio income.) |
Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not
adversely affect net interest income. Interest rates risk is measured as the potential volatility
in our net interest income caused by changes in market interest rates. Lending and deposit taking
create interest rate sensitive positions on our balance sheet. Interest rate risk from these
activities as well as the impact of ever changing market conditions is mitigated using the ALM
process. The Company does not operate a trading account and does not hold a position with exposure
to foreign currency exchange or commodities. The Company faces market risk through interest rate
volatility.
The Board of Directors has overall responsibility for the Companys interest rate risk management
policies. The Company has an Asset/Liability Management Committee (ALCO) which establishes and
monitors guidelines to control the sensitivity of earnings to changes in interest rates. The
internal ALCO Roundtable group maintains a net interest income forecast using different rate
scenarios utilizing a simulation model. This group updates the net interest income forecast for
changing assumptions and differing outlooks based on economic and market conditions.
The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In the simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for +
200 to - 200 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero.
43
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
The formal policies and practices adopted by the Company to monitor and manage interest rate risk
exposure measure risk in two ways: (i) repricing opportunities for earning assets and
interest-bearing liabilities and (ii) changes in net interest income for declining interest rate
shocks of 100 to 200 basis points. Because of the Companys predisposition to variable rate,
pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment, the Companys net
interest income and margin would be expected to decline, and, in an increasing interest rate
environment, the Companys net interest income and margin would be expected to increase. However,
no assurance can be given that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Company is asset sensitive,
the Company is adversely affected by declining rates rather than rising rates.
To estimate the effect of interest rate shocks on the Companys net interest income,
management uses a model to prepare an analysis of interest rate risk exposure. Such analysis
calculates the change in net interest income given a change in the federal funds rate of 100 or 200
basis points up or down. All changes are measured in dollars and are compared to projected net
interest income. Managements most recent calculation estimated an annualized reduction in net
interest income attributable to a 50 and 100 basis point decline in the federal funds rate. At
December 31, 2008, the estimated annualized reduction in net interest income attributable to a 100
and 200 basis point decline in the federal funds rate was $741,121 and $1,036,979, respectively,
with a similar and opposite result attributable to a 100 and 200 basis point increase in the
federal funds rate.
The ALCO has established a policy limitation to interest rate risk of -14% of net interest margin
and -20% of the present value of equity.
The securities portfolio is integral to our asset liability management process. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity, regulatory requirements and the
relative mix of our cash positions.
The Companys approach to managing interest rate risk may include the use of derivatives. This
helps to minimize significant, unplanned fluctuations in earnings, fair values of assets and
liabilities and cash flows caused by interest rate volatility. This approach involves modifying the
repricing characteristics of certain assets and liabilities so that changes in interest rates do
not have a significant adverse effect on the net interest margin and cash flows. As a result of
interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair
value hedging strategy, the effect of this unrealized gain or loss will generally be offset by
income or loss on the derivatives linked to the hedged assets and liabilities. For a cash flow
hedge, the change in the fair value of the derivative to the extent that it is effective is
recorded through other comprehensive income.
The Company may use derivatives as part of our interest rate risk management, including interest
rate swaps, caps and floors. At inception, the relationship between hedging instruments and hedged
items is formally documented with our risk management objective, strategy and our evaluation of
effectiveness of the hedge transactions. This includes linking all derivatives designated as fair
value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific
transactions. Periodically, as required, we formally assess whether the derivative we designated
in the hedging relationship is expected to be and has been highly effective in offsetting changes
in fair values or cash flows of the hedged item. The Companys use of derivatives is monitored by
the Directors ALCO committee.
44
ITEM 4T. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is designed to provide
reasonable assurance that information required to be disclosed is accumulated and communicated to
management in a timely manner. Management has reviewed this system of disclosure controls and
procedures as of the end of the period covered by this report and believe that the system is
operating effectively to ensure appropriate disclosure.
During the quarter ended March 31, 2009, there have been no changes in the Companys internal
controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
PART II. Other Information
Item 1. Legal proceedings
The Company is involved in various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions, which are both
probable and estimable. In the opinion of management, the disposition of claims, currently pending
will not have a material adverse affect on the Companys financial position or results of
operations.
Item 1a. Risk Factors
There have been no material changes from the risk factors previously disclosed in the registrants
Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
N/A.
Item 4. Submission of Matters to a vote of Security Holders
N/A
Item 5. Other Information
Item 6. Exhibits
|
|
|
(31.1)
|
|
Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 |
|
(31.2)
|
|
Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 |
|
(32.0)
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 |
45
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: May 1, 2009 |
/s/ Samuel D. Jimenez
|
|
|
Samuel D. Jimenez |
|
|
Senior Vice President and
Chief Financial Officer |
|
|
46